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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________.
Commission File Number 1-7852
POPE & TALBOT, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-0777139
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
1500 SW 1st Avenue, Portland, Oregon 97201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 228-9161
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
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Common Stock, par value $1.00 New York Stock Exchange,
Pacific Stock Exchange
Rights to purchase Series A Junior New York Stock Exchange,
Participating Cumulative Pacific Stock Exchange
Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $262,663,771 as of March 13, 2000 ($19.00 per share).
14,553,448
(Number of shares of common stock outstanding as of March 13, 2000)
Part I and Part II incorporate specified information by reference from the
annual report to shareholders for the year ended December 31, 1999. Part III
incorporates specified information by reference from the proxy statement for the
annual meeting of shareholders to be held on April 27, 2000.
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PART I
This Annual Report on Form 10-K and the documents incorporated herein
by reference contain forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. The
statements contained in this report that are not statements of historical fact,
including without limitation, statements containing the words "believes,"
"expects," and words of similar import, constitute forward-looking statements
that involve a number of risks and uncertainties. Moreover, from time to time
the Company may issue other forward-looking statements. Investors are cautioned
that such forward-looking statements are subject to an inherent risk that actual
results may differ materially from such forward looking statements. Such risks
and uncertainties include those set forth under "Factors That May Affect Future
Results" in the Management's Discussion and Analysis of Results of Operations
and Financial Condition incorporated by reference from the Company's Annual
Report to Shareholders for the year ended December 31, 1999. Unless required by
law, the Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, readers should carefully review the reports and documents the Company
files from time to time with the Securities and Exchange Commission,
particularly its Quarterly Reports on Form 10-Q and any Current Reports on Form
8-K.
ITEM 1. BUSINESS
INTRODUCTION
Pope & Talbot, Inc. (the Company) is engaged principally in the wood
products and pulp products businesses. Wood products accounted for 51 percent of
the Company's 1999 revenues of $486.9 million and pulp products accounted for 49
percent. The Company's wood products business involves the manufacture and sale
of standardized and specialty lumber and wood chips. In its pulp products
business, the Company manufactures and sells bleached kraft pulp for newsprint,
tissue and high-grade coated and uncoated paper. On November 8, 1999, the
Company acquired the remaining minority interest in Harmac Pacific Inc.
(Harmac). Through a number of purchases in 1997 and 1998, the Company previously
acquired a 60 percent ownership interest in Harmac. The Harmac acquisition was
accounted for as a step purchase transaction, and the results of operations of
Harmac have been included in the consolidated financial statements from February
2, 1998. Harmac, which was publicly traded on the Toronto, Vancouver and
Montreal stock exchanges, operates a pulp mill located on the East Coast of
Vancouver Island at Nanaimo, British Columbia, Canada.
Until the sale of the tissue business in March 1998, the Company
produced a line of private label consumer tissue products including towels,
napkins, bathroom tissue and facial tissue. Also, until the February 1996 sale
of the diaper business, the Company produced disposable diaper products. These
products were sold under private and controlled labels. The tissue business
results for 1998 and 1997 were shown as discontinued tissue operations. Revenues
from these operations were $8.3 million in 1998, $136.2 million in 1997 and
$133.6 million in 1996.
For further information regarding the Company's discontinued
operations, see Note 11 of "Notes to Consolidated Financial Statements" in the
Company's 1999 Annual Report to Shareholders.
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The Company, a Delaware corporation, was originally incorporated as a
California corporation in 1940. It is the successor to a partnership formed in
San Francisco, California in 1849 that acquired its first timberlands and opened
a lumber mill in the Seattle, Washington area in 1853. Subsequently, the Company
developed a lumber business based on timberland and facilities in the U.S.
Pacific Northwest, British Columbia, Canada and the Black Hills region of South
Dakota and Wyoming.
Since the mid-1980s, the Company has reduced its dependency on timber
from the Pacific Northwest, where environmental concerns have sharply restricted
the availability of and increased the cost of public timber. At the same time,
the Company has increased its operations in regions presently having more stable
timber supplies, specifically in British Columbia and the Black Hills region of
South Dakota and Wyoming. In 1985, the Company distributed its timber and land
development properties in the State of Washington to its shareholders through
interests in a newly formed master limited partnership. In 1989, the Company
sold its Oregon sawmill, and the Company has since sold its remaining Oregon
timberlands. In 1992, the Company acquired a sawmill in Castlegar, British
Columbia and related timber cutting rights. At the end of 1995, the Company
permanently closed its Port Gamble, Washington sawmill. The Company currently
operates five sawmills.
In the late 1970s, the Company expanded into the pulp business with the
purchase of the Halsey, Oregon pulp mill. The Halsey mill produces bleached
kraft pulp which is sold to writing paper, tissue and newsprint manufacturers in
the U.S., Europe and Asia.
The businesses in which the Company is engaged are extremely
competitive, and a number of the Company's competitors are substantially larger
than the Company with correspondingly greater resources.
Environmental regulations to which the Company is subject require the
Company from time to time to incur significant operating costs and capital
expenditures. In addition, as discussed herein, environmental concerns have in
the past materially affected the availability and cost of raw materials used in
the Company's business. See "Wood Products Business," "Pulp Products Business"
and "Environmental Matters."
WOOD PRODUCTS BUSINESS
The Company's wood products business involves the manufacture and sale
of boards and dimension lumber. Wood chips and other similar materials obtained
as a by-product of the Company's lumber operations are also sold. During the
last three years, revenues from lumber sales were approximately 85 percent or
more of total wood products revenues with the balance of revenues from the sale
of logs and wood chips. The principal sources of raw material for the Company's
wood products operations are timber obtained through long-term cutting licenses
on public lands, logs purchased on open log markets, timber offered for sale via
competitive bidding by federal agencies and timber purchased under long-term
contracts to cut timber on private lands.
Approximately 75 percent of the Company's current lumber capacity is
located in British Columbia, Canada and 25 percent in the Black Hills region of
South Dakota and Wyoming. In Canada, timber requirements are obtained primarily
from the Provincial Government of British Columbia under long-term timber
harvesting licenses which allow the Company to remove timber from defined areas
annually on a sustained yield basis. The Provincial Government of British
Columbia has the authority to modify prices and harvest volumes at any time.
Under the provincial stumpage pricing formula, wood costs are based on a
relationship to end-product prices. Approximately 20 to 25 percent of the
Company's Canadian log requirements are satisfied through open market log
purchases. In the Black Hills, the Company obtains its timber
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from various public and private sources under long-term timber harvesting
contracts in addition to buying logs on open markets. Under these Black Hills
contracts, prices are subject to periodic adjustment based upon formulas set
forth therein.
The Provincial Government of British Columbia's Commission of Resources
and Environment issued the Kootenay Boundary Land Use Plan in 1997. This land
use plan set aside several new wilderness areas. Although no assurances can be
given, management believes that in the near-term, timber supplies for the
Company's Canadian sawmills should be relatively stable. The Company has in
place reforestation practices designed to sustain and enhance timber supplies in
the long-term to mitigate the adverse effects of forest restrictions.
The British Columbia government has also implemented its Forest
Practices Code (Code). This Code sets strict standards for logging activities
and reforestation responsibilities. Requirements under this Code were phased in
beginning in 1996, with full implementation completed in 1998. The Code could
ultimately have a long-term unfavorable impact on the Company's timber harvest
volumes.
During 1996, U.S. and Canadian trade negotiators reached an agreement
establishing volume quotas on Canadian softwood lumber shipments to the U.S.
Based on this agreement, as amended by Canada and the United States on August
26, 1999, Canadian lumber producers in certain provinces are assigned quotas of
lumber volumes which may be shipped to the U.S. tariff-free. Revisions to quotas
of lumber volumes and related tariffs since the implementation of the Softwood
Lumber Agreement have increased tariff fees paid to the Government of Canada
and/or reduced production (by increasing downtime) at the Company's British
Columbia sawmills. Because of the Softwood Lumber Agreements, the Company took
several shutdowns during 1999, 1998 and 1997. The Company continually evaluates
the need for temporary shutdowns in balancing the economics of the Softwood
Lumber Agreement, sales prices and production costs.
MARKETING AND DISTRIBUTION. The Company's lumber products are sold
primarily to wholesale distributors. Wood chips produced by the Company's
sawmills are sold to manufacturers of pulp and paper in the U.S. and Canada.
Logs not suitable for consumption in the Company's sawmills are sold to other
U.S. and Canadian forest products companies.
Marketing of the Company's wood products is centralized in its
Portland, Oregon office. Although the Company does not have distribution
facilities at the retail level, the Company does utilize several reload
facilities around the U.S. to assist in moving the product closer to the
customer. The Company sold wood products to numerous customers during 1999, the
ten largest of which accounted for approximately 44 percent of total wood
products sales.
BACKLOG. The Company maintains a minimal finished goods inventory of
wood products. At December 31, 1999 orders were approximately $5.4 million
compared with approximately $5.1 million at December 31, 1998. This backlog
represented an order file for the Company which generally would be shipped
within one to two months.
COMPETITION. The wood products industry is highly competitive, with a
large number of companies producing products that are reasonably standardized.
There are numerous competitors of the Company that are of comparable size or
larger, none of which is believed to be dominant. The principal means of
competition in the Company's wood products business are pricing and the ability
to satisfy customer demands for various types and grades of lumber.
For further information regarding amounts of revenue, operating profit
and other financial information attributable to the wood products business, see
Note 13 of "Notes to Consolidated Financial Statements" in the Company's 1999
Annual Report to Shareholders.
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PULP PRODUCTS BUSINESS
The Company owns a pulp mill located in Halsey, Oregon (the Halsey
mill) and a pulp mill in Nanaimo, British Columbia (the Harmac mill). The Halsey
mill, with a capacity of approximately 180,000 metric tons, produces bleached
kraft pulp which is sold in various forms to printing and writing paper, tissue
and newsprint manufacturers in the Pacific Northwest and on the open market. In
conjunction with the fiber acquisition program for the Halsey pulp mill, the
Company brokers wood chips for sale primarily into the export market. The Harmac
mill supplies pulp to all sectors of the paper market, for products ranging from
newsprint and tissue to high-grade coated and uncoated paper.
With a current annual capacity of 390,000 metric tons, the Harmac mill
is one of the largest producers of market pulp in Canada. The Harmac mill
produced 370,800 metric tons of pulp in 1999, and 354,400 metric tons in 1998,
of which 325,100 metric tons were produced in the period subsequent to February
2, 1998. The Harmac mill manufactures a wide range of high-quality kraft pulp
made from custom blends of western hemlock, balsam, western red cedar and
Douglas fir. The Harmac mill's products are marketed globally through sales
offices in Portland, Oregon and Brussels, Belgium and through agency sales
offices around the world.
The Company has a long-term fiber supply agreement for the Harmac mill
with Weyerhaeuser Company Limited (Weyerhaeuser) that provides for 1.7 million
cubic meters of fiber per year through 2019. Under this contract, fiber is
purchased at market, or at prices determined under a formula intended to reflect
fair market value of the fiber and which takes into account the net sales value
of pulp sold by Harmac. To run the Harmac mill at full capacity, additional
fiber is required to supplement the base supply from Weyerhaeuser.
Weyerhaeuser has agreed that it will supply, in addition to the minimum
volumes to which it is committed under the Chip and Pulp Log Supply Agreement,
the fiber required to fulfill the balance of the Harmac mill's operating
requirements, provided that such fiber is available in the market without
detriment to Weyerhaeuser's own operations. In addition, the Company has entered
into arrangements with other independent fiber suppliers to provide pulp fiber
incremental to that provided by Weyerhaeuser. Finally, improved utilization and
recovery of available raw materials, through means such as the chip conditioning
system completed in 1998, will help to ensure that adequate fiber is available.
To a very limited degree, the Harmac mill also acquires wood chips from the
Company's Canadian sawmills.
The Company has an agreement with Grays Harbor Paper L.P. (Grays
Harbor), under which the Halsey mill supplies pulp to the Grays Harbor writing
grade paper mill. Grays Harbor purchased approximately 66,000 metric tons,
60,000 metric tons and 89,000 metric tons of pulp from the Company in 1999, 1998
and 1997, respectively. All output from the paper mill is sold to Weyerhaeuser.
In the event that the paper mill's sales to its customer are adversely impacted
for any reason, sales of the Company's pulp may be adversely impacted. A
significant portion of the pulp sold to the paper mill is produced from sawdust,
which has historically been less expensive than softwood and hardwood chips. In
1997, pricing for pulp sold to Grays Harbor was computed using a formula based
on prices for white paper. In late 1997, the Company and Grays Harbor modified
their pulp supply contract. The modified contract, which became effective
January 1, 1998, changed the pulp pricing formula so that pulp prices are based
on southern mixed (U.S.) bleached hardwood kraft prices rather than white paper
prices. The Company believes that over the longer-term, pulp pricing under the
new formula will be comparable to that under the previous pricing formula.
The availability of softwood fiber (wood chips and sawdust),
particularly in the quantities necessary to support world-scale pulp facilities,
fluctuates in the Pacific Northwest. The
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Company had access to more than adequate supplies of fiber during 1999.
Substantially all of the Company's wood chip and sawdust requirements for the
Halsey pulp mill are satisfied through purchases by the Company from third
parties. The Company has long-term chip supply contracts with sawmills in the
Pacific Northwest. To provide an adequate supply of wood fiber for the mill, the
Company has expanded its capability of using sawdust as a raw material for a
significant portion of the production. Additionally, the Company continues to
use an expanded geographic base to maintain an adequate supply of chips for the
approximately 30 to 40 percent of the pulp mill's production which remains based
on softwood chips. The Company believes that, based on existing wood chip and
sawdust availability both within the Willamette Valley region of Oregon and from
other sources, fiber resources will be adequate for the Company's requirements
at the Halsey pulp mill in the foreseeable future.
MARKETING AND DISTRIBUTION. The Company utilizes its own sales force
and pulp brokers to sell its pulp products to paper manufacturers worldwide. In
1999, approximately 50 percent of the pulp segment's sales volume was shipped to
Europe, 20 percent to North America and 30 percent to Japan and other Pacific
Rim countries. Sales in 1999 to Grays Harbor represented 11 percent of pulp
revenues and the remaining nine largest pulp customers accounted for an
additional 49 percent of pulp revenues.
In 1999, approximately 57 percent of pulp products were sold to
customers at market prices under long-term or "evergreen" contracts, renewable
each year. The balance of the mills' pulp is sold on a spot basis. By
establishing and maintaining long-term contractual relationships, the Company is
better able to forecast and regulate production than would be the case if it
relied entirely on the spot markets.
BACKLOG. The Company's pulp customers either enter into contracts for
periods of one to three years or purchase products without obligation for future
purchases. The contractual customers provide the Company with annual estimates
of their requirements, followed by periodic orders based on more definitive
information. As of December 31, 1999, the Company's backlog of orders believed
to be firm for both contractual and non-contractual customers was $77.5 million
compared with $37.9 million at December 31, 1998. The increase in the total
backlog of orders was due to a 37 percent increase in selling prices and a 49
percent increase in order volumes. The backlog of pulp orders at year-end
represents orders which will be filled in the first quarter of the following
year.
COMPETITION. The pulp industry is highly competitive, with a
substantial number of competitors having extensive financial resources,
manufacturing expertise and sales and distribution organizations, many of which
are larger than the Company, but none of which is believed to be dominant.
Canada and the Nordic countries produce substantially more market pulp than they
consume, with the surplus being sold in Western Europe, the United States and
Japan and other Asian countries. Canada, Finland, Norway and Sweden are the
principal suppliers of northern bleached softwood kraft pulp to world markets.
The United States is a large exporter of hardwood and southern softwood pulp,
as well as a significant importer of northern bleached softwood kraft pulp.
Latin America also exports both hardwood and softwood pulp.
The principal methods of competition in the pulp market are price,
quality, volume, reliability of supply and customer service. The Company's
competitive advantages include the strength of its northern softwood fiber and
the variety and consistent quality of the pulps it produces. In addition, Harmac
has the operational flexibility provided by its three separate production lines
in combination with the three principal species of fiber available in the
region.
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For further information regarding amounts of revenue, operating profit
and loss and other financial information attributable to the pulp products
business, see Note 13 of "Notes to Consolidated Financial Statements" in the
Company's 1999 Annual Report to Shareholders.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state, provincial and local air,
water and land pollution control, solid and hazardous waste management, disposal
and remediation laws and regulations in all areas where it has operations.
Compliance with these laws and regulations generally requires operating costs as
well as capital expenditures. It is difficult to estimate the costs related
solely to environmental matters of many capital projects which have been
completed in the past or which may be required in the future. Changes required
to comply with environmental standards will affect other areas such as facility
life and capacity, production costs, changes in raw material requirements and
costs and product value. In April 1998, the Environmental Protection Agency
(EPA) published regulations establishing standards and limitations for
non-combustion sources under the Clean Air Act and revised regulations under the
Clean Water Act. These regulations are collectively referred to as the "Cluster
Rules." The Company's exposure to these regulations relates to the Company's
Halsey pulp mill. The capital costs to comply with these new regulations at the
Halsey mill are anticipated to be $35 million, with compliance required by the
first quarter of 2001. The required upgrade of the Halsey mill is underway and
is expected to be completed by the end of 2000. Approximately $8.2 million of
costs related to this project have been incurred through December 31, 1999.
Other environmental expenditures anticipated in the year 2000 are not material.
Based on its understanding of future environmental compliance
standards, the Company's expenditures for such purposes, with the exception of
expenditures related to Cluster Rule compliance, are currently estimated to not
be significant in 2000. However, the ultimate outcome of future compliance is
uncertain due to various factors such as the interpretation of environmental
laws, potential introduction of new environmental laws and evolving
technologies.
The preservation of old-growth forests and wildlife habitat has
affected and may continue to affect the amount and cost of timber obtainable
from public agencies in Oregon and Western Washington. The Halsey pulp mill has
been affected by the decrease in timber availability since its primary raw
materials, wood chips and sawdust, are by-products of the lumber manufacturing
process.
In British Columbia, the Company's forest resources and related logging
activities and reforestation responsibilities have been affected by governmental
actions over the past several years. Refer to "Wood Products Business" for the
discussion on the impact of the Provincial Government of British Columbia's
Commission of Resources and Environment and the Forest Practices Code.
The major environmental issues for pulp producers in coastal British
Columbia are the management of wastewater, air emissions and solid waste in
compliance with the extensive body of applicable environmental protection laws
and regulations. Harmac has in place a comprehensive environmental management
program, comprising modern pollution abatement and control technologies,
detailed operating procedures and practices, early warning systems, scheduled
equipment inspections and emergency response planning. Regular independent
audits ensure that the environmental program is being implemented effectively
and that all regulated requirements are being met.
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Current legislation requires all pulp mills in British Columbia to
eliminate the discharge of chlorinated organic compounds by December 31, 2002.
Currently, the cost of available technology to eliminate all chlorinated organic
compounds at kraft pulp mills is prohibitive. The British Columbia government,
industry and other stakeholders are engaged in discussion to resolve this issue.
If the current legislation is not amended, substantially all of the chemical
pulp mills in British Columbia would likely be required to be closed, which
would have a material adverse affect on the Company.
Legislation in British Columbia governing contaminated sites became
effective in April 1997. If a triggering event occurs in respect of any
property that has been used for industrial or commercial purposes, the
regulations require, among other things, a site profile to be prepared in
order to determine whether the site in question is potentially contaminated,
in which case remediation may be required under government supervision. Pulp
mills are subject to these regulations and past and present owners or
operators of mill sites may face remediation costs if contaminated areas are
found. Triggering events would include the sale of the property or the
decommissioning of the mill. The Company cannot assess the magnitude of costs
it may be required to incur in order to comply with this legislation if a
triggering event should occur.
See "Item 3. Legal Proceedings" for a discussion of certain
environmental legal proceedings.
EMPLOYEES
At December 31, 1999, the Company employed 2067 employees of whom 1646
were paid on an hourly basis and a majority of which were members of various
labor unions. Approximately 60 percent of the Company's employees were
associated with the Company's wood products business, 37 percent were associated
with the Company's pulp business and 3 percent were corporate management,
marketing and administration personnel.
GEOGRAPHIC AREAS
For information regarding the Company's revenues and long-lived assets
by geographic area, see Note 13 of "Notes to Consolidated Financial Statements"
in the Company's 1999 Annual Report to Shareholders.
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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 1999 production of the Company's lumber mills:
<TABLE>
<CAPTION>
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Estimated Annual 1999
Location Capacity (3) Production(3)
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<S> <C> <C>
Spearfish, South Dakota 115,000,000 bd. ft.(1) 113,000,000 bd. ft.
Newcastle, Wyoming 35,000,000 bd. ft.(1) 32,000,000 bd. ft.
Grand Forks, British Columbia 85,000,000 bd. ft.(2) 72,000,000 bd. ft.
Midway, British Columbia 155,000,000 bd. ft.(2) 153,000,000 bd. ft.
Castlegar, British Columbia 220,000,000 bd. ft.(2) 208,000,000 bd. ft.
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</TABLE>
(1) Based on operating two shifts, five days per week for the
Spearfish, South Dakota lumber mill and one shift, five days
per week for the Newcastle, Wyoming lumber mill.
(2) Based on operating two shifts, five days per week for the
Midway and Castlegar, British Columbia mills and one shift,
five days per week for the Grand Forks, British Columbia mill.
These capacities reflect reduced operations resulting from
tariffs under the 1996 Softwood Lumber Agreement.
(3) Wood chips are produced as a result of the operation of the
Company's lumber mills. It is estimated that the aggregate
annual capacity for such production is 300,000 bone-dry units.
In 1999, 295,000 bone dry units were produced.
The Company believes that its wood products manufacturing facilities are
adequate and suitable for current operations. The Company owns all of its wood
products manufacturing facilities.
PULP PRODUCTS PROPERTIES
The Company owns a bleached kraft pulp mill near Halsey, Oregon. In
1999, 181,000 metric tons of pulp were produced, which approximated full
capacity for the mill. Other than future mill modifications required by the
EPA's "Cluster Rules," as described previously in "Environmental Matters," the
Company believes that its Halsey pulp facility is adequate and suitable for
current operations.
The Harmac pulp mill is located on a site owned by the Company in
Nanaimo on the east coast of Vancouver Island in British Columbia. The Harmac
pulp mill has an annual capacity of 390,000 metric tons of NBSK pulp and
produced 371,000 metric tons in 1999.
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ITEM 3. LEGAL PROCEEDINGS
The Oregon Department of Environmental Quality (ODEQ), based on
detection of possible creosote and hydrocarbon contamination, determined that a
vacant industrial site formerly owned by the Company requires further action.
Accordingly, the Company and the local governmental owner agreed in a Consent
Order with ODEQ to investigate the site and determine an appropriate remedy. The
Company is currently participating in the investigation phase of this site with
remediation and monitoring to occur over an extended future time period. Based
on preliminary findings, the Company has established a reserve in the amount of
$6.1 million representing the low end of the range of estimated future
remediation and monitoring costs at this site. Factors outside the Company's
control could cause the costs to be substantially greater.
The Washington Department of Ecology (WDOE) requested that the Company
undertake an assessment to determine whether and to what extent the Company's
former mill site at Port Gamble, Washington may be contaminated. Further, WDOE
requested that the Company perform an investigation of sediments in the adjacent
bay to determine the extent of wood waste accumulation. These activities were
completed during 1999. Future regulatory developments and investigation findings
regarding sediments may indicate remediation will be necessary. Based on
preliminary findings, the Company has established a reserve in the amount of
$2.6 million representing the low end of the range of estimated future
remediation and monitoring costs at this site. Factors outside the Company's
control could cause the costs to be substantially greater.
The Company has tendered the defense of the above environmental claims
to a number of insurance carriers which issued comprehensive general liability
policies to the Company from 1959 to 1985. In 1995, the Company filed a
declaratory judgment action to obtain a decision that the insurance carriers
were obligated to defend the Company and indemnify it for any environmental
liabilities incurred as a result of certain operations of the Company during
that period. The Company expects that the case will be tried, if necessary in
the year 2001. The Company has concluded settlements with several insurance
carriers and is engaged in settlement discussions with other insurance carriers.
If it is determined that the insurance carriers are obligated to pay the
Company's defense and indemnity claims, there are more than sufficient policy
limits available to meet the Company's estimated liabilities. The Company
believes recovery under these policies is probable and has recorded receivables
in amounts it has deemed highly probably of realization.
In March 1999, the Company filed a claim under Chapter 11 of the North
American Free Trade Agreement (NAFTA) against the Canadian Federal Government.
The complaint arises from the Company's assertion that its duty-free export
quota under the Canada/U.S. Softwood Lumber Agreement was unfairly allocated and
then reduced after the agreement came into effect. The NAFTA contains a special
process that permits NAFTA investors who have been harmed by government actions
which are inconsistent with the provisions of NAFTA's Investment Chapter to seek
compensation before an impartial international arbitration panel. An
international arbitration panel has been appointed to hear this claim but there
can be no assurance as to when the claim will be resolved.
The Internal Revenue Service (IRS) has assessed the Company additional
tax of approximately $5.3 million pertaining to transactions between the Company
and one of its Canadian subsidiaries during it 1993 tax year. The Company has
filed a petition with the Tax Court to challenge the IRS's assessment. The
Company has negotiated a tentative settlement with the IRS on this issue for
1993 and certain subsequent tax years and has established a
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reserve for the amount. While a settlement has been negotiated with the IRS, the
settlement has not been finally approved or accepted on behalf of the IRS.
The Company is also a party to legal proceedings and environmental
matters generally incidental to its business. Although the final outcome of any
legal proceeding or environmental matter is subject to many variables and cannot
be predicted with any degree of certainty, the Company presently believes that
the ultimate outcome resulting from these proceedings and matters would not have
a material effect on the Company's current financial position or liquidity;
however, in any given future reporting period such proceedings or matters could
have a material effect on results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT WHO ARE NOT DIRECTORS
In addition to the executive officers who are also directors of the
Company, the following executive officers are not directors:
Abram Friesen, age 57, has been Vice President - Division Manager, Wood
Products since February 1996. From 1987 to 1996, Mr. Friesen was President of
Pope & Talbot Ltd., a wholly-owned subsidiary of the Company.
Maria M. Pope, age 35, has been Vice President, Chief Financial Officer
and Secretary since May 1999. From April 1998 to May 1999, Ms. Pope was the
Company's Treasurer and Secretary. Prior to becoming Secretary and Treasurer,
Ms. Pope was Planning and Budgeting Manager for the Company upon joining the
Company in 1995. Ms. Pope previously worked for Levi Strauss & Co. and Morgan
Stanley & Co., Inc. Ms. Pope is the daughter of Peter T. Pope, Chairman of the
Board of the Company.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Pope & Talbot, Inc. common stock is traded on the New York and Pacific
stock exchanges under the symbol POP. The number of registered shareholders at
year-end 1999 and 1998 were 1,049 and 952, respectively. Additional information
required by Item 5 of Part II is presented in the table entitled "Quarterly
Financial Information" on page 30 of the Company's 1999 Annual Report to
Shareholders. Such information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information required by Item 6 of Part II is presented in the table
entitled "Five Year Summary of Selected Financial Data" on page 29 of the
Company's 1999 Annual Report to Shareholders. Such information is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by Item 7 of Part II is presented on pages 9
through 15 of the Company's 1999 Annual Report to Shareholders. Such information
is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7a of Part II is presented on pages 21
and 23 of the Company's 1999 Annual Report to Shareholders. Such information is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Part II is presented on pages 15
through 28 of the Company's 1999 Annual Report to Shareholders. Such information
is incorporated herein by reference. Additionally, the required supplementary
quarterly financial information is presented on page 30 of the Company's 1999
Annual Report to Shareholders and is incorporated herein by reference.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by Item 10 of Part III is presented on page 11
as a separate item entitled "Executive Officers of the Registrant Who are Not
Directors" in Part I of this Report on Form 10-K and under the items entitled
"Certain Information Regarding Directors and Officers" and "Section 16(a) -
Beneficial Ownership Reporting Compliance" in the Company's Definitive Proxy
Statement for the Annual Meeting of Shareholders on April 27, 2000. Such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Part III is presented under the
items entitled "Director Remuneration" and "Executive Compensation and Other
Information" in the Company's Definitive Proxy Statement for the Annual Meeting
of Shareholders on April 27, 2000. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Part III is presented under the
items entitled "Security Ownership of Management" and "Beneficial Ownership of
Over 5% of Pope & Talbot Common Stock" in the Company's Definitive Proxy
Statement for the Annual Meeting of Shareholders on April 27, 2000. Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Annual Report to
Shareholders
---------------------------------------------------------------------- ----------------------
<S> <C>
Report of Independent Public Accountants 15
Consolidated balance sheets at December 31, 1999 16
and 1998
Consolidated statements of income for each of the three years in the 17
period ended December 31, 1999
Consolidated statements of stockholders' equity for 18
each of the three years in the period ended
December 31, 1999
Consolidated statements of cash flows for each of the three years in 19
the period ended December 31, 1999
Notes to consolidated financial statements 20-28
</TABLE>
The consolidated financial statements listed above are included in the
Annual Report to Shareholders of Pope & Talbot, Inc. for the year ended
December 31, 1999. With the exception of the items referred to in Items 1, 5,
6, 7, 7a and 8, the 1999 Annual Report to Shareholders is not to be deemed
filed as part of this report.
The report of PricewaterhouseCoopers LLP on the financial statements of
Harmac as of and for the year ended December 31, 1998, which report has been
relied upon by Arthur Andersen LLP in their report listed above, is filed as
Exhibit 99.1 to this Form 10-K.
(a)(2) SCHEDULES
All schedules are omitted since the required information is not present
or is not present in amounts sufficient to require submission of the
related schedule, or because the information required is included in
the financial statements and notes thereto.
(a)(3) EXHIBITS
The following exhibits are filed as part of this annual report.
EXHIBIT NO.
3.1. Certificate of Incorporation, as amended. (Incorporated herein by
reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1992).
3.2. Bylaws.
4.1. Indenture, dated June 2, 1993, between the Company and Chemical Trust
Company of California as Trustee with respect to the Company's 8-3/8%
Debentures due 2013. (Incorporated herein by reference to Exhibit 4.1
to the Company's registration statement on Form S-3 filed April 6,
1993).
4.2. Rights Agreement, dated as of April 3, 1998, between the Company and
Chase-Mellon Shareholder Services, L. L. C., as rights agent.
(Incorporated herein by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K filed on April 7, 1998).
13
<PAGE>
4.3. Participation Agreement dated as of September 15, 1999 among the
Company, SELCO Service Corporation, the Note Purchasers named therein,
Wilmington Trust Company and First Security Bank, National Association.
(Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999).
4.4. Facility Lease between the Company and Wilmington Trust Company dated
September 30, 1999. (Incorporated herein by reference to Exhibit 4.5 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.1. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.1.1. Stock Option and Appreciation Plan (as amended). (Incorporated herein
by reference to Exhibits 99.1 and 99.2 to the Company's Form S-8 filed
on February 22, 1999).
10.1.2. Executive Incentive Plan, as amended. (Incorporated herein by reference
to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992).
10.1.3. Restricted Stock Bonus Plan. (Incorporated herein by reference to
Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992).
10.1.4. Deferral Election Plan. (Incorporated herein by reference to Exhibit
10(d) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992).
10.1.5. Supplemental Executive Retirement Income Plan. (Incorporated herein by
reference to Exhibit 10(e) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990).
10.1.6. Form of Severance Pay Agreement among the Company and certain of its
executive officers. (Incorporated herein by reference to Exhibit 10.1.6
to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
10.1.7. 1996 Non-Employee Director Stock Option Plan. (Incorporated herein by
reference to Exhibit 10.1.7 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996).
10.1.8. Special Non-Employee Director Stock Retainer Fee Plan. (Incorporated
herein by reference to Exhibit 99.5 to the Company's Form S-8 filed on
February 22, 1999).
10.1.9. Employment Agreement with Ralph Leverton, dated November 30, 1998.
(Incorporated herein by reference to Exhibit 10.1.9 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998).
10.1.10.Separation Agreement with Ralph Leverton dated August 31, 1999.
10.1.11 Split Dollar Life Insurance Agreement between the Company and Maria M.
Pope, as trustee of the Pope Grandchildren's Trust, dated December 21,
1999.
14
<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, 1998, for Atlanta diaper mill site as amended
September 1, 1988 and August 30, 1989. (Incorporated herein by
reference to Exhibit 10(h) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990).
10.4. Lease agreement between the Company and Shenandoah development Group,
Ltd., dated July 31, 1989, for additional facilities at Atlanta diaper
mill as amended August 30, 1989 and February 1990. (Incorporated herein
by reference to Exhibit 10(1) to the Company's Annual Report on Form
10-K for the year ended December 31, 1990).
10.5. Province of British Columbia Tree Farm License No. 8, dated March 1,
1995. (Incorporated herein by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996).
10.6. Province of British Columbia Tree Farm License No. 23, dated March 1,
1995. (Incorporated herein by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996).
10.7. Province of British Columbia Forest License A18969, dated December 1,
1993. (Incorporated herein by reference to Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996).
11.1. Statement showing computation of per share earnings.
13.1. Portions of the Annual Report to Shareholders for the year ended
December 31, 1999 which have been incorporated by reference in this
report.
21.1. List of subsidiaries.
23.1. Consent of Arthur Andersen LLP.
23.2. Consent of PricewaterhouseCoopers LLP.
27.1. Financial Data Schedule.
99.1. Report of PricewaterhouseCoopers LLP.
The undersigned registrant hereby undertakes to file with the
Commission a copy of any agreement not filed under exhibit item (4) above on the
basis of the exemption set forth in the Commission's rules and regulations.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended
December 31, 1999.
15
<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 20th day of March, 2000.
POPE & TALBOT, INC.
By: \s\Peter T. Pope
------------------------------------
Peter T. Pope, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 20, 2000, by the following persons on behalf of
the registrant and in the capacities indicated.
<TABLE>
<S> <C>
\s\Peter T. Pope Chairman of the Board
- --------------------------------------------- -------------------------------------------
Peter T. Pope
President, Director and
\s\Michael Flannery Chief Executive Officer
- --------------------------------------------- -------------------------------------------
Michael Flannery
\s\Gordon P. Andrews Director
- --------------------------------------------- -------------------------------------------
Gordon P. Andrews
\s\Hamilton W. Budge Director
- --------------------------------------------- -------------------------------------------
Hamilton W. Budge
\s\Charles Crocker Director
- --------------------------------------------- -------------------------------------------
Charles Crocker
\s\Lionel G. Dodd Director
- --------------------------------------------- -------------------------------------------
Lionel G. Dodd
\s\Kenneth G. Hanna Director
- --------------------------------------------- -------------------------------------------
Kenneth G. Hanna
\s\Robert Stevens Miller, Jr. Director
- --------------------------------------------- -------------------------------------------
Robert Stevens Miller, Jr.
\s\Brooks Walker, Jr. Director
- --------------------------------------------- -------------------------------------------
Brooks Walker, Jr.
Vice President and
\s\Maria M. Pope Chief Financial Officer
- --------------------------------------------- -------------------------------------------
Maria M. Pope
\s\Gerald L. Brickey Financial Controller
- --------------------------------------------- -------------------------------------------
Gerald L. Brickey
</TABLE>
16
<PAGE>
Exhibit 3.2
BYLAWS
OF
POPE & TALBOT, INC.
ARTICLE I
STOCKHOLDERS
Section 1.1 ANNUAL MEETINGS. An annual meeting of stockholders shall
be held for the election of directors at such date, time and place either within
or without the State of Delaware as may be designated by the Board of Directors
from time to time. Any other proper business may be transacted at the annual
meeting.
Section 1.2. SPECIAL MEETINGS. Special meetings of stockholders may be
called at any time by the Board, or by a majority of the members of the Board,
or by a committee of the Board which has been duly designated by the Board and
whose powers and authority, as provided in a resolution of the Board or in the
Bylaws, include the power to call such meetings, but such special meetings may
not be called by any other person or persons; provided, however, that if and to
the extent that any special meeting of stockholders may be called by any other
person or persons specified in any provisions of the Certificate of
Incorporation or any amendment thereto or any certificate filed under Section
151(g) of the Delaware General Corporation Law (or any successor thereto), then
such special meeting may also be called by the person or persons, in the manner,
at the times and for the purposes so specified. A special meeting shall be held
at such date, time and place either within or without the State of Delaware as
may be stated in the notice of the meeting.
Section 1.3. NOTICE OF MEETINGS. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise provided by law, the written notice of any meeting
shall be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the Corporation.
Section 1.4. ADJOURNMENTS. Any meetings of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting
1
<PAGE>
the Corporation may transact any business which might have been transacted at
the original meeting. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
Section 1.5. QUORUM. At each meeting of stockholders, except where
otherwise provided by law, the holders of a majority of the outstanding shares
of each class of stock entitled to vote at the meeting, present in person or
represented by proxy, shall constitute a quorum. For purposes of the foregoing,
two or more classes or series of stock shall be considered a single class if the
holders thereof are entitled to vote together as a single class at the meeting.
In the absence of a quorum the stockholders so present may, by majority vote,
adjourn the meeting from time to time in the manner provided by Section 1.4 of
these Bylaws until a quorum shall attend. Shares of its own capital stock
belonging on the record date for the meeting to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors of such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of the
Corporation to vote stock, including but not limited to its own stock, held by
it in a fiduciary capacity.
Section 1.6. ORGANIZATION. Meetings of stockholders shall be presided
over by the Chairman of the board, or in his absence by the President, or in his
absence by a Senior Vice President, or in their absence by a Vice President, or
in the absence of the foregoing persons by a chairman designated by the Board of
Directors, or in the absence of such designation by a chairman chosen at the
meeting. The Secretary shall act as secretary of the meeting, but in his absence
the chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 1.7. VOTING; PROXIES. Each stockholder entitled to vote at any
meeting of stockholders shall be entitled to vote for each share of stock held
by him which has voting power upon the matter in question, except to the extent
that the Certificate of Incorporation provides for cumulative voting with
respect to the election of directors. Each stockholder entitled to vote at a
meeting of stockholders may authorize another person or persons to act for him
by proxy, but no such proxy shall be voted or acted upon after three years from
its date, unless the proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A stockholder may revoke any proxy which is not irrevocable
by attending the meeting and voting in person or by filing an instrument in
writing revoking the proxy or another duly executed proxy bearing a later date
with the Secretary of the Corporation. Voting at meetings of stockholders need
not be by written ballot and need not be conducted by inspectors unless the
holders of a majority of the outstanding shares of all classes of stock entitled
to vote thereon present in person or by proxy at such meeting shall so
determine.
2
<PAGE>
Section 1.8. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect to any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than sixty nor less than ten days before the date of such meeting, nor more
than sixty days prior to any other action. If no record date is fixed: (1) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; and (2) the record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.
Section 1.9. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The Secretary
shall prepare and make, at least ten days before every meeting of stockholders,
a complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for the purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present.
Section 1.10. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(A) ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons
for election to the Board of Directors of the Corporation and the proposal of
business to be considered by the stockholders may be made at an annual meeting
of the stockholders (a) pursuant to the Corporation's notice of meeting, (b) by
or at the direction of the Board of Directors or (c) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of notice
provided for in this Bylaw, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in this Bylaw.
(2) For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to clause (c) of
paragraph (A) (1) of this Bylaw, the stockholder must have given timely notice
in conformance with the requirements of this Bylaw, thereof in writing to the
Secretary of the Corporation and such other business must otherwise be a proper
matter for stockholder action. To be timely, a stockholder's notice shall be
delivered to the Secretary at the principal executive
3
<PAGE>
offices of the Corporation not later than the close of business on the 90th day
prior to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is more than 30
days before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not later than the close of
business on the 90th day prior to such annual meeting or the 10th day following
the day on which public announcement of the date of such meeting is first made
by the Corporation. In no event shall the public announcement of an adjournment
of an annual meeting commence a new time period for the giving of a
stockholder's notice as described above. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or re-election as a director (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the class and number of shares of the corporation which are
beneficially owned by such person, (iv) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder, and (v) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (the "1934 Act") (including without
limitation such person's written consent to being named in the proxy statement,
if any, as a nominee and to serving as a director if elected); and (b) as to any
other business that the stockholder proposes to bring before the meeting (i) a
brief description of the business desired to be brought before the meeting, (ii)
the reasons for conducting such business at the meeting, (iii) any material
interest in such business of such stockholder and the beneficial owner, if any,
on whose behalf the proposal is made and (iv) any other information which is
required to be disclosed in solicitations of proxies on behalf of any such
business, and specifically, any such information called for by Items 4 and 5 of
Regulation 14A under the 1934 Act regarding such other business, the proponent
of such other business and any associates or persons who would be deemed
"participants" under Regulation 14A were the proponent soliciting proxies on
behalf of such other business. All such notices shall include (i) a
representation that the person sending the notice is a shareholder of record and
will remain such through the record date for the meeting, (ii) the name and
address, as they appear on the corporation's books, of such shareholder, (iii)
the class and number of the corporation's shares which are owned beneficially
and of record by such shareholder, and (iv) a representation that such
shareholder intends to appear in person or by proxy at such meeting to make the
nomination or move the consideration of other business set forth in the notice.
(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this Bylaw to the contrary, in the event that the number of
directors to the Board of Directors of the Corporation is increased and there is
no public announce-ment by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors at least 70
days prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Bylaw shall also be considered timely, but
only with respect to nominees for any new positions created by
4
<PAGE>
such increase, if it shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
10th day following the day on which such public announcement is first made by
the Corporation.
(B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this Bylaw, who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Bylaw. In the event the
Corporation calls a special meeting of stockholders for the purpose of electing
one or more directors to the Board of Directors, any such stockholder may
nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (A)(2) of this Bylaw shall be
delivered to the Secretary at the principal executive offices of the Corporation
not later than the close of business on the 90th day prior to such special
meeting or the 10th day following the day on which public announcement is first
made on the date of the special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time period
for the giving of a stockholder's notice as described above.
(C) GENERAL. (1) Only such persons who are nominated in accordance
with the procedures set forth in this Bylaw shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Bylaw. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the chairman of the meeting shall refuse to
acknowledge the nomination of any person or the consideration of any business
not made in compliance with the foregoing procedures.
(2) For purposes of this Bylaw, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this
Bylaw, a stockholder shall also comply with all applicable requirements of the
1934 Act and the rules and regulations thereunder with respect to the matters
set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any
rights (i) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under
5
<PAGE>
the 1934 Act or (ii) of the holders of any series of Preferred Stock to elect
directors under specified circumstances.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1. POWERS; NUMBER; QUALIFICATIONS. The business and affairs
of the Corporation shall be managed by or under the direction of the Board of
Directors, except as may be otherwise provided by law. The authorized number of
directors shall be nine (9), and such number shall not be changed except by a
Bylaw amending this section duly adopted by the Board or duly adopted by the
Stockholders pursuant to the terms of Article SIXTH of the Certificate of
Incorporation. Directors need not be stockholders.
Section 2.2. ELECTION; TERM OF OFFICE; RESIGNATION; REMOVAL;
VACANCIES. Each director shall hold office until the expiration of his term and
until his successor is elected and qualified or until his earlier resignation or
notice to the Board of Directors or to the President or the Secretary of the
Corporation. Such resignation shall take effect at the time specified therein,
and unless otherwise specified therein no acceptance of such resignation shall
be necessary to make it effective. Any director or the entire Board of Directors
may be removed, with cause, by the holders of a majority of the shares then
entitled to vote at an election of directors. Vacancies and newly created
directorships resulting from any increase in the authorized number of directors
or from any other cause may be filled by a majority of the directors then in
office, although less than a quorum, or by the sole remaining director.
Section 2.3. REGULAR MEETINGS. A regular annual organizational meeting
of the Board of Directors shall be held without other notice than this Bylaw at
such time as the Board of Directors may specify within twenty-four (24) hours
after, and at the same place as, the annual meeting of stockholders, for the
purpose of electing officers and conducting any other business which may
properly be considered. The Board of Directors may provide for the time and
place of other regular meetings from time to time by resolution, and no notice
need be given of such regular meetings.
Section 2.4. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be held at any time or place within or without the State of
Delaware whenever called by the Chairman of the Board, by the President or by
any two directors. Notice of all special meetings of the Board shall be given to
each director by two days' service of the same by telegram, by letter, or
personally. Such notice may be waived by any director and any meeting shall be a
legal meeting without notice having been given if all the directors shall be
present thereat or if those not present shall, either before or after the
meeting, sign a written waiver of notice of, or a consent to, such meeting or
shall after the meeting sign an approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate records or be
made a part of the minutes of the meeting.
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Section 2.5. TELEPHONIC MEETINGS PERMITTED. Members of the Board of
Directors, or any committee designated by the Board, may participate in a
meeting of the Board or of such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this Bylaw shall constitute presence in person at such
meeting.
Section 2.6. QUORUM; VOTE REQUIRED FOR ACTION. At all meetings of the
Board of Directors a majority of the entire Board shall constitute a quorum for
the transaction of business. The vote of a majority of the directors present at
a meeting at which a quorum is present shall be the act of the Board. In case at
any meeting of the Board a quorum shall not be present, the members of the Board
present may adjourn the meeting from time to time until a quorum shall attend.
Section 2.7. ORGANIZATION. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, or in his absence by the President,
or in his absence by the Vice President of Finance, or in his absence by a
Senior Vice President, or in their absence by a chairman chosen at the meeting.
The Secretary shall act as secretary of the meeting, but in his absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 2.8. ACTION BY DIRECTORS WITHOUT A MEETING. Any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board or of such committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
of Directors.
Section 2.9 COMPENSATION OF DIRECTORS. The Board of Directors shall
have the authority to fix the compensation of directors.
ARTICLE III
COMMITTEES
Section 3.1. COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board to act at the meeting in place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
Corporation,
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and may authorize the seal of the Corporation to be affixed to all papers which
may require it; but no such committee shall have power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of
dissolution, removing or indemnifying directors or amending these Bylaws; and,
unless the resolution expressly so provides, no such committee shall have the
power or authority to declare a dividend or to authorize the issuance of the
stock.
Section 3.2. COMMITTEE RULES. Unless the Board of Directors otherwise
provides, each committee designated by the Board may adopt, amend and repeal
rules for the conduct of its business. In the absence of a provision by the
Board or a provision in the rules of such committee to the contrary, a majority
of the entire authorized number of members of such committee shall constitute a
quorum for the transaction of business, the vote of a majority of the members
present at a meeting at the time of such vote if a quorum is then present shall
be the act of such committee, and in other respects each committee shall conduct
its business in the same manner as the Board conducts its business pursuant to
Article II of these Bylaws.
ARTICLE IV
OFFICERS
Section 4.1. NUMBER AND TERM. The officers of the Corporation shall be
the Chairman of the Board, the President, a Vice President of Finance, who shall
be the chief financial officer of the Corporation and a Secretary, all of which
shall be chosen by the Board of Directors. In addition, the Board of Directors
may, but is not required to, appoint such other officers as may be deemed
expedient for the proper conduct of the business of the Corporation, including
but not limited to one or more other Executive Vice Presidents, one or more
Senior Vice Presidents, one or more Vice Presidents, a Corporate Controller, a
Treasurer, one or more Assistant Secretaries and one or more Assistant
Treasurers, each of whom shall have such authority and perform such duties as
the Board of Directors or the Chief Executive Officer may from time to time
determine. Upon action of the Board of Directors, any Vice President may be
named as an Executive Vice President or a Senior Vice President. The following
officers of the Corporation shall be elected annually at the regular or
organizational meeting of the Board of Directors held after the annual meeting
of stockholders and shall serve at the pleasure of the Board of Directors:
Chairman of the Board, President, Vice President of Finance, Secretary and such
other officers as the Board of Directors may determine. The Chairman of the
Board shall be elected from the members of the Board of Directors. If officers
are not chosen at such meeting of the Board of Directors, they shall be chosen
as soon thereafter as shall be convenient. Each officer shall hold office until
his successor shall have been duly chosen or until his removal or resignation.
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Section 4.2. REMOVAL AND RESIGNATION. Any officer chosen by the Board
of Directors may be removed at any time, with or without cause, by the
affirmative vote of a majority of all the members of the Board of Directors.
Any officer chosen by the Board of Directors may resign at any time by
giving written notice of said resignation to the Corporation. Unless a different
time is specified therein, such resignation shall be effective upon its receipt
by the Chairman of the Board, the President, the Secretary or the Board of
Directors.
Section 4.3. VACANCIES. A vacancy in any office because of any cause
may be filled by the Board of Directors for the unexpired portion of the term.
Section 4.4. CHAIRMAN OF THE BOARD. The Chairman of the Board shall,
when present, preside at all meetings of the stockholders and of the Board of
Directors.
Section 4.5. PRESIDENT. The President shall be the Chief Executive
Officer of the Corporation. As Chief Executive Officer, he shall exercise the
general supervision of the property, affairs and business of the Corporation,
shall sign or countersign or authorize another officer to sign all certificates,
contracts, and other instruments of the Corporation as authorized by the Board
of Directors, shall make reports to the Board of Directors and the stockholders,
and shall perform all such other duties as are incident to such officer or are
properly required by the Board of Directors.
Section 4.6. ABSENCE OR DISABILITY OF THE CHIEF EXECUTIVE OFFICER. In
the absence or disability of the President, the Board of Directors shall
designate one of the other officers or directors of the Corporation or other
individual to act as Chief Executive Officer.
Section 4.7. VICE PRESIDENT OF FINANCE. The Vice President of Finance
shall be the chief financial officer of the Corporation. Such officer shall have
custody of all moneys and securities of the Corporation and shall keep regular
books of account. Such officer shall disburse the funds of the Corporation in
payment of the just demands against the Corporation, or as may be ordered by the
Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Board of Directors from time to time as may be required of such
officer, an account of all transactions and of the financial condition of the
Corporation. Such officer shall perform all duties incident to such office or
which are properly required by the Board of Directors or by the chief executive
officer.
Section 4.8. EXECUTIVE VICE PRESIDENTS. The Executive Vice Presidents
shall perform such duties and have such other powers as may from time to time be
assigned and conferred upon them by the Board of Directors or by the chief
executive officer.
Section 4.9. SENIOR VICE PRESIDENTS AND VICE PRESIDENTS. The Senior
Vice Presidents and the Vice Presidents shall respectively perform such duties
and have such powers as may from time to time be assigned and conferred upon
them by the Board of
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Directors or by the chief executive officer, and shall perform such other duties
and have such other powers as may be reasonably incident to their respective
offices.
Section 4.10. SECRETARY. The Secretary shall see that notices for all
meetings are given in accordance with the provisions of these Bylaws and as
required by law, shall keep minutes of all meetings, shall have charge of the
seal and the corporate books, and shall make such reports and perform such other
duties as are incident to such office or which are properly required by the
Board of Directors or by the chief executive officer. The Assistant Secretary or
the Assistant Secretaries, in the order of their seniority, shall, in the
absence or disability of the Secretary, or in the event of such officer's
refusal to act, perform the duties and exercise the powers and discharge such
duties as may be assigned from time to time by the Board of Directors or by the
chief executive officer.
Section 4.11. TREASURER. The Treasurer shall, in the absence or
disability of the Vice President of Finance, or in the event of such officer's
refusal to act, perform the duties and exercise the powers of the Vice President
of Finance, and shall have such powers and discharge such duties as may be
assigned from time to time by the Board of Directors or by the chief executive
officer.
Section 4.12. CORPORATE CONTROLLER. The Corporate Controller shall
perform such duties and have such powers as may be from time to time assigned
and conferred upon him by the Board of Directors or by the chief executive
officer, and shall perform such other duties and have such other powers as may
be reasonably incident to such office.
Section 4.13. SUBORDINATE OFFICERS. The Board of Directors may from
time to time elect such subordinate officers as it may deem desirable. Each such
officer shall hold office for such period, and shall have such authority and
perform such duties, as the Board of Directors or the chief executive officer
may from time to time prescribe. The Board of Directors may authorize any
officer to appoint subordinate officers and to prescribe the powers and duties
thereof.
Section 4.14. COMPENSATION. The Board of Directors shall have power to
fix the compensation of all officers and employees of the Corporation. It may
appoint one or more committees with authority to fix the compensation of
officers and employees, it may authorize the chief executive officer or any
officer upon whom the power of appointing subordinate officers may have been
conferred to fix the compensation of subordinate officers, and it may authorize
an individual to fix the salaries and wages of non-officer employees. No officer
shall be prevented from receiving a salary or other compensation from the
Corporation by reason of the fact that such officer is also a director of the
Corporation.
ARTICLE V
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STOCK
Section 5.1. CERTIFICATES. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by or in the name of the
Corporation by the Chairman of the Board of Directors, or the President or a
Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary, of the Corporation, certifying the number of shares
owned by him in the Corporation. If such certificate is manually signed by one
officer or manually countersigned by a transfer agent or by a registrar, any
other signature on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
Section 5.2. LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF
NEW CERTIFICATES. The Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it, alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate, or his legal representative, to give the
Corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
ARTICLE VI
MISCELLANEOUS
Section 6.1. FISCAL YEAR. The fiscal year of the Corporation shall be
determined by the Board of Directors.
Section 6.2. SEAL. The Corporation may have a corporate seal which
shall have the name of the Corporation inscribed thereon and shall be in such
form as may be approved from time to time by the Board of Directors. The
corporate seal may be used by causing it or a facsimile thereof to be impressed
or affixed or in any other manner reproduced.
Section 6.3. WAIVER OF NOTICE OF MEETINGS OF STOCKHOLDERS, DIRECTORS
AND COMMITTEES. Whenever notice is required to be given by law or under any
provision or the Certificate of Incorporation or these Bylaws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders,
directors, or members of a committee of directors need be specified in any
written waiver of notice.
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Section 6.4. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES.
(a) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise or as a member of any committee or similar
body, against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, that he had
reasonable cause to believe that his conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or as a
member of any committee or similar body, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
Corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
(c) Any indemnification under Section 6.4(a) or Section 6.4(b) of
the Bylaws (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in Sections 6.4(a) and
6.4(b) of the Bylaws. Such
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determination shall be made (i) by the Board by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding,
or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (iii) by the stockholders.
(d) Notwithstanding the other provisions of this Section, to the
extent that a director, officer, employee or agent of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 6.4(a) or Section 6.4(b) of the Bylaws, or in
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
(e) Expenses incurred in defending a civil or criminal action,
suit or proceeding may be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding as authorized by the Board in the
specific case upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Corporation as
authorized in this Section.
(f) The indemnification provided by this Section shall not be
deemed exclusive and is declared expressly to be nonexclusive of any other
rights to which those seeking indemnification may be entitled under any Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(g) Upon resolution passed by the Board, the Corporation may
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise or as a
member of any committee or similar body against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Section.
(h) For the purposes of this Section, references to "the
Corporation" include in addition to the resulting corporation any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise or as
a member of any
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committee or similar body shall stand in the same position under the provisions
of this Section with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(i) To assure indemnification under this Section of all such
persons who are determined by the Corporation or otherwise to be or to have been
"fiduciaries" of any employee benefit plan of the corporation which may exist
from time to time, references to "other enterprises" shall be deemed to include
such an employee benefit plan, including, without limitation, any plan of the
Corporation which is governed by the Act of Congress entitled "Employee
Retirement Income Security Act of 1974," as amended from time to time; the
corporation shall be deemed to have requested a person to serve an employee
benefit plan where the performance by such person of his duties to the
Corporation also imposes duties on, or otherwise involves services by, such
person to the plan or participants or beneficiaries of the plan; excise taxes
assessed on a person with respect to an employee benefit plan pursuant to such
Act of Congress shall be deemed "fines"; and action taken or omitted by a person
with respect to an employee benefit plan in the performance of such person's
duties for a purpose reasonably believed by such person to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be for a
purpose which is not opposed to the best interests of the Corporation.
Section 6.5. INTERESTED DIRECTORS; QUORUM. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have financial interest, shall be void or voidable solely for this
reason, or solely because the director or officer is present at or participates
in the meeting of the Board of Directors or committee thereof which authorizes
the contract or transaction, or solely because his or their votes are counted
for such purpose, if: (1) the material facts as to his relationship or interest
and as to the contract or transaction are disclosed or are known to the Board or
the committee, and the Board or committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or (2)
the material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or (3) the contract or transaction is fair as to
the Corporation as of the time it is authorized, approved or ratified, by the
Board, a committee thereof or the stockholders. Common or interested directors
may be counted in determining the presence of a quorum at a meeting of the Board
or of a committee which authorizes the contract or transaction.
Section 6.6. REPRESENTATION OF SHARES IN OTHER CORPORATIONS. Shares of
other corporations standing in the name of this Corporation may be voted or
represented and all incidents thereto may be exercised on behalf of the
Corporation by the Chairman
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of the Board, the President, the Executive Vice President(s) or any Vice
President and the Treasurer or the Secretary or an Assistant Secretary.
Section 6.7. AUTHORIZED SIGNATURES. All written instruments shall be
binding upon the Corporation if signed on its behalf by any two of the following
officers of the Corporation: the Chairman of the Board, the Vice Chairman, the
President, the Executive Vice President(s), the Senior Vice President(s) and the
Vice Presidents.
Section 6.8. FORM OF RECORDS. Any records maintained by the
Corporation in the regular course of its business, including its stock ledger,
books of account and minute books, may be kept on, or be in the form of, punch
cards, magnetic tape, photographs, microphotographs or any other information
storage device, provided that the records so kept can be converted into clearly
legible form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
Section 6.9. AMENDMENT OF BYLAWS. These Bylaws may be amended or
repealed, and new Bylaws adopted, by the Board of Directors, but the
stockholders entitled to vote may adopt additional Bylaws and may amend or
repeal any Bylaw whether or not adopted by them, provided that such stockholder
action is approved by the affirmative vote of the holders of not less than
two-thirds of the total voting power of all outstanding shares of stock of the
Corporation entitled to vote in the election of directors, considered for
purposes of this Section as one class.
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Exhibit 10.1.10
SPLIT-DOLLAR LIFE INSURANCE AGREEMENT
DECEMBER 21, 1999
POPE & TALBOT, INC.
A DELAWARE CORPORATION
1500 S.W. FIRST AVENUE, SUITE 200
PORTLAND, OREGON 97201 COMPANY
MARIA M. POPE
TRUSTEE OF THE POPE GRANDCHILDREN'S TRUST
1500 S.W. FIRST AVENUE, SUITE 200
PORTLAND, OREGON 97201 TRUSTEE
The Company and the Trustee enter into this Agreement to govern an
arrangement whereby the Company and the Trustee will join in the purchase of
Policy No. 020043774, on a policy form entitled Variable Estate Protection
Policy 1999, (Policy), issued by John Hancock Mutual Life Insurance Company
(Insurer), insuring the lives of Peter T. Pope (Pope) and his wife, Josephine D.
Pope. This Agreement is entered into in connection with the employment by the
Company of Pope as the Company's Chairman and Chief Executive Officer and is
intended to be a split-dollar life insurance agreement described in Rev. Rul.
64-328.
ARTICLE 1
LIFE INSURANCE POLICY AND COLLATERAL ASSIGNMENT
1.01 POLICY
1.01-1 In connection with this Agreement, the Trustee will
apply for and purchase the Policy.
1.01-2 The Trustee will be owner of the Policy. The Trustee
may freely exercise all rights and incidents of ownership, subject to the rights
of the Company under this Agreement and the collateral assignment of the Policy
to secure the Company's rights as described below.
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1.01-3 The Trustee may pledge or assign the Policy to secure
a loan, including a policy loan from the Insurer, but only to the extent that
the Policy death benefit and net cash surrender value will not thereby be
reduced below the amount the Company would then be entitled to receive under
2.01 in the event of a death benefit being payable under the Policy or under
3.01 in the event of surrender of the Policy. The Trustee is responsible for
payment of interest on any such loan.
1.01-4 The Trustee will promptly provide copies of all
Policy documents, including the Policy, the Policy application, the Collateral
Assignment, any loan documents and any other documents relating to the Policy,
to the Company.
1.02 PREMIUM PAYMENTS
The Company will pay the entire premium under the policy.
1.03 COLLATERAL ASSIGNMENT
1.03-1 To secure the Company's rights under this Agreement,
the Trustee will collaterally assign the Policy to the Company using a
collateral assignment form attached as Attachment A (Collateral Assignment). The
Collateral Assignment will merely secure the Company's rights under this
Agreement and will not transfer any incidents of ownership of the Policy to the
Company.
1.03-2 The Trustee shall own and retain all rights under the
Policy, subject to the Company's rights under the Collateral Assignment,
including the right to designate beneficiaries, the right to settlement and
dividend options, the right to make a policy loan on the cash value as security,
the right to surrender or partially surrender the Policy and receive the cash
value and any other incidents of ownership.
1.03-3 The Trustee and the Company will take any additional
actions necessary to cause the Collateral Assignment to conform to this
Agreement.
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ARTICLE 2
DEATH BENEFIT UNDER POLICY
2.01 PAYMENT TO COMPANY
If a death benefit becomes payable under the Policy, a sum
equal to the accumulated premiums paid by the Company under 1.02, less any
amount previously reimbursed, shall be paid to the Company.
2.02 BALANCE OF PROCEEDS
Any balance of the proceeds over the amount payable under 2.01
shall be paid to the Trustee or other beneficiaries designated by the Trustee in
the manner and in the amounts provided in the Policy's provisions for
designation of beneficiary.
ARTICLE 3
SURRENDER OF POLICY
3.01 PAYMENT TO COMPANY ON SURRENDER
If the Trustee surrenders or partially surrenders the Policy,
the Company shall have the unqualified right to receive the lesser of (a) the
net proceeds from the complete or partial surrender of the policy or (b) the
accumulated premiums paid by the Company under 1.02, less any amount previously
reimbursed.
3.02 BALANCE OF NET CASH SURRENDER VALUE
Any balance of the Policy's net cash surrender value over the
amount payable to the Company under 3.01 shall be payable to the Trustee.
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ARTICLE 4
TERMINATION OF AGREEMENT
4.01 TERMINATION OF AGREEMENT
This Agreement shall terminate on the earlier of (a) such date
as the Company and the Trustee may agree in writing or (b) the last day of the
sixteenth Policy year.
4.02 RELEASE OF COLLATERAL ASSIGNMENT
4.02-1 For sixty days after the date of termination of the
Agreement under 4.01, the Trustee shall have the option of obtaining the release
of the Collateral Assignment as follows.
4.02-2 The Trustee may exercise this option by paying to the
Company the amount of the net cash surrender value of the Policy that the
Company would then be entitled to receive under 3.01 if the Policy were then
surrendered.
4.02-3 Upon receipt of payment under 4.02-2 the Company will
release the Collateral Assignment by executing and delivering to the Trustee and
the Insurer an appropriate instrument of release.
4.03 COMPANY'S RIGHTS
If the Trustee does not exercise the option under 4.02, the
Company may enforce its rights to claim and receive payment from the net cash
surrender value of the Policy of the amount under 3.01. The Trustee will, at the
Company's request, execute any documents required by the Insurer to make payment
to the Company, including surrender or partial surrender of the Policy if
required under the terms of the Policy.
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ARTICLE 5
MISCELLANEOUS
5.01 BINDING AGREEMENT
This Agreement is binding on and enforceable by and against
the parties, their successors, legal representatives and assigns.
5.02 AMENDMENTS
This Agreement may be amended only in a written document
signed by both parties.
5.03 GOVERNING LAW
This Agreement is governed by and construed according to the
laws of the state of Oregon with the exception of its rules with respect to
choice of laws.
5.04 SEVERABILITY
No part of this Agreement will be affected if any other part
of it is held invalid or unenforceable.
5.05 NOTICES
All notices required or permitted to be given under this
Agreement must be given in writing and will be deemed given when personally
delivered or, if earlier, when received after mailing by registered or certified
mail, postage prepaid, with return receipt requested.
5.06 ADAYS@
Any reference in this Agreement to Adays@ means all calendar
days, whether or not legal holidays.
5.07 WAIVERS
A party's failure to insist on compliance or enforcement of
any provision of this Agreement shall neither affect the validity of the
provision or its enforceability, nor constitute a waiver of future enforcement
of that or any other provision.
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5.08 DUPLICATE ORIGINALS
This Agreement may be executed in duplicate originals, any of
which shall have the same significance.
TRUSTEE: TRUSTEE OF THE POPE GRANDCHILDREN'S TRUST
By: /s/ Maria M. Pope
------------------
COMPANY: POPE & TALBOT, INC.
By: /s/ Michael Flannery
---------------------
6
<PAGE>
Exhibit 10.1.11
August 31, 1999
Mr. Ralph Leverton
9137 N.W. McKenna Drive
Portland, OR 97229
RE: SEPARATION AGREEMENT
Dear Ralph:
This letter, when signed by you, will constitute our Agreement regarding your
separation from employment with "Pope & Talbot, Inc." (or the "Company").
Because of the subject of this letter, its tone necessarily is formal. However,
on behalf of the Company, I want to express our appreciation for the
contributions you have made during your employment. I also want to convey to you
our best wishes for your future.
We have mutually agreed upon your resignation as Vice President Pulp Division
from the Company effective July 31, 1999. Your separation will be recorded in
your personnel file and communicated by management within the Company as a
resignation.
The Company has agreed to provide you with the following:
o Three months of salary continuation starting on August 1, 1999 and
ending on October 31, 1999. This salary continuation is for the purpose
of you providing transition services as requested by me.
o Medical and dental benefits to continue through October 31, 1999 with
Pope & Talbot or until your reside in Canada and are covered under the
Harmac agreement, whichever occurs first.
o Club dues will continue through October 31, 1999 or until you reside in
Canada and are covered under the Harmac agreement, whichever occurs
first.
o Continued use of the vehicle through October 31, 1999 or until you
reside in Canada and are covered under the Harmac agreement, whichever
occurs first.
o We will notify immigration on October 31, 1999 that you are no longer
with the company.
1
<PAGE>
Mr. Ralph Leverton
Separation Agreement
August 31, 1999
Page 2
o We will pay $2,500.00 towards the cost for Arthur Andersen to prepare
your 1999 Canadian and U.S. tax returns.
o We will relocate you back to Vancouver, B.C. according to Pope &
Talbot's Relocation Policy with modifications, of which you have a
copy.
You acknowledge that the Company has no legal obligation to provide you with
these separation/transition benefits except as part of this Agreement. These
benefits are unique to you and your circumstances.
In consideration for these benefits, you release the Company, its officers,
directors, employees, agents, and insurers, from any claims you might have,
whether known or unknown to you at this time, in connection with your employment
or your resignation. This release includes any claims you might have under
applicable state, federal or local law dealing with employment, contract, wage
and hour, tort, or civil rights matters, including, but not limited to
applicable state civil rights or wage payment laws, Title VII of the Civil
Rights Act of 1964, the Post-Civil War Rights Acts (42 USC (delta)(delta)
1981-1988), the Civil Rights Act of 1991, the Age Discrimination in Employment
Act, the Older Workers Benefit Protection Act, the Rehabilitation Act of 1973,
the Americans with Disabilities Act, the Equal Pay Act, the Family and Medical
Leave Act, the Uniformed Services Employment and Reemployment Rights Act, the
Vietnam Era Veterans Readjustment Assistance Act, the Worker Adjustment and
Retraining Notification Act, Executive Order 11246, and any regulations under
such laws. This release, however, does not affect any rights you might have for
benefits under any applicable medical insurance, disability, workers
compensation, unemployment compensation or retirement program, or the two
attached letters (one from Harmac Pacific dated November 30, 1998 and one from
Pope & Talbot, Inc. dated December 2, 1998).
You agree to hold confidential the terms of this separation Agreement, except to
the extent that disclosure of its terms to your spouse, accountant, attorney and
taxing authorities may be necessary for your financial or legal affairs or as
may be required by law.
You acknowledge that this Separation Agreement contains the entire agreement
between you and the Company regarding the terms of your separation from
employment. You further acknowledge that you have been given at least 21 days to
consider this agreement and discuss it with financial or legal counsel of your
choice; and that you voluntarily sign it and agree to be bound by its terms. You
understand that this Separation Agreement must be signed within 21 days after
you receive it in order for you to be entitled to the benefits given under it.
However, you may revoke the Separation Agreement by sending me a written
statement to that effect within 7 days after you have signed it. Unless you
revoke it, the Separation Agreement will be
2
<PAGE>
Mr. Ralph Leverton
Separation Agreement
August 31, 1999
Page 3
effective as of 7 days after you have signed it and the Company will then
provide you with the benefits stated in the Separation Agreement.
If you wish to enter into this Separation Agreement, please sign the enclosed
copy where indicated and return the copy to me.
Again, I thank you for all you have done for us during your employment and wish
you every success in the future.
Sincerely,
Michael Flannery
Chairman &
Chief Executive Officer
BH:kmt
fl'rl899
Enclosure
I voluntarily agree to and accept the terms of this Separation Agreement.
- ---------------------------------------- -----------------------------------
Ralph Leverton Date Signed
3
<PAGE>
EXHIBIT 11.1
POPE & TALBOT, INC. AND SUBSIDIARIES
Statement Showing Calculation of Average
Common Shares Outstanding and Earnings
Per Average Common Share
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average number of
common shares outstanding 13,666,705 13,481,441 13,419,195
Application of the "treasury stock"
method to the stock option plan 82,654 807 42,257
---------------- --------------- ---------------
Total common and common
equivalent shares,
assuming full dilution 13,749,359 13,482,248 13,461,452
================ =============== ===============
Net income $ 14,421,000 $ 342,000 $ 10,020,000
================ =============== ===============
Net income per common share,
assuming dilution $ 1.05 $ .03 $ .75
================ =============== ===============
</TABLE>
The computation of basic net income per common share is not included because the
computation can be clearly determined from the material contained in this
report.
<PAGE>
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Pope & Talbot, Inc. and Subsidiaries
OVERVIEW
Improving pulp and lumber markets, combined with pulp mill and sawmill
efficiency gains, led to dramatically improved financial results in 1999. Net
income for 1999 was $14.4 million, or $1.05 per diluted share, compared with a
loss from continuing operations of $23.5 million, or $1.74 per diluted share, in
1998. Income from continuing operations was $4.4 million, or $.33 per diluted
share, in 1997. On November 8, 1999, the Company acquired the remaining minority
interest in Harmac Pacific Inc. (Harmac). The Company became the controlling
shareholder of Harmac with a 53 percent ownership interest on February 2, 1998
and increased its ownership of Harmac to 60 percent on December 2, 1998. The
Company's consolidated results of operations include Harmac's results from
February 2, 1998.
The Company made significant progress during 1999 on several strategic
objectives. In the fourth quarter of 1999, with the acquisition of the remaining
Harmac minority interest, the Company completed the last step of the process
begun in 1997 to reposition the Company to exclusively wood products and pulp
business lines. On a per share basis, Pope & Talbot is highly leveraged to pulp
and lumber price changes. Production of North American softwood lumber reached a
new record high in 1999, the highest level in twelve years. Lumber prices
reached a cyclical high in the third quarter of 1999 and at year-end 1999
remained above 1998 price levels. In January 2000, the list price of northern
bleached softwood kraft (NBSK) pulp delivered into Europe increased to $630 per
metric ton, a level not experienced since the first quarter of 1996.
Total revenues in 1999 increased to $486.9 million from $420.8 million
in 1998 and $329.9 million in 1997. Lumber sales volumes in 1999 were flat
compared with 1998, but the Company's average lumber sales prices increased 16
percent. Pulp sales volumes in 1999 increased 10 percent over 1998 volumes, and
average pulp sales prices ton increased 4 percent. Comparing 1998 revenues with
1997, excluding Harmac revenues of $140.3 million in 1998, total revenues would
have been less than 1997 primarily due to low commodity prices in both lumber
and pulp. In addition, U.S. pulp operations in 1998 experienced a 12 percent
decrease in volume sold compared with 1997 as the result of market-related
downtime.
The Company's focus on cost reductions at the mills and on controlling
selling, general and administrative expenses was also a strategic objective.
Cost of sales were $430.7 million, $429.1 million and $300.3 million in 1999,
1998 and 1997, respectively. The increase in cost of sales in 1998 compared with
1997 primarily reflects the acquisition of Harmac in 1998. Included in the 1998
amount was $140.4 million of Harmac pulp operations costs. For additional
details regarding costs of sales, see the Wood Products and Pulp Products
sections following this overview.
Selling, general and administrative expenses were $23.9 million in
1999, compared with $24.1 million in 1998 and $14.8 million in 1997. Costs in
1998 increased $9.3 million over 1997 primarily due to the inclusion of Harmac
in the 1998 results without any corresponding amounts in 1997. In 1999, the
Company's progress in reduction of costs through integration of Harmac's
corporate and sales functions with Pope & Talbot's was largely offset by higher
legal and other corporate costs.
The Company is also focused on maximizing return on invested capital.
Capital expenditures for 1999, excluding environmental compliance costs, have
been aimed at small, high-return investments to increase efficiencies and
capacity. The open market purchases by the Company of approximately 430,000
shares of its common stock in the fourth quarter of 1999 was consistent with the
goal of maximizing returns on invested capital.
RESULTS OF OPERATIONS
WOOD PRODUCTS
The Company's Wood Products business comprised 51 percent of 1999 consolidated
revenues and generated an operating profit before corporate expenses, interest
and income taxes of $42.6 million. Results for 1999 compared to 1998 and 1997
operating profits of $1.3 million and $24.9 million, respectively.
Wood Products revenues were $248.7 million in 1999 compared with $216.9
million and $248.3 million in 1998 and 1997, respectively. The $31.8 million
increase in 1999 was due primarily to a 16 percent increase in average lumber
prices. The 1998 revenue decrease relative to 1997 was due to lumber prices
averaging 21 percent lower in 1998.
U.S. lumber consumption reached record levels in 1999, with housing
starts of almost 1.7 million and softwood lumber consumption in the U.S.
approximating 54 billion board feet. Improving economies in Japan and other
Pacific Rim countries also had a favorable impact on lumber demand in 1999. The
Company shipped 577.9 million board feet in 1999, compared with 573.0 million
board feet in 1998 and 546.4 million board feet in 1997. The average price per
thousand board feet of western spruce/pine/fir (SPF) lumber has fluctuated
significantly during the last three years. The Random Lengths Composite Price
Index for SPF averaged $354 per thousand board feet in 1997, $288 in 1998 and
rose to $342 in 1999. Despite record domestic demand in 1998, the collapse of
the Japanese and other Asian economies caused the price of lumber to drop
dramatically in 1998.
Wood Products cost of sales for 1999 totaled $199.3 million, compared
with $211.8 million in 1998 and $219.1 million in 1997. The $12.5 million
decrease in cost of sales in 1999 was primarily due to reductions in the cost of
saw logs as well as to lower manufacturing costs. Wood Products cost of sales in
1998 declined $7.3 million from 1997, primarily due to log cost decreases.
Average log costs dropped 17 percent in the Canadian sawmills and 3 percent in
the U.S sawmills in 1999, after
<PAGE>
10
decreasing 11 percent and 5 percent, respectively, in 1998 relative to 1997.
British Columbia stumpage fees, which are indexed (with a three-month lag) to
lumber prices, increased in the third quarter of 1999 in response to rising
lumber prices. Lumber production per man-hour and lumber recovery from logs
increased in 1999 and 1998 relative to 1997 as the result of several
well-targeted capital expenditures. In the fourth quarter of 1999, the
Company completed the installation of a new curve sawing gang-edger at the
Spearfish, South Dakota mill. The new energy system in place at our largest
Canadian sawmill, Castlegar, led to further cost savings in 1999.
Approximately 75 percent of the Company's current lumber capacity is
located in British Columbia, Canada. Most of the timber supply for the Canadian
mills is under long-term harvesting licenses with the Provincial Government and
the balance is purchased in the open market. Lumber sales into the U.S. from
certain provinces in Canada (including British Columbia) are subject to tariffs
under the 1996 Softwood Lumber Agreement. Based on this agreement, as amended by
Canada and the United States on August 26, 1999, Canadian lumber producers in
certain provinces are assigned quotas of lumber volumes which may be shipped to
the U.S. tariff-free. Incremental volumes are subject to a three-tier tariff of
$53 per thousand board feet, $106 per thousand board feet and $146 per thousand
board feet. The first annual period subject to quotas and tariffs ended March
31, 1997. The Company's tariff-free volume was reduced by 11.4 million board
feet from 1996/1997 fiscal year to the 1997/1998 fiscal year, and then by
another 11.6 million board feet for the 1998/1999 fiscal year. The tariff-free
volume was essentially unchanged from 1998/1999 to 1999/2000. Although the
Company's volume at the $53 tariff was reduced by 4.1 million board feet for
1999/2000, the volume at the $106 tariff was limited (previously it was
unlimited) and the additional tier at $146 per thousand board feet was added.
The net impact of these changes has been to increase tariff fees paid to the
Government of Canada and/or reduce production (by increasing downtime) at the
Company's British Columbia sawmills. During 1999, 1998, and 1997, the Company
expensed tariff charges of approximately $7.1 million, $2.9 million and $1.9
million, respectively, related to shipments from the Company's British Columbia
sawmills into the U.S. Because of the Softwood Lumber Agreement, the Company
took several shutdowns during 1999, 1998 and 1997. The Company continually
evaluates the need for temporary shutdowns in balancing the economics of the
Softwood Lumber Agreement, sales prices and production costs.
The Provincial Government of British Columbia's Commission of Resources
and Environment issued the Kootenay Boundary Land Use Plan in 1997. This land
use plan set aside several new wilderness areas. Although no assurances can be
given, management believes that in the near term, timber supplies for the
Company's Canadian sawmills will be relatively stable. The Company has in place
reforestation practices designed to sustain and enhance timber supplies in the
long-term to mitigate the adverse effects of forest restrictions.
PULP PRODUCTS
In the fourth quarter of 1999, the Company completed the acquisition of the
remaining 40 percent Harmac minority interest. As a result of acquiring the
minority interest in Harmac's annual capacity, the Company increased its annual
pulp capacity by 152,000 tons. In addition, integration of Harmac's
administrative, sales and other mill support functions was substantially
completed by the end of 1999. The Company's proportion of revenues in 1999 from
pulp products was 49 percent of total revenues compared with 48 percent in 1998
and 25 percent in 1997. The Company is currently the world's ninth largest
producer of high grade NBSK pulp with approximately 445,000 metric tons of
capacity. The Company also has 125,000 metric tons of short-fiber (sawdust) pulp
producing capacity. In 1999, revenues from the Company's pulp operations totaled
$238.2 million, compared with $203.8 million in 1998 and $81.6 million in 1997.
Due to steadily increasing pulp prices combined with sales volume increases,
operating losses from the Company's pulp operations in 1999 decreased to $1.9
million from $21.2 million in 1998. Operating losses related to the Company's
Halsey mill in 1997 totaled $2.7 million.
Pulp pricing, reflecting weak pulp markets since the end of 1996,
strengthened significantly in the second half of 1999. The European benchmark
price for NBSK pulp averaged $587 per metric ton in the fourth quarter of 1999
compared with $462 per metric ton in the fourth quarter of 1998, an increase of
27 percent. The benchmark price of NBSK pulp per metric ton averaged $520 in
1999, $516 in 1998 and $566 in 1997.
Pulp revenues in 1999 for the Company's Harmac mill, in Nanaimo,
British Columbia, were $162.9 million on shipments of 375,000 metric tons. This
compares with sales of $140.3 million on 335,000 metric tons in the eleven-month
period of 1998. Approximately 50 percent of sales were to Europe, 30 percent to
Japan and other Pacific Rim countries and 20 percent to North America.
Harmac produced 370,800 tons in 1999, the highest volume of pulp
produced by the mill since 1969. Harmac produced 325,100 metric tons of pulp in
the eleven-month period of 1998. During 1999, total costs decreased $6 per
metric ton of pulp. This reduction was primarily the result of lower fiber costs
due to species mix changes and to lower labor costs. Mill staff reductions
related to the 1998 restructuring initiative have reduced labor costs and
improved the mill's man-hour per ton of production efficiency ratio to 3.1 from
3.6 for the year 1998.
Harmac has a long-term fiber supply agreement with Weyerhaeuser Company
Limited that provides 1.7 million cubic meters of fiber per year through 2019.
Fiber is purchased at market or at prices determined under a formula intended to
reflect fair market value of the fiber and which takes into account the net
sales value of pulp sold by Harmac. Surplus residual fiber in coastal British
Columbia and the mix of pulp products produced mitigated the impact of the more
expensive whole log chips and the cost of fiber indexed to the sales price of
pulp.
To reduce break-even levels, the Company has focused on reducing
operating costs at the Harmac mill. During 1998, the Company initiated a
comprehensive restructuring plan by closing
<PAGE>
11
Harmac's on-site log chipping mill and the Vancouver, BC corporate
administrative and pulp sales office. The plan also included reductions of
hourly and salaried staff at the mill. The pulp sales and administrative
functions of Harmac and Pope & Talbot were combined during the fourth quarter
of 1998 in the Company's corporate office in Portland, Oregon. The combined
pulp sales function sells a broad range of pulp and is able to pursue larger
pulp customers and negotiate better transportation prices. A new labor
contract ratified in January 1999 provided for improved work practice
flexibility, leading to further reductions in labor costs at the mill. Also
in 1998, Harmac completed its three-year project to modernize its fiber
handling system. As a result of these initiatives and other actions, Harmac
lowered its manufacturing costs by $30 per metric ton from 1997 to 1999.
Certain restructuring costs recorded by Harmac totaling $6.5 million
(costs totaling $5.6 million associated with employee terminations and $900,000
of fixed asset write-offs) were included in liabilities in the computation of
the fair value of assets and liabilities assumed at the acquisition date. Costs
charged to the restructure liability in 1998 totaled $3.2 million and related
primarily to severance and other employee benefits and fixed asset write-offs.
Costs charged to the restructure liability in 1999, primarily cash payments for
severance and other employee benefits, totaled $1.3 million. As of December 31,
1999, total restructuring costs incurred and anticipated for the restructuring
plan totaled $5.0 million. Therefore, $1.5 million of restructuring costs
included in the original acquisition cost allocation was reversed at December
31, 1999 as an adjustment to the fair value of assets and liabilities acquired.
The remaining liability for restructuring costs at December 31, 1999 was $.5
million, representing employee benefits payable to terminated employees.
Pulp revenues for the Company's Halsey, Oregon mill in 1999 were $75.3
million compared with $63.5 million in 1998 and $81.6 million in 1997. Average
1999 prices realized at Halsey increased 6 percent from 1998 prices. In
addition, sales volume in 1999 increased 17 percent from 1998 volumes. For 1999
and 1998, all of Halsey's pulp sales were priced on the basis of market prices
for the various grades of pulp, including the 35 to 40 percent sold to Grays
Harbor Paper Company (Grays Harbor). During 1997, 50 percent of Halsey's pulp
was sold to Grays Harbor with pricing contractually indexed to the price of
white paper. In 1998, the contract was modified to provide for pricing based on
southern mixed (U.S.) bleached hardwood kraft prices.
Halsey shipped 185,000 metric tons of pulp in 1999, compared with
158,000 metric tons in 1998 and 180,000 metric tons in 1997. In 1999, the Halsey
mill achieved an all-time production record of 181,000 metric tons. Production
was reduced in 1998 to balance inventory levels and reduce fiber costs.
The Halsey mill produces pulp from two fiber sources- wood chips and
sawdust. Sawdust has historically been in greater supply and less expensive than
wood chips, which are normally used as the primary raw material for pulp mills.
As a result of rising wood chip prices in 1998, Halsey further shifted its mix
of production in favor of the lower cost fiber source. Halsey's 1999 sales mix
was 69 percent sawdust pulp compared with 62 percent and 59 percent in 1998 and
1997, respectively. Sawdust prices averaged 9 percent higher in 1999 compared
with 1998, and rose 16 percent in 1998 from 1997 levels. In contrast, the price
of wood chips fell 17 percent in 1999 from 1998 average prices. Wood chip prices
in 1998 increased 49 percent from average prices in 1997.
The Company expects to complete its $35 million chlorine dioxide
capital project at the Halsey mill by the end of 2000. These expenditures will
improve the environmental performance of the mill and make it fully compliant
with the Environmental Protection Agency's (EPA) "Cluster Rules." In addition,
pulp quality will be improved.
The Company changed the method of depreciating its U.S. pulp production
assets from straight-line to units-of-production in 1998. The Company believed
this method, common within the industry, most appropriately matches production
costs with pulp sales revenues and brought the accounting methods of the
Company's pulp mills into conformity. The impact to the consolidated loss from
continuing operations in 1998 was a reduction of depreciation expense before tax
of $.8 million. The cumulative effect of this accounting change on years prior
to 1998 was income of $.7 million, net of tax, or $.06 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of internally generated cash is operating income
before depreciation and the principal external source of cash is debt financing.
The Company had a strong recovery in earnings before income taxes, depreciation
and amortization (EBITDA), starting in the second quarter of 1999. EBITDA for
the year 1999 was $65.1 million compared with a negative EBITDA of $3.1 million
in 1998 and EBITDA of $33.5 million for 1997. EBITDA for all years excludes the
impact of minority interest and discontinued operations.
The $14.4 million increase in accounts receivable in 1999 was primarily
the result of higher pulp sales volumes at higher prices in 1999. Inventories
increased at year-end 1999 as logging activities increased during the winter
months, and higher levels of wood chips for pulp operations were acquired at
favorable prices in late 1999. Cash flow from reductions in inventories in 1998
of $16.9 million related primarily to active management of Wood Products log and
lumber inventories. Changes in current and deferred income taxes in 1999 and
1998 relate primarily to the utilization of deferred tax assets related to net
operating loss carryforwards. The increase in other liabilities in 1998 related
primarily to restructuring cost liabilities.
On September 30, 1999, the Company completed the sale and leaseback of
its Halsey, Oregon pulp mill. The Company received $64.6 million in cash and
treated the transaction as a financing for financial reporting purposes. A
portion of the proceeds was used to fund the Company's $35 million capital
project to bring the Halsey mill into compliance with the EPA's "Cluster
Rules."
On November 8, 1999, the Company acquired the 40 percent of the
outstanding Harmac stock it did not already own. Under terms of the agreement,
Harmac shareholders received
<PAGE>
12
approximately $20 million U.S. in cash and approximately 1.5 million shares
of Company common stock. In conjunction with the transaction, Harmac redeemed
its 8% convertible subordinated debentures with an outstanding principal
balance of $76.5 million Canadian (approximately $52 million U.S.) at par
plus accrued interest. The cash requirements for these transactions were
financed with a portion of the proceeds from the Halsey mill sale/leaseback
and existing cash balances.
On February 2, 1998, the Company increased its ownership of Harmac
stock from 10 percent to 53 percent through completion of a cash tender offer.
The total cost of the 53 percent interest in Harmac was $50.3 million, net of
cash acquired of $19.6 million, and included common stock purchases and other
acquisition costs. The payment for Harmac shares was made from existing cash and
cash equivalent balances and borrowings of approximately $20 million under the
Company's revolving credit agreement. The sale of the tissue business, also in
the first quarter of 1998, generated $120.5 million in cash and the purchaser
assumed certain tissue business liabilities. The Company used the cash received
primarily to pay down short-term debt obligations related to the Harmac
acquisition and to purchase short-term investments. In December 1998, the
Company acquired an additional 1.2 million shares of Harmac stock for $2.5
million, increasing its ownership to 60 percent.
In April 1999, the Company's Board of Directors authorized the
repurchase of up to 2 million shares of its common stock through open market and
privately negotiated transactions. During the fourth quarter of 1999, the
Company acquired approximately 430,000 shares of its common stock for $5.2
million through open market purchases. The Company acquires its stock when the
Company believes its shares are undervalued in the market.
The Company has historically paid dividends based on a percentage of
equity. Dividends paid totaled $7.0 million in 1999, and $10.2 million in 1998
and 1997. In the first quarter of 1999, the Board of Directors reduced the
quarterly dividend rate to $.11 per share from $.19 per share to conserve the
Company's net worth and cash balances.
At December 31, 1999 and 1998, the current ratio was 2.1 to 1 and 2.5
to 1, respectively, and the Company's long-term debt to total capitalization
ratio was 44 percent and 41 percent, respectively. At December 31, 1999, the
Company had available approximately $67 million of borrowing capacity under
revolving credit lines totaling $78 million.
Total capital spending in 1999 was $24.8 million. Capital spending in
1999, excluding Halsey's environmental compliance spending, was $18.1 million
compared with $27.6 million in 1998 and $13.1 million in 1997. The 1998
capital expenditures included Harmac's expenditures totaling $8.1 million, of
which $6.6 million related to the installation of a barge unloading facility
to modernize its fiber handling system. The Wood Products division spent
approximately $9 million in 1998 for a waste wood burning energy system at
the Castlegar sawmill.
The Company estimates it will spend approximately $35 million on
capital projects at its Halsey pulp mill by the end of 2000 to comply with the
EPA "Cluster Rules." Approximately $8.2 million of costs related to this project
have been incurred through December 31, 1999. Other anticipated capital projects
in the Wood and Pulp Divisions for 2000 will be primarily to sustain existing
operations with a limited number of relatively small, high-return projects.
Projected 2000 capital spending will be funded with internally generated cash
and supplemented, if necessary, with borrowings on the Company's lines of
credit.
DISCONTINUED OPERATIONS
In January 1998, the Company sold the assets of its tissue business for cash
consideration of $120.5 million and the assumption by the purchaser of certain
liabilities. The liabilities assumed included the $18.8 million City of Eau
Claire note payable and the business's $7.1 million post-retirement benefit
obligation. The sale closed on March 6, 1998 and the Company recognized a gain
of $26.8 million, net of tax. The Company's tissue business operating results
are reflected in the Consolidated Statements of Income as income from
discontinued operations, net of tax.
The Company sold its disposable diaper business in February 1996. In
1998, the Company settled legal issues related to the diaper business and
recognized certain costs related to facilities formerly used in diaper
production. These costs were $4.0 million, net of tax, or $.30 per share.
See Note 11 of Notes to Consolidated Financial Statements for
additional discussion of the discontinued tissue and disposable diaper
businesses.
YEAR 2000 COMPLIANCE
Pope & Talbot, like all other companies using computers and microprocessors, was
faced with the task of addressing the Year 2000 problem. The Year 2000 issue
existed because many computer systems and applications use two-digit fields to
designate a year. This could have led to incorrect results when computer
software performs arithmetic operations, comparisons or data field sorting
involving years later than 1999. As a result of the Company's efforts towards
systems replacement or corrections, no significant systems problems occurred at
the turn of the millennium.
Beginning in 1998, the Company embarked on a comprehensive approach to
identify where this problem was likely to occur in its information technology
and manufacturing systems, and to evaluate the Year 2000 readiness of certain
third parties, such as suppliers and customers. The direct costs of projects
solely intended to correct the Company's Year 2000 problems approximated $3.3
million. Most of these expenditures, related to replacement of systems and
applications, have been capitalized. No significant additional Year 2000
expenditures are anticipated.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The statements contained in this report that are not statements of historical
fact, including without limitation, statements containing the words "believes,"
"expects," and words of similar import, constitute forward-looking statements
that involve a number of risks and uncertainties. Moreover, from time to time
the Company may issue other forward-looking statements. Investors are cautioned
that such forward-looking statements
<PAGE>
13
are subject to an inherent risk that actual results may differ materially
from such forward-looking statements. Factors that may result in such
variances include, but are not limited to the following:
CYCLICAL OPERATING RESULTS AND PRODUCT PRICING
The Company's financial performance is principally dependent on the prices it
receives for its products. Prices for the Company's products are highly cyclical
and have fluctuated significantly in the past and may fluctuate significantly in
the future. Prices for both of the Company's principal products, lumber and
pulp, fell during 1998 and then improved in 1999. No assurance can be given as
to the sustainability of the recent price improvements.
The Company's financial performance is also dependent on the rate at
which it utilizes its production capacity. When capacity utilization is reduced
in response to weak demand for the Company's products, its cost per unit of
production increases and its profitability decreases.
The markets for the Company's products are highly cyclical and are
characterized by periods of excess product supply due to many factors,
including:
o additions to industry capacity;
o increased industry production;
o periods of insufficient demand due to weak general economic activity
or other causes; and
o inventory destocking by customers.
The Company's primary products are commodities, resulting in extreme
price competition. Both the wood products and pulp industries have had
over-capacity for several years. The Company's industries are capital-intensive,
which leads to high fixed costs and generally results in continued production as
long as prices are sufficient to cover marginal costs. This has caused
substantial price competition and volatility and caused the Company to generate
net losses from continuing operations as recently as 1996 and 1998. These losses
were primarily due to losses in its pulp operations, which continued to be
unprofitable in 1999. In the event of a recession, demand and prices are likely
to drop substantially.
RISKS OF INTERNATIONAL BUSINESS
In general, the Company's sales are subject to the risks of international
business, including:
o fluctuations in foreign currencies;
o changes in the economic strength of the countries in which it does
business;
o trade disputes;
o changes in regulatory requirements;
o tariffs and other barriers; and
o quotas, duties, taxes and other charges or restrictions upon
exportation and importation.
The economic crisis in Asia softened demand for wood and pulp products
in that region and, consequently, lowered prices in 1998. As a result, producers
for the Asian markets redirected their products to other regions, thereby
lowering prices elsewhere. In addition, Asian producers may be able to further
lower prices and increase exports as a result of their depreciated currencies.
Weakness in Asian markets has eroded worldwide pricing for the Company's
products, indirectly adversely affecting its financial results. Asian markets
strengthened in 1999, but if these markets worsened, it could have a material
adverse effect on the Company's financial condition and results of operations.
AVAILABILITY AND PRICING OF RAW MATERIALS
Logs, wood chips and sawdust, the principal raw materials used in the
manufacture of the Company's products, are purchased in highly competitive,
price-sensitive markets. These raw materials have historically exhibited price
and demand cyclicality. Supply and price of these raw materials are dependent
upon a variety of factors over which the Company has no control, including
environmental and conservation regulations, and natural disasters, such as
forest fires, hurricanes and other extreme weather conditions. A decrease in the
supply of logs, wood chips and sawdust can cause higher raw material costs.
The principal sources of raw material for the Company's wood products
operations are timber obtained through long-term cutting licenses on public
lands, logs purchased on open markets, timber offered for sale through
competitive bidding by U.S. federal agencies and timber purchased under
long-term contracts to cut timber on private lands. The Company's lumber
capacity comes from British Columbia (75%) and the Black Hills region of South
Dakota and Wyoming (25%). In Canada, the Company's timber requirements are
obtained primarily from the Provincial Government of British Columbia under
long-term timber harvesting licenses which allow the Company to remove timber
from defined areas annually on a sustained yield basis. Under these licenses,
the Provincial Government has the authority to modify prices and harvest volumes
at any time. British Columbia's Commission on Resources and Environment issued
the Kootenay Boundary Land Use Plan of 1997. This land use plan set aside
several new wilderness areas. The British Columbia government has also
implemented a Forest Practices Code, which sets strict standards for logging
activities and reforestation responsibilities. No assurance can be given that
in the near or long-term the Company's timber supplies will be stable or that
these forest restrictions will not have a material adverse effect on the
Company's operations.
Softwood fiber (wood chips and sawdust), particularly in the quantities
necessary to support world-scale pulp production facilities, is in increasingly
short supply in the Pacific Northwest. In the last decade Pacific Northwest log
availability has been reduced and lumber and plywood mills have shut down. The
volume of lower cost residual chips has dropped correspondingly. Pulp mills that
require wood chips as the primary source of raw material now rely on additional
higher cost supply sources which produce chips directly from pulpwood and/or
deliver from greater distances. Consequently, the market price of chips to all
buyers has increased. To provide an adequate supply of wood fiber for its
Halsey, Oregon mill, the Company has expanded its capability of using sawdust as
a raw material for a significant portion of the production and diversified its
suppliers of fiber. There can be no assurance that the Company will be able to
obtain an adequate supply of softwood fiber for its operations.
<PAGE>
14
DEPENDENCE ON A SINGLE SUPPLIER FOR THE HARMAC PULP MILL
Harmac has a long-term fiber supply agreement with Weyerhaeuser Company Limited
that provides for at least 75% of Harmac's fiber requirements through 2019.
Fiber is purchased at market or at prices determined under a formula intended to
reflect fair market value of the fiber and which takes into account the net
sales value of pulp sold by Harmac. The failure by Weyerhaeuser to deliver the
required fiber pursuant to this contract could have a material adverse effect on
the Company as a whole.
DEPENDENCE ON A SINGLE CUSTOMER FOR THE HALSEY PULP MILL
Approximately 35-40% of the pulp produced by the Halsey, Oregon pulp mill is
sold to Grays Harbor Paper Company pursuant to a long-term contract. Loss of
this key customer would have a material adverse impact on the Company if a
replacement buyer could not be secured on a timely basis.
QUOTAS AND EXPORT FEES ON LUMBER EXPORTS TO THE UNITED STATES
Softwood lumber exports to the U.S. by Canadian producers have been a
contentious trade issue between Canada and the U.S. for a number of years.
Effective April 1996, the governments of Canada and the U.S. entered into the
Softwood Lumber Agreement for the export of softwood lumber to the U.S. Pursuant
to the agreement, in each fiscal year ended March 31, Canadian softwood lumber
producers are assigned quotas of lumber volumes which may be shipped to the U.S.
tariff-free. Incremental volumes were subject to a two-tier tariff of $53 per
thousand board feet and $106 per thousand board feet. On August 26, 1999 Canada
and the United States amended the Softwood Lumber Agreement to add a third-tier
tariff at a rate of $146 per thousand board feet and to reduce the amount of
timber volume subject to the first tier by 25%. The Company has been allocated a
specific quota within each tier. The Company's tariff-free volume was reduced by
11.4 million board feet from the 1996/1997 fiscal year to the 1997/1998 fiscal
year, and then by another 11.6 million board feet for the 1998/1999 fiscal year.
As a partial offset, the Company received increases in allocation at the lower
tariff from the 1996/1997 fiscal year to the 1998/1999 fiscal year. For the
1999/2000 fiscal year, the Company's tariff-free volume was essentially
unchanged, while its volume at the $53 tariff level was decreased by 4.1 million
board feet.
In March 1999, the Company filed under the North American Free Trade
Agreement a claim against the Canadian Federal Government. In its claim, the
Company asserts that its duty-free export quota has been unfairly reduced. There
can be no assurance as to when the claim will be resolved. The Canadian Softwood
Lumber Agreement expires in 2001 and the Company cannot predict whether the
agreement will be renewed or what the terms of any renewed agreement might be.
GLOBAL COMPETITION
The markets for the Company's products are highly competitive on a global basis,
with a number of major companies competing in each market and with no company
holding a dominant position. In particular, the wood products industry is highly
competitive, with a large number of companies producing products that are
reasonably standardized. Many of the Company's competitors have substantially
greater financial resources than it does. Some of its competitors may have the
advantage of not being affected by fluctuations in the value of the Canadian
dollar. While the principal basis for competition is price, the Company also
competes to a lesser extent on the basis of quality and customer service.
EXCHANGE RATE FLUCTUATIONS
Although the Company's sales are made primarily in U.S. dollars, a substantial
portion of its operating costs and expenses are incurred in Canadian dollars.
Significant variations in relative currency values, particularly a significant
increase in the value of the Canadian dollar relative to the U.S. dollar, could
have a material adverse effect on its business, financial condition, results of
operations and cash flows.
ENVIRONMENTAL REGULATION
The Company is subject to extensive federal, state, provincial and local
environmental laws and regulations. These laws and regulations impose stringent
standards on the Company regarding, among other things:
o air emissions;
o water discharges;
o use and handling of hazardous materials;
o use, handling and disposal of waste; and
o remediation of environmental contamination.
The Company may incur substantial costs to comply with current
requirements or new environmental laws that might be adopted. In addition, the
Company may discover currently unknown environmental problems or conditions
which may or may not require remediation. Any such event could have a
material adverse effect on its business, financial condition, results of
operations and cash flows. The Company has spent significant amounts of money
in the past to comply with environmental regulations and expects that it will
have to spend money in the future. The Company has taken reserves based on
current information to address environmental liabilities. Additional
significant expenditures could be required if the law changes or new
information is discovered, and those expenditures could have a material
adverse effect on its financial condition. In addition, the Company has been
required to make significant environmental capital expenditures every year.
In April 1998, the U.S. Environmental Protection Agency published
regulations known as the "Cluster Rules" establishing standards and limitations
for air and water emissions by pulp mills. The capital costs to comply with
these new regulations at the Halsey pulp mill are anticipated to total
approximately $35 million, with compliance required by the first quarter of
2001.
<PAGE>
15
The Company has spent $8.2 million of these capital costs through the end of
1999 and expects the mill upgrade to be complete by the end of 2000.
Current legislation requires all pulp mills in British Columbia to
eliminate the discharge of chlorinated organic compounds by December 31, 2002.
Currently, the cost of available technology to eliminate all chlorinated organic
compounds at kraft pulp mills is prohibitive. The British Columbia government,
industry participants and other stakeholders are engaged in discussion to
resolve this issue. If the current legislation is not amended, substantially all
of the chemical pulp mills in British Columbia would likely be required to be
closed, which would have a material adverse effect on the Company's business.
The Company is currently participating in the investigation of
environmental contamination at two sites on which it previously conducted
business. See Note 12 of Notes to Consolidated Financial Statements. The
ultimate cost to the Company for site remediation and monitoring on these sites
cannot be predicted with certainty due to the unknown magnitude of the
contamination, the varying costs of alternative clean-up methods, the clean-up
time frame possibilities, the evolving nature of remediation technologies and
governmental regulations and the inability to determine its share of multi-party
obligations or the extent to which contributions will be available from other
parties, including insurance carriers.
COST REDUCTIONS EXPECTED FROM CAPITAL EXPENDITURES
The Company has made and will continue to make capital expenditures in both its
lumber and pulp operations from which it expects to generate cost savings.
Although the Company's management is experienced in achieving cost reductions
and operating efficiencies, there can be no assurance that any specified level
of cost savings will be fully achieved or will be achieved within the time
periods contemplated. In addition, cost savings from capital projects may be
offset by cost increases in other areas so that total costs may not actually
decrease.
FINANCIAL LEVERAGE
As a result of increased borrowings, the Company's long-term debt as a
percentage of total capitalization at December 31, 1999 of 44 percent is higher
than in recent years. While the Company's leverage level is not unusual for the
forest products and pulp industries, such leverage increases its financial risk
by (i) potentially increasing the cost of additional financing for working
capital, capital expenditures and other purposes, and (ii) increasing the amount
of cash flow dedicated to the payment of interest and principal.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Pope & Talbot, Inc.
We have audited the accompanying consolidated balance sheets of Pope & Talbot,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Harmac Pacific Inc.,
which statements reflect total assets and total revenues of 43 percent and 33
percent in 1998, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for the other
entity, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Pope & Talbot, Inc. and subsidiaries as of
December 31, 1999 and 1998, and the results of its operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 1998, the Company changed its method of accounting for depreciation
of pulp production assets from the straight-line method to the
units-of-production method.
ARTHUR ANDERSEN LLP
Portland, Oregon
JANUARY 20, 2000
<PAGE>
16
CONSOLIDATED BALANCE SHEETS
Pope & Talbot, Inc. and Subsidiaries
As of December 31
(in thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,719 $ 27,473
Short-term investments 10,649 9,857
Accounts receivable 74,099 59,676
Inventories 84,466 77,757
Prepaid expenses 10,866 10,651
------------- -------------
Total current assets 202,799 185,414
Properties:
Plant and equipment 457,537 424,519
Accumulated depreciation (232,129) (199,417)
------------- -------------
225,408 225,102
Land and timber cutting rights 8,759 9,290
------------- -------------
Total properties 234,167 234,392
Other assets:
Deferred income tax assets, net 19,448 16,218
Other 13,792 13,565
------------- -------------
Total other assets 33,240 29,783
------------- -------------
$ 470,206 $ 449,589
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 11,059 $ 10,259
Current portion of long-term debt 4,024 556
Accounts payable 29,305 21,532
Accrued payroll and related taxes 18,727 18,471
Income taxes 17,784 8,775
Other accrued liabilities 14,317 13,994
------------- -------------
Total current liabilities 95,216 73,587
Long-term liabilities:
Long-term debt, net of current portion 147,038 138,004
Other long-term liabilities 41,851 40,182
------------- -------------
Total long-term liabilities 188,889 178,186
Minority interest - 39,759
Stockholders' equity:
Preferred stock, $10 par value, 1,500,000 shares authorized, none issued - -
Common stock, $1 par value, 20,000,000 shares authorized, 15,450,646 issued 15,451 13,972
Additional paid-in capital 48,596 31,160
Retained earnings 147,893 140,482
Cumulative translation adjustments (11,149) (18,113)
Common stock held in treasury, at cost (14,690) (9,444)
------------- -------------
Total stockholders' equity 186,101 158,057
------------- -------------
$ 470,206 $ 449,589
============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
<PAGE>
17
CONSOLIDATED STATEMENTS OF INCOME
Pope & Talbot, Inc. and Subsidiaries
Years ended December 31
(in thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 486,948 $ 420,785 $ 329,899
Cost and expenses:
Cost of sales 430,719 429,071 300,320
Selling, general and administrative 23,910 24,100 14,814
Interest, net 9,063 7,973 5,995
------------- ------------- -------------
463,692 461,144 321,129
Income (loss) before income taxes, minority interest, discontinued
operations and cumulative effect of accounting change 23,256 (40,359) 8,770
Income tax provision (benefit) 11,422 (13,352) 4,338
------------- ------------- -------------
Income (loss) before minority interest, discontinued operations
and cumulative effect of accounting change 11,834 (27,007) 4,432
Minority interest in subsidiary loss, net of income tax benefit (2,587) (3,547) -
------------- ------------- -------------
Income (loss) from continuing operations 14,421 (23,460) 4,432
Discontinued operations:
Income from discontinued tissue operations
(net of income tax provision of $164 and $3,573
for 1998 and 1997, respectively) - 256 5,588
Gain on sale of discontinued tissue operations
(net of income tax provision of $24,630) - 26,818 -
Loss on sale of discontinued diaper operations
(net of income tax benefit of $1,985) - (4,015) -
------------- ------------- -------------
Income from discontinued operations - 23,059 5,588
------------- ------------- -------------
Income (loss) before cumulative effect of accounting change 14,421 (401) 10,020
Cumulative effect of accounting change - 743 -
------------- ------------- -------------
Net income $ 14,421 $ 342 $ 10,020
============= ============= =============
Basic income (loss) per common share:
Income (loss) from continuing operations $ 1.06 $ (1.74) $ .33
Income from discontinued operations - 1.71 .42
Cumulative effect of accounting change - .06 -
------------- ------------- -------------
Net income $ 1.06 $ .03 $ .75
============= ============= =============
Diluted income (loss) per common share:
Income (loss) from continuing operations $ 1.05 $ (1.74) $ .33
Income from discontinued operations - 1.71 .42
Cumulative effect of accounting change - .06 -
------------- ------------- -------------
Net income $ 1.05 $ .03 $ .75
============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
<PAGE>
18
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Pope & Talbot, Inc. and Subsidiaries
For the years ended December 31, 1999, 1998
and 1997 (in thousands of dollars except per
share amounts)
<TABLE>
<CAPTION>
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, 1996 13,971,605 $ 13,972 (607,826) $ (11,111) $ 35,976 $ 150,563 $ (6,172) $183,228
Issuance of shares under stock plans - - 117,662 1,667 265 - - 1,932
Cash dividends ($.76 per share) - - - - - (10,197) - (10,197)
Partnership transaction tax
settlement costs - - - - (1,846) - - (1,846)
Comprehensive income (loss):
Net income - - - - - 10,020 - 10,020
Change in translation
adjustment - - - - - - (3,675) (3,675)
Total comprehensive income - - - - - - - 6,345
---------- -------- -------- -------- -------- --------- -------- --------
Balance at December 31, 1997 13,971,605 13,972 (490,164) (9,444) 34,395 150,386 (9,847) 179,462
---------- -------- -------- -------- -------- --------- -------- ---------
Cash dividends ($.76 per share) - - - - - (10,246) - (10,246)
Partnership transaction tax
settlement costs - - - - (3,235) - - (3,235)
Comprehensive income (loss):
Net income - - - - - 342 - 342
Change in translation
adjustment - - - - - - (8,266) (8,266)
Total comprehensive loss - - - - - - - (7,924)
---------- -------- -------- -------- -------- --------- -------- ---------
Balance at December 31, 1998 13,971,605 13,972 (490,164) (9,444) 31,160 140,482 (18,113) 158,057
---------- -------- -------- -------- -------- --------- -------- ---------
Cash dividends ($.52 per share) - - - - - (7,010) - (7,010)
Issuance of shares in acquisition of
Harmac minority interest 1,479,041 1,479 - - 16,812 - - 18,291
Value of options exchanged for Harmac
options included as additional - - - - 624 - - 624
purchase price
Repurchased shares - - (429,600) (5,246) - - - (5,246)
Comprehensive income (loss):
Net income - - - - - 14,421 - 14,421
Change in translation
adjustment - - - - - - 6,964 6,964
Total comprehensive income - - - - - - - 21,385
---------- -------- -------- -------- -------- --------- -------- ---------
Balance at December 31, 1999 15,450,646 $ 15,451 (919,764) $ (14,690) $ 48,596 $ 147,893 $(11,149) $186,101
========== ======== ======== ======== ======== ========= ======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
<PAGE>
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Pope & Talbot, Inc. and Subsidiaries
Years ended December 31
(in thousands of dollars)
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 14,421 $ 342 $ 10,020
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 32,773 29,919 30,056
Gain on disposal of discontinued operations - (51,448) -
Minority interest in subsidiary loss, net of income tax (2,587) (3,547) -
Cumulative effect of accounting change - (743) -
Changes in assets and liabilities:
Accounts receivable (14,423) (161) (5,410)
Inventories (6,709) 16,906 (2,620)
Prepaid expenses and other assets 561 2,207 (4,820)
Accounts payable and accrued liabilities 11,986 (8,928) (1,737)
Current and deferred income taxes 4,843 6,168 (2,219)
Other liabilities 316 3,141 1,698
------------ ------------ ------------
Net cash provided by (used for) operating activities 41,181 (6,144) 24,968
Cash flow from investing activities:
Purchases of short-term investments (19,488) (43,935) -
Proceeds from maturities of short-term investments 18,696 29,311 -
Proceeds from sales of short-term investments - 4,869 -
Purchases of noncurrent investments held for sale - (2,206) (13,760)
Capital expenditures (24,827) (27,574) (13,084)
Investment in subsidiary, net of cash acquired (20,389) (38,337) -
Minority interest in subsidiary treasury stock issuance 207 174 -
Proceeds from sale of discontinued operations - 120,451 -
Proceeds from sale of other properties 335 1,261 378
------------ ------------ ------------
Net cash provided by (used for) investing activities (45,466) 44,014 (26,466)
Cash flow from financing activities:
Net increase (decrease) in short-term borrowings 800 (31,541) 11,800
Increase (decrease) in long-term debt, including current portion 10,987 (521) (488)
Shares repurchased (5,246) - -
Partnership transaction tax settlement costs - - (1,846)
Proceeds from issuance of treasury stock, net - - 1,932
Cash dividends (7,010) (10,246) (10,197)
------------ ------------ ------------
Net cash provided by (used for) financing activities (469) (42,308) 1,201
------------ ------------ ------------
Decrease in cash and cash equivalents (4,754) (4,438) (297)
Cash and cash equivalents at beginning of period 27,473 31,911 32,208
------------ ------------ ------------
Cash and cash equivalents at end of period $ 22,719 $ 27,473 $ 31,911
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
<PAGE>
20
NOTES TO FINANCIAL STATEMENTS
POPE & TALBOT, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Pope
& Talbot, Inc. and Subsidiaries (the Company), after eliminating significant
intercompany transactions and balances.
All assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at the period-end exchange rates. Revenues and
expenses are translated at an average exchange rate for the year. Translation
gains and losses are reflected in stockholders' equity as cumulative translation
adjustments. Net gains and losses on foreign currency transactions, which were
not significant, are reflected in net income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' data to conform to the
current year's presentation.
INVENTORIES
Inventories are stated at the lower of cost or market. For portions of lumber
and raw material inventories, cost has been determined on the last-in, first-out
method. For remaining inventories, cost has been determined using the first-in,
first-out and average-cost methods.
PLANT AND EQUIPMENT
Plant and equipment is carried at cost and includes expenditures for new
facilities and those expenditures which substantially increase the useful lives
of existing plant and equipment. Costs of maintenance and repairs are charged to
expense as incurred. Upon sale or retirement, the related cost and accumulated
depreciation are removed from the accounts, with the resultant gain or loss
included in income. The estimated useful lives of the principal items of plant
and equipment range from 3 to 40 years.
Depreciation of assets other than pulp production assets is computed
using the straight-line method over the useful lives of respective assets. In
1998, depreciation of the Company's U.S. pulp production assets was changed to
the units-of-production method from the straight-line method. The change was
adopted to conform depreciation methods between the Company's U.S. and Canadian
pulp operations. The Company believes the units-of-production method, common in
the industry, more appropriately matches production costs and pulp sales
revenues over the lives of the pulp mill assets. The effect of the change in
1998 was to decrease the loss from continuing operations by approximately $.5
million. The cumulative effect of applying the new method for years prior to
1998 was reported net of tax as a cumulative effect of accounting change in the
1998 period.
The Company capitalizes interest on borrowed funds during the
construction period of major capital projects. Interest capitalized is
determined by applying the Company's effective interest rate to the accumulated
capital costs during the construction period of a project. Interest capitalized
in 1999 and 1998 was $.4 million per year. There were no significant interest
costs capitalized in 1997. Capitalized interest is amortized over the
depreciable life of related assets.
The Company evaluates recoverability of long-lived assets using
projections of related future cash flows. Realization of these assets is
dependent on generating sufficient future cash flows to recover the asset's
carrying value. Although realization is not assured, management believes current
long-lived asset carrying values will be recovered. These assets may become
impaired in the future, however, if estimates of future cash flows are
significantly reduced.
TIMBER RESOURCES
In the U.S., the Company obtains its timber from various public and private
sources under timber harvesting contracts. Additionally, logs are purchased on
open log markets. Liabilities for timber removed under harvesting contracts are
not recorded until the timber is cut, as the Company generally does not incur a
direct liability for, or ownership of, this timber until it has been harvested.
The total volume committed under contract at December 31, 1999, and the 2000
planned contract harvest was 218 million board feet and 70 million board feet,
respectively. The Company's best estimate of its total commitment at current
contract rates under these contracts was approximately $43 million. The Company
evaluates the realizability of harvesting contracts based on the estimated total
cost applied to such harvests and the projected values to be realized from sales
of the converted product.
In Canada, the Company primarily obtains its timber from the Provincial
Government of British Columbia under timber harvesting licenses. The cost
assigned to these timber licenses is amortized over 50 years on a straight-line
basis. The Company also purchases logs in Canada on open log markets.
The Canadian timber harvesting licenses allow, but do not require, the
Company to remove timber from defined areas annually on a sustained yield basis.
Future allowable harvests may be adjusted if the Company does not remove timber
over a five-year period in accordance with the grants. As in the U.S.,
liabilities for the cost of timber removed are not recorded until the timber is
cut as the Company does not incur a direct liability for, or ownership of, this
timber until it has been harvested.
REFORESTATION
Under the Canadian timber harvesting licenses mentioned above, the Company is
responsible for the reforestation of the land from which timber is harvested. A
substantial portion of the costs incurred to reforest do not occur until 10 to
15 years
<PAGE>
21
after the timber is harvested. The Company accrues for the total projected
cost of reforestation as the timber is removed. Actual expenditures for
reforestation are applied against this accrual when they are made.
INCOME TAXES
The Company accounts for income taxes using the liability method, and deferred
taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities given
the provisions of the enacted tax laws. The principal temporary differences are
related to depreciation, net operating loss carryforwards, various tax credits,
reforestation and postretirement benefits.
Undistributed earnings of the Company's Canadian subsidiaries totaled
$163.3 million on December 31, 1999, which, under existing law, will not be
subject to U.S. tax until distributed as dividends. Since the earnings have
been, and are intended to be reinvested in Canadian operations, no provision has
been made for any U.S. taxes that may be applicable thereto. Furthermore, any
taxes paid to the Canadian government on those earnings may be used, in whole or
in part, as credits against the U.S. tax on any dividends distributed from such
earnings. It is not practicable to estimate the amount of unrecognized deferred
U.S. taxes on these undistributed earnings.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures related to current operations that qualify as
property, plant and equipment or which substantially increase the economic value
or extend the useful life of an asset are capitalized, and all other
expenditures are expensed as incurred. Expenditures that relate to an existing
condition caused by past operations are expensed as incurred.
The Company recognizes a liability for environmental remediation costs
when it believes it is probable a liability has been incurred and the amount can
be reasonably estimated. The liabilities are based on currently available
information and reflect the participation of other potentially responsible
parties depending on the parties' financial condition and probable contribution.
The accruals are recorded at undiscounted amounts. Recoveries of environmental
remediation costs from insurance carriers are recorded at such time as their
receipt is deemed highly probable and the amounts can be reasonably estimated.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment to its customers
or when customers assume risk of ownership.
INTEREST
Interest in the Consolidated Statements of Income is shown net of interest
income and capitalized interest. Interest income was $3.7 million in 1999, $3.4
million in 1998 and $1.9 million in 1997.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's subsidiary, Harmac Pacific Inc. (Harmac), from time to time
entered into Canadian dollar forward exchange contracts with maturities of one
to five months to fix the conversion of a portion of pulp sales receivables
denominated in U.S. dollars. At December 31, 1999, Harmac had no open derivative
contracts to hedge its U.S. currency exposure. At December 31, 1998, Harmac had
contracts to purchase $23 million Canadian with the exchange rate used at
settlement approximating the spot rate at the date the contract was acquired.
PER SHARE INFORMATION
Per share information is based on the weighted average number of common shares
outstanding during each year. The weighted average number of shares used to
calculate basic net income (loss) per common share was 13,667,000 in 1999,
13,481,000 in 1998 and 13,419,000 in 1997.
Certain Company stock options were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market prices of the common shares. Such stock options totaled
777,000 shares, 827,000 shares and 475,000 shares at year-end 1999, 1998 and
1997, respectively, at average exercise prices of $16 in 1999, $18 in 1998 and
$21 in 1997. The Company's outstanding stock options affected the calculation of
diluted earnings per share for 1999, but did not affect the calculation for 1998
or 1997.
STATEMENTS OF CASH FLOWS
The Company classifies as cash and cash equivalents unrestricted cash on deposit
in banks plus all investments having original maturities of 90 days or less.
Carrying amounts of any such investments approximate fair values. The effect of
exchange rate changes on cash balances held in foreign currencies was not
significant. Total cash expenditures for interest were $12.0 million, $11.8
million and $10.1 million for 1999, 1998 and 1997, respectively. Total cash
expenditures for income taxes were $10.6 million for 1999, $1.9 million for 1998
and $9.2 million for 1997.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments and hedging activities. The adoption of
this statement is not expected to have a material impact on the Company. The
FASB subsequently issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of Effective Date of SFAS No. 133," which
postpones initial application until fiscal years beginning after June 15, 2000.
The Company expects to adopt SFAS No. 133 in 2001.
2. ACQUISITION
On November 8, 1999, the Company completed the acquisition of the 40 percent of
Harmac shares it did not already own. Harmac shareholders received $30 million
Canadian (approximately $20.4 million U.S.) and approximately 1.5 million shares
of Company stock at an amount assigned to the issuable shares of $18.3 million.
Also included in the purchase price were
<PAGE>
22
acquisition costs of $0.7 million and value assigned to Company options that
were exchanged for Harmac options of $0.6 million. Through a number of
purchases in 1997 and 1998, the Company had acquired a 60 percent ownership
interest in Harmac for $72.4 million. The total purchase price of Harmac, net
of cash acquired, was $92.8 million.
The acquisition was accounted for as a step purchase transaction, and the
results of operations of Harmac have been included in the consolidated financial
statements from February 2, 1998. The fair value of assets acquired and
liabilities assumed for the purchase of the 53 percent of Harmac shares as of
February 1998 were as follows:
<TABLE>
<CAPTION>
(THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Current assets, other than cash $ 58,814
Property, plant and equipment 147,164
Other assets 2,902
Current liabilities (29,297)
Convertible subordinated debentures (52,556)
Other liabilities (23,049)
Minority interest (53,678)
-------------
Purchase price, net of $19,637 cash received $ 50,300
=============
</TABLE>
The subsequent purchases, in December 1998 and November 1999, resulted in
acquired net assets in excess of cost. The excess over cost was allocated to
reduce proportionately the values assigned to noncurrent assets in determining
their fair value. This resulted in a reduction in the carrying value of property
of $14.2 million and an increase to deferred tax assets of $5.7 million to
reflect the tax effect of the property adjustment.
In conjunction with the Company's acquisition of a majority interest in
Harmac in 1998, a comprehensive plan to reduce operating costs at the mill and
administrative and selling costs was announced. The plan consisted of closing
Harmac's on-site log chipping mill, closing the Vancouver, BC corporate
administrative and pulp sales office and combining those functions with the
Company's corporate offices, and additional reductions in hourly and salaried
staff at the mill. Certain restructuring costs recorded by Harmac totaling $6.5
million (costs totaling $5.6 million associated with employee terminations and
$0.9 million of fixed asset write-offs) were included in current liabilities in
the computation of the fair value of assets and liabilities assumed at the
acquisition date. Costs charged to the restructure liability in 1998 totaled
$3.2 million and related primarily to severance and other employee benefits and
fixed asset write-offs. Costs charged to the restructure liability in 1999,
primarily cash payments for severance and other employee benefits, totaled $1.3
million. At December 31, 1999, total restructuring costs incurred and
anticipated for the restructuring plan totaled $5.0 million. Therefore, $1.5
million of restructuring costs included in the original acquisition cost
allocation was reversed as an adjustment of the purchase price of Harmac. The
remaining liability for restructuring costs at December 31, 1999 was $.5
million, representing employee benefits payable to terminated employees.
The following unaudited pro forma information below gives effect as if
the Harmac purchase transactions had occurred at the beginning of each of the
respective years after giving effect to certain adjustments, including material
differences between Canadian and U.S. generally accepted accounting principles.
For 1997, the assumed purchase is 60 percent of Harmac shares, the amount owned
by the end of 1998. For 1998 and 1999, the assumed purchase is 100 percent of
Harmac shares. The unaudited pro forma information does not necessarily reflect
the results of operations that actually would have been achieved had the
acquisition been consummated at that time.
<TABLE>
<CAPTION>
(THOUSANDS EXCEPT PER SHARE, UNAUDITED) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $486,948 $429,849 $493,428
Income (loss) from continuing operations 11,898 (27,756) (1,192)
Income from discontinued operations - 23,059 5,588
Cumulative effect of accounting change - 743 -
-----------------------------------------------------
Net income (loss) $ 11,898 $ (3,954) $ 4,396
=====================================================
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ 0.87 $ (2.06) $ (0.09)
Income from discontinued operations - 1.71 0.42
Cumulative effect of accounting change - 0.06 -
-----------------------------------------------------
Net income (loss) $ 0.87 $ (0.29) $ 0.33
=====================================================
</TABLE>
3. INVESTMENT SECURITIES
At December 31, 1999, the Company's short-term investments consisted primarily
of corporate debt securities. Included in other assets at December 31, 1998,
were debt securities with maturities beyond one year totaling $2.2 million. The
investment securities were classified as available-for-sale and the amortized
cost approximated the fair value.
4. INVENTORIES
<TABLE>
<CAPTION>
(THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lumber $ 9,454 $ 7,978
Pulp 13,513 14,517
Logs 32,742 28,958
Wood chips and sawdust 15,676 12,376
Chemicals and supplies 12,460 12,431
Other 621 1,497
-------------------------------------
$ 84,466 $ 77,757
=====================================
</TABLE>
The portion of lumber and raw materials inventories determined using the
last-in, first-out (LIFO) method aggregated $4.1 million and $3.5 million at
December 31, 1999 and 1998, respectively. The cost of LIFO inventories valued at
the lower of average cost or market, which approximated current cost, at
December 31, 1999 and 1998, was $6.4 million and $5.7 million, respectively.
5. PROPERTIES
<TABLE>
<CAPTION>
(THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Plant and equipment:
Mills, plants and improvements $ 58,907 $ 56,863
Equipment 361,528 341,698
Mobile equipment 20,390 19,145
Construction in progress 16,712 6,813
----------------------------------
$457,537 $424,519
==================================
Land and timber cutting rights:
Land $ 4,313 $ 4,904
Canadian timber cutting rights 4,446 4,386
----------------------------------
$ 8,759 $ 9,290
==================================
</TABLE>
<PAGE>
23
Included in plant and equipment above at December 31, 1999, were assets at cost
of $157.9 million and a net book value of $49.0 million for which the Company
does not hold title. See the following Note 6 and discussion of the Halsey mill
sale/leaseback.
6. DEBT
<TABLE>
<CAPTION>
(THOUSANDS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM DEBT-
Revolving credit and term loan facility, variable
interest rate (6.25% at December 31, 1999) $ 11,059 $ 3,259
Demand operating line of credit - 7,000
-------------------------------------
Short-term debt $ 11,059 $ 10,259
=====================================
LONG-TERM DEBT-
8.375% debentures, due 2013 $ 75,000 $ 75,000
State of Oregon Small Scale Energy Loan Program
(SELP) note payable, secured by irrevocable
letter of credit, 6.55%, payable monthly
through 2013 13,150 13,705
Lease financing obligation, interest at 6.6% 62,912 -
Harmac 8% convertible subordinated debentures - 49,855
-------------------------------------
Total long-term debt 151,062 138,560
Less current portion of long-term obligations 4,024 556
-------------------------------------
Long-term debt, net of current obligations $ 147,038 $ 138,004
=====================================
</TABLE>
The Company has revolving credit agreements with three banks which, when
combined, provides approximately $78 million of available borrowings. Each
agreement contains certain financial covenants, all of which had been met as of
December 31, 1999.
The Company has a revolving credit and term loan facility with a Canadian
bank, secured by certain inventory and accounts receivable. The agreement
provides $40 million Canadian (approximately $28 million U.S.) of revolving
credit until September 2000, unless extended. The interest rate associated with
this agreement is based, at the option of the Company, at the bank's prime
lending rate, LIBOR rate plus 1%, the bank's Corporate Bankers' Acceptance Rate
plus 3/8 percent, or a fixed rate determined by the bank. A commitment fee of
1/4 percent per year on the unused portion is payable quarterly. The Company had
outstanding $16 million Canadian (approximately $11 million U.S.) of borrowings
under this agreement at December 31, 1999.
The Company has an additional revolving credit and term loan facility
with another Canadian bank, secured by certain Canadian inventory, accounts
receivable and property, plant and equipment. The agreement provides $25 million
U.S. of revolving credit until March 2000, unless extended. The interest rate
associated with this agreement is based, at the option of the Company, at the
bank's prime lending rate plus 1/4 percent (or 1 1/4 percent for borrowings in
excess of $10 million), the U.S. base rate plus 1/4 percent (or 1 1/4 percent
for borrowings in excess of $10 million), LIBOR plus 1 percent (or 2 percent for
borrowings in excess of $10 million), or the bank's corporate bankers'
acceptance rate plus 1 percent (or 2 percent for borrowings in excess of $10
million). A commitment fee of 3/10 percent per year on the unused portion of
available borrowings up to $10 million and 1/2 percent of the unused portion
over $10 million is payable quarterly.
The Company also has a revolving credit agreement with a domestic bank,
secured by certain inventory and accounts receivable. The agreement provides $25
million U.S. of revolving credit until June 2000, unless extended. The interest
rate associated with this agreement is based, at the option of the Company, at
the bank's prime lending rate or LIBOR plus 1 percent. A commitment fee of 3/10
percent per year on the unused portion is payable quarterly.
In the third quarter of 1999, the Company entered into a sale/leaseback
arrangement of its Halsey pulp mill. The facility was sold for $64.6 million
cash. The transaction was accounted for as a financing, wherein the property
remained on the books and continues to be depreciated. A lease-financing
obligation equal to the proceeds received was recorded, and subsequently reduced
by a payment made by the Company at the closing of the lease agreement. The
lease has a term of approximately twelve years, with an early purchase option
in the seventh year. The lease requires semiannual rent payments as follows:
for the years 2000 through 2005 - $3.3 million; $4.0 million in 2006; and
beginning in January of 2007 (if the lease has not been previously terminated
by exercise of the Company's purchase options), three semiannual payments of
$11.4 million are required. The Company has three purchase options under the
lease. The purchase option in the seventh year is fixed at $41.1 million,
payable in five installments during 2007. The other two options are at the
facility's fair market value or a fixed termination value. The facility lease
contains several financial covenants, which the Company is required to meet
throughout the term of the lease.
The Harmac 8 percent convertible subordinated debentures were redeemed in
November 1999 at par plus accrued interest.
The fair value of the 8 3/8 percent debentures and 6.55 percent Oregon
SELP note at December 31, 1999 were estimated to be $71 million and $13 million,
respectively, based upon rates currently available for debt with similar terms.
A hypothetical 10 percent change in interest rates would change the fair value
of the Company's fixed-rate long-term debt obligations by $6 million. The annual
maturities of long-term obligations for the five years subsequent to December
31, 1999 are: 2000 - $4.0 million; 2001- $3.2 million; 2002 - $3.5 million; 2003
- - $3.7 million and 2004 - $3.9 million.
7. INCOME TAXES
The income tax provision (benefit) consists of the following components:
<TABLE>
<CAPTION>
(THOUSANDS) Current Deferred Total
- --------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C>
Federal $ 1,659 $ (3,289) $ (1,630)
State 54 (460) (406)
Canada 15,559 (2,101) 13,458
------------------------------------------------------
$17,272 $ (5,850) $ 11,422
======================================================
1998
Federal $ 915 $ (10,924) $ (10,009)
State - (529) (529)
Canada 2,767 (5,581) (2,814)
------------------------------------------------------
$ 3,682 $ (17,034) $ (13,352)
======================================================
1997
Federal $ - $ (3,004) $ (3,004)
State - (311) (311)
Canada 9,024 (1,371) 7,653
------------------------------------------------------
$ 9,024 $ (4,686) $ 4,338
======================================================
</TABLE>
<PAGE>
24
The income tax provision (benefit) was different from the amount computed by
applying the U.S. statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
(THOUSANDS) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes and minority interest:
<S> <C> <C> <C>
United States $ (10,112) $ (31,147) $ (10,947)
Canada 33,368 (9,212) 19,717
------------------------------------------------------
$ 23,256 $ (40,359) $ 8,770
======================================================
United States:
U.S. statutory federal income tax $ (3,539) $ (10,901) $ (3,831)
State income franchise taxes, net
of federal income tax benefit (264) (344) (122)
Adjustment to prior years taxes 1,459 - -
Other items, net 308 707 638
------------------------------------------------------
(2,036) (10,538) (3,315)
------------------------------------------------------
Canada:
U.S. statutory federal income tax 11,679 (3,224) 6,901
Effect of Canadian tax rate
different from U.S. 1,270 (303) 719
Large corporate tax 389 370 -
Other items, net 120 343 33
------------------------------------------------------
13,458 (2,814) 7,653
------------------------------------------------------
$ 11,422 $ (13,352) $ 4,338
======================================================
</TABLE>
The net deferred tax asset at December 31, 1999 was $24.8 million. The
temporary differences that give rise to deferred taxes are shown in the
following table. The primary deferred tax asset relates to net operating loss
carryforwards. At December 31, 1999, the Company had available $22.6 million of
U.S. federal tax loss carryforwards expiring as follows: 2010 - $15.0 million;
2011 - $1.1 million; and 2012 - $6.5 million. The Company had available $40.5
million of Canadian tax loss carryforwards related to Harmac expiring as
follows: 2002 - $21.1 million; 2003 - $6.1 million; 2004 - $1.1 million; 2005 -
$3.3 million; and 2006 - $8.9 million. As of December 31, 1999, the Company also
had Alternative Minimum Tax carryforwards of $1.4 million that may be carried
forward indefinitely.
Management believes that the Company will have sufficient future U.S. and
Canadian taxable income to make it more likely than not that the net operating
loss deferred tax asset will be realized. In making this assessment, management
has considered the cyclical nature of its businesses, the relatively long
expiration period of net operating losses and the ability to utilize certain tax
planning strategies if a net operating loss were to otherwise expire. The
strategy that would be most feasible for U.S. federal tax loss carryforwards is
changing the method of tax depreciation. Similarly, for Canadian net operating
losses, deferral in utilization of capital cost allowance deductions may be
employed in order to utilize net operating losses. The realization of the asset
is not assured and could be reduced in the future if estimates of future taxable
income during the carryforward period are reduced.
Deferred taxes are determined based on the estimated future tax effects
of differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws. The net deferred tax
asset is comprised of the following:
<TABLE>
<CAPTION>
(THOUSANDS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current deferred taxes:
Gross assets $ 5,317 $ 4,991
Noncurrent deferred taxes:
Gross assets 68,738 54,730
Gross liabilities (49,290) (38,512)
-------------------------------------
Total noncurrent deferred taxes 19,448 16,218
-------------------------------------
Net deferred tax asset $ 24,765 $ 21,209
=====================================
</TABLE>
The Company's valuation allowance against deferred tax assets at December
31, 1999, 1998 and 1997 was $7.3 million. These amounts relate to certain state
net operating loss carryforwards and pollution control and energy tax credits
that the Company believes will not be realized in the future.
The tax effect of significant temporary differences representing deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
(THOUSANDS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Postretirement benefits $ 6,742 $ 6,121
Reforestation 4,552 4,677
Vacation pay 866 798
Depreciation (20,734) (29,475)
AMT and other tax credits 4,444 4,866
Net operating loss carryforwards 23,400 28,939
Other, net (including valuation allowance) 5,495 5,283
--------------------------------
Net deferred tax asset $ 24,765 $ 21,209
================================
</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 (IRS) has assessed the Company additional
tax of approximately $5.3 million pertaining to transactions between the Company
and one of its Canadian subsidiaries during its 1993 tax year. The Company has
filed a petition with the Tax Court to challenge the IRS's assessment. The
Company has negotiated a tentative settlement with the IRS on this issue for
1993 and certain subsequent tax years and has established a reserve for the
amount. While a settlement has been negotiated with the IRS, the settlement has
not been finally approved or accepted on behalf of the IRS.
8. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
<TABLE>
<CAPTION>
(THOUSANDS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reforestation $ 15,320 $ 15,441
Postretirement benefits 14,712 13,286
Other 11,819 11,455
-------------------------------
$ 41,851 $ 40,182
===============================
</TABLE>
<PAGE>
25
9. PENSION AND OTHER POSTRETIREMENT PLANS
The Company's retirement plans consist principally of noncontributory
defined-benefit pension plans and postretirement medical and life insurance
plans. The pension plans include plans administered by the Company and
multi-employer plans administered by various unions.
Certain union employees are covered under multi-employer pension plans.
Contributions to these plans are based upon negotiated hourly rates. It is not
possible to determine the amount of accumulated benefits or net assets available
for benefits that apply solely to Company employees covered by these plans. All
other Company participating employees are covered by noncontributory
defined-benefit pension plans administered by the Company. The pension benefit
for salaried employees is based on years of service and the five highest out of
the last ten years of compensation. Pension benefits for employees covered under
hourly plans are generally based on each employee's years of service.
The Company's funding policy regarding all of its Company-administered
pension plans is to make contributions to the plans that are between the minimum
amounts required by the Employee Retirement Income Security Act (ERISA) and the
maximum amounts deductible under current tax regulations. Substantially all of
the pension plans' assets are invested in common stock, fixed-income securities,
cash and cash equivalents. For 1998, amounts due to curtailments and settlements
are related to discontinued operations (see Note 11). Curtailment gains were
included as a component of the gain on sale of discontinued operations.
The Company sponsors postretirement medical and life insurance plans for
certain salaried and nonsalaried employees and eligible spouses and dependents
of the employees. The medical plans pay a stated percentage of covered medical
expenses incurred after deducting co-payments made once a stated deductible has
been met. The life insurance plans pay a defined benefit. The Company's funding
policy for these plans is to not make contributions to the plans prior to the
actual incurrence of costs under the plans.
The following table sets forth selected financial information regarding
the pension and postretirement benefit plans:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
----------------------- -----------------------------
(THOUSANDS) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 69,449 $57,044 $13,808 $ 14,024
Service cost 2,468 2,382 507 475
Interest cost 4,809 4,408 950 880
Amendment 515 - - -
Settlement (926) (14,766) - -
Curtailment - (1,727) - (6,437)
Actuarial (gain) loss (5,249) 3,982 (1,295) (1,195)
Acquisition - 22,344 - 6,717
Benefits paid (2,831) (2,349) (374) (315)
Foreign currency rate changes 2,036 (1,869) 401 (341)
--------------------------------------------------
Benefit obligation at end of year $ 70,271 $69,449 $ 13,997 $ 13,808
==================================================
Change in plan assets
Fair value of plan assets at beginning of year $ 74,330 $70,883 $ - $ -
Actual return on plan assets 10,590 3,503 - -
Acquisition - 19,623 - -
Employer contribution 604 847 374 315
Settlement - (16,392) - -
Benefits paid (2,831) (2,349) (374) (315)
Foreign currency rate changes 1,692 (1,785) - -
--------------------------------------------------
Fair value of plan assets at end of year $ 84,385 $74,330 $ - $ -
==================================================
Funded status $ 14,114 $ 4,881 $(13,997) $(13,808)
Unrecognized net actuarial (gain) loss (15,575) (6,108) (715) 522
Unrecognized prior service cost 1,719 1,261 - -
Unrecognized net asset at transition (143) (243) - -
--------------------------------------------------
Prepaid (accrued) benefit cost $ 115 $ (209) $(14,712) $(13,286)
==================================================
Plans having assets in excess of accumulated benefits
Benefit obligation $ 56,282 $34,405
Fair value of plan assets 74,205 44,856
Plans having accumulated benefits in excess of assets
Benefit obligation $ 13,989 $35,044
Fair value of plan assets 10,180 29,474
Weighted-average assumptions as of December 31
Discount rate 7.25% 6.75% 7.25% 6.75%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
Expected return on plan assets 8.50% 8.75%
</TABLE>
<PAGE>
26
For measurement purposes, for all plans except the Harmac plan, 7.5
percent and 8 percent rates of increase were assumed for health care costs in
1999 and 1998, respectively. The rate was assumed to decline in 1/2 percent
decrements every year until it reached 5 percent in 2004 where it remained
thereafter. The Harmac plan assumed 9 percent and 10 percent annual rates of
increase for health care costs in 1999 and 1998, respectively. The rate was
assumed to decline in 1 percent decrements every year until it reached 5
percent in 2003 where it remained thereafter.
Net periodic pension cost for 1999, 1998 and 1997 was composed of the
following:
<TABLE>
<CAPTION>
Pension Benefits
-------------------------------------------------
(THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 2,468 $ 2,382 $ 1,823
Interest cost 4,809 4,408 3,998
Expected return on plan assets (6,384) (6,200) (5,128)
Amortization of prior service cost (33) 177 392
Amortization of net transition obligation (asset) 58 24 (140)
Recognized net actuarial gain (293) (735) (243)
Settlement gains (440) - -
Curtailment gains - (3,537) -
--------------------------------------------------
Net periodic benefit cost for Company
administered plans 185 (3,481) 702
Contributions to multi-employer plans 4,666 4,558 3,575
--------------------------------------------------
Net periodic benefit cost $ 4,851 $ 1,077 $ 4,277
==================================================
</TABLE>
Net periodic pension costs for the Company's discontinued tissue
operations were $1.1 million for 1997 and are included in the preceding table.
The Company has granted some former employees pension benefits which
supplement the normal Company plans. These benefits are unfunded, general
obligations of the Company. The cost associated with these benefits was $117,000
in 1999, $386,000 in 1998 and $342,000 in 1997.
Net periodic cost for the Company's postretirement medical and life
insurance plans for 1999, 1998 and 1997 was composed of the following:
<TABLE>
<CAPTION>
Postretirement Benefits
--------------------------------------------------
(THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 507 $ 475 $ 435
Interest cost 950 880 977
Amortization of prior service cost - - (43)
Recognized net actuarial (gain) loss (31) (17) 2
Curtailment gains - (6,437) -
--------------------------------------------------
Net periodic benefit cost $1,426 $ (5,099) $1,371
==================================================
</TABLE>
Net periodic costs of postretirement medical and life insurance plans for
the Company's discontinued tissue operations were $660,000 for 1997 and are
reflected in the preceding table.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement medical plans. A one-percentage-point
change in assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
One Percentage Point
--------------------------------------
(THOUSANDS) Increase Decrease
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total service and interest cost components $ 281 $ (235)
Effect on postretirement benefit obligation 2,244 (1,911)
</TABLE>
10. STOCK OPTION PLANS
The Company has a stock option and appreciation plan (Option Plan) for officers
and key employees. This plan is administered by the Human Resources and
Nominating Committee of the Board of Directors. The Committee is composed of
outside Directors who are not eligible for awards. Additionally, the Company has
a nonemployee director stock option plan (Director Plan). At December 31, 1999,
403,485 shares were available for future grants under these plans. A nonemployee
director stock retainer fee plan (Retainer Plan) was approved by the Company's
Board of Directors and ratified by the Company's stockholders at the 1999 Annual
Meeting. At December 31, 1999, 245,878 shares were available for future grants
under this plan. In connection with the acquisition by the Company of the Harmac
minority interest in 1999, holders of Harmac options received options to
purchase a total of 95,411 shares of Company common stock in exchange for their
Harmac options at an appropriately adjusted exercise price.
The Option Plan provides for granting both incentive stock options and
nonqualified stock options to purchase shares of the Company's common stock at
prices not less than 85 percent of fair market value on the date of grant.
Options are exercisable as stated in each individual grant; however, no option
may extend beyond ten years from the date of grant.
The Director Plan provides for automatic option grants at designated
intervals to nonemployee directors over their period of continued service on the
Board of Directors. Such options are granted at 100 percent of fair market value
on the date of grant. Options are immediately exercisable and have a ten-year
term.
The Retainer Plan permits nonemployee directors to apply all or a portion
of their annual retainer fees to the acquisition of options to purchase shares
of the Company's common stock. The number of shares covered by such options is
determined by dividing the amount of retainer fees to be applied by the
Black-Scholes formula value for the option. Such options are granted at 100
percent of fair market value on the date of grant. Options are immediately
exercisable and have a ten-year term.
The Company accounts for these plans following the guidance of APB
Opinion No. 25, under which no compensation cost has been recognized. SFAS No.
123, "Accounting for Stock-Based Compensation," if fully adopted, changes the
methods for recognition of costs on plans similar to those of the Company.
Adoption of SFAS No. 123 is optional for stock option cost recognition; however,
pro forma disclosures are required, and shown below, as if the Company had
adopted the cost recognition requirements under SFAS No. 123.
A summary of the stock options outstanding at December 31, 1999, 1998 and
1997 and changes during the years then ended in the number of shares (Shares)
and the weighted
<PAGE>
27
average exercise price (Price) is presented below (options received by former
Harmac option holders are denoted as "Exchanged"):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ------------------------- -------------------------
(SHARES IN THOUSANDS) Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 837 $ 18 901 $ 19 916 $ 18
Granted 277 9 76 14 109 16
Exchanged 95 10 - - - -
Exercised - - - - (117) 16
Canceled (155) 16 (140) 19 (7) 23
------- ------ -----
Outstanding at end of year 1,054 15 837 18 901 19
======= ====== =====
Exercisable at year-end 642 18 540 19 475 19
======= ====== =====
Weighted average fair value
of options granted during year $1.93 $3.57 $4.69
======= ====== =====
</TABLE>
The fair value of options granted in 1999, 1998 and 1997 was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions used for grants in 1999, 1998 and 1997, respectively:
risk-free interest rates of 5.1, 5.5 and 6.6 percent; dividend yields of 5.4,
4.2 and 4.2 percent; and expected volatility of 35, 31 and 34 percent. Expected
option lives of six years were assumed. The following table summarizes
information about stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Range of exercise prices
----------------------------------------
(SHARES IN THOUSANDS) $5 - $11 $12 - $20 $24 - $30 Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding:
Number outstanding 279 684 91 1,054
Remaining contractual life in years 9.0 5.0 2.4 5.8
Weighted average exercise price $8 $16 $28 $15
Options exercisable:
Number exercisable 43 508 91 642
Weighted average exercise price $8 $17 $28 $18
</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) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 14,421 $ 342 $ 10,020
Pro forma 14,093 179 9,734
Diluted net income per share:
As reported $ 1.05 $ .03 $ .75
Pro forma 1.03 .01 .73
</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.
11. DISCONTINUED OPERATIONS
TISSUE BUSINESS
In March 1998, the Company sold the assets of its tissue business to PLAINWELL,
INC. (Plainwell) for a total cash consideration of $120.5 million and the
assumption by Plainwell of certain liabilities. Operating results of the tissue
business for 1998 and 1997 are shown separately in the Consolidated Statements
of Income as income from discontinued tissue operations, net of tax. The
discontinued tissue operating results include an allocation of consolidated net
interest expense based upon net assets. The net interest expense allocated was
$.1 million and $2.3 million in 1998 and 1997, respectively. Tissue sales of
$8.3 million in 1998 and $136.2 million in 1997 were excluded from revenues in
the Consolidated Statements of Income.
DISPOSABLE DIAPER BUSINESS
In February 1996, the Company sold all the operating assets of the disposable
diaper business, primarily properties and inventory, to Paragon Trade Brands,
Inc. (Paragon). During the fourth quarter of 1998, the Company settled certain
diaper business legal issues outstanding and recognized costs associated with
former diaper business facilities. The charges totaled $6.0 million pre-tax
($4.0 million after tax).
12. LEGAL MATTERS AND CONTINGENCIES
The Company is a party to legal proceedings and environmental matters generally
incidental to its business. Although the final outcome of any legal proceeding
or environmental matter is subject to many variables and cannot be predicted
with any degree of certainty, the Company presently believes that the ultimate
outcome resulting from these proceedings and matters would not have a material
effect on the Company's current financial position or liquidity; however, in any
given future reporting period such proceedings or matters could have a material
effect on results of operations.
The Oregon Department of Environmental Quality (ODEQ), based on detection
of possible creosote and hydrocarbon contamination, determined that a vacant
industrial site formerly owned by the Company requires further action.
Accordingly, the Company and the local governmental owner agreed in a Consent
Order with ODEQ to investigate the site and determine an appropriate remedy. The
Company is currently participating in the investigation phase of this site with
remediation and monitoring to occur over an extended future time period. Based
on preliminary findings, the Company has established a reserve in the amount of
$6.1 million representing the low end of the range of estimated future
remediation and monitoring costs at this site. Factors outside the Company's
control could cause the costs to be substantially greater.
The Washington Department of Ecology (WDOE) requested that the Company
undertake an assessment to determine whether and to what extent the Company's
former mill site at Port Gamble, Washington may be contaminated. Further, WDOE
<PAGE>
28
requested that the Company perform an investigation of sediments in the adjacent
bay to determine the extent of wood waste accumulation. These activities were
completed during 1999. Future regulatory developments and investigation findings
regarding sediments may indicate remediation will be necessary. Based on
preliminary findings, the Company has established a reserve in the amount of
$2.6 million representing the low end of the range of estimated future
remediation and monitoring costs at this site. Factors outside the Company's
control could cause the costs to be substantially greater.
The Company has tendered the defense of the above environmental claims to
a number of insurance carriers which issued comprehensive general liability
policies to the Company from 1959 to 1985. In 1995, the Company filed a
declaratory judgment action to obtain a decision that the insurance carriers
were obligated to defend the Company and indemnify it for any environmental
liabilities incurred as a result of certain operations of the Company during
that period. The Company expects that the case will be tried, if necessary, in
the year 2001. The Company has concluded settlements with several insurance
carriers and is engaged in settlement discussions with other insurance carriers.
If it is determined that the insurance carriers are obligated to pay the
Company's defense and indemnity claims, there are more than sufficient policy
limits available to meet the Company's estimated liabilities. The Company
believes recovery under these policies is probable and has recorded receivables
in amounts it has deemed highly probable of realization.
In March 1999, the Company filed a claim under Chapter 11 of the North
American Free Trade Agreement (NAFTA) against the Canadian Federal Government.
The complaint arises from the Company's assertion that its duty-free export
quota under the Canada/U.S. Softwood Lumber Agreement has been unfairly
allocated and then reduced each year since the agreement came into effect.
The NAFTA contains a special process that permits NAFTA investors who
have been harmed by government actions which are inconsistent with the
provisions of NAFTA's Investment Chapter to seek compensation before an
impartial international arbitration panel. An international arbitration panel
has been appointed to hear this claim but there can be no assurance as to when
the claim will be resolved.
13. SEGMENT INFORMATION
The Company is a manufacturer of pulp and lumber, with operations in the U.S.
and in Western Canada. The Company classifies its business into two operating
segments: wood products and pulp products. The two operating segments were
identified as distinct segments based upon the difference in products and the
manner in which the operations are managed.
Wood products manufactures standardized and specialty lumber and sells
residual wood chips. Lumber products are sold mainly to wholesalers, and wood
chips are sold to manufacturers of pulp and paper.
Pulp products manufactures a broad range of pulp utilizing both wood
chips and sawdust as fiber sources. Pulp is sold primarily to end users in North
America, Europe and Pacific Rim countries.
The accounting policies of the operating segments are the same as those
described in Accounting Policies, Note 1. The Company evaluates performance
based on profit or loss before income taxes. A reconciliation of the totals
reported for the operating segments to the applicable line items in the
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
(THOUSANDS) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C> <C>
Wood products $248,704 $216,940 $248,320
Pulp products 238,244 203,845 81,579
-------------------------------------------------
Total operating segments $486,948 $420,785 $329,899
=================================================
OPERATING PROFIT (LOSS)
FROM CONTINUING OPERATIONS
Wood products $ 42,589 $ 1,294 $ 24,924
Pulp products (1,939) (21,169) (2,650)
-------------------------------------------------
Total operating segments 40,650 (19,875) 22,274
Corporate (8,331) (12,511) (7,509)
Interest, net (9,063) (7,973) (5,995)
-------------------------------------------------
$ 23,256 $(40,359) $ 8,770
=================================================
DEPRECIATION AND
AMORTIZATION EXPENSE
Wood products $ 8,028 $ 7,629 $ 7,902
Pulp products 23,819 20,965 10,313
-------------------------------------------------
Total operating segments 31,847 28,594 18,215
Corporate 926 674 543
Discontinued operations - 651 11,298
-------------------------------------------------
$ 32,773 $ 29,919 $ 30,056
=================================================
TOTAL ASSETS AT YEAR-END
Wood products $119,588 $116,328 $123,913
Pulp products 276,571 272,586 93,283
-------------------------------------------------
Total operating segments 396,159 388,914 217,196
Corporate 74,047 60,675 90,710
Discontinued operations (1) - - 67,861
-------------------------------------------------
$470,206 $449,589 $375,767
=================================================
CAPITAL EXPENDITURES
Wood products $ 8,780 $ 13,445 $ 6,159
Pulp products 14,930 12,238 2,742
-------------------------------------------------
Total operating segments 23,710 25,683 8,901
Corporate 1,117 1,271 497
Discontinued operations - 620 3,686
-------------------------------------------------
$ 24,827 $ 27,574 $ 13,084
=================================================
REVENUES BY GEOGRAPHIC REGION (2)
United States $281,449 $242,437 $261,582
Europe 102,740 78,782 15,274
Other 102,759 99,566 53,043
-------------------------------------------------
$486,948 $420,785 $329,899
=================================================
PROPERTIES BY GEOGRAPHIC REGION
United States $ 75,730 $ 71,889 $ 75,932
Canada 158,437 162,503 32,233
-------------------------------------------------
$234,167 $234,392 $108,165
=================================================
</TABLE>
(1) DISCONTINUED OPERATIONS FOR 1997 REFLECTS TISSUE OPERATIONS ASSETS HELD FOR
SALE.
(2) REVENUES ARE REPORTED BY THE LOCATION OF THE CUSTOMER.
<PAGE>
29
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Pope & Talbot, Inc. and Subsidiaries
Years ended December 31
(in thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Revenues $ 486,948 $ 420,785 $ 329,899 $ 313,845 $ 417,396
Depreciation and amortization 32,773 29,919 30,056 31,440 45,066
Interest expense, net 9,063 7,973 5,995 6,035 9,480
Income (loss) from continuing operations 14,421 (23,460) 4,432 (1,329) 4,955
Income (loss) from discontinued tissue operations - 23,059 5,588 5,238 (29,793)
Cumulative effect of accounting change - 743 - - -
------------ ------------ ------------ ------------ -----------
Net income (loss) $ 14,421 $ 342 $ 10,020 $ 3,909 $ (24,838)
============ ============ ============ ============ ===========
PER COMMON SHARE
Income (loss) from continuing operations - basic $ 1.06 $ (1.74) $ .33 $ (.10) $ .37
Income (loss) from continuing operations - diluted 1.05 (1.74) .33 (.10) .37
Income (loss) from discontinued operations - basic
and diluted - 1.71 .42 .39 (2.23)
Cumulative effect of accounting change - basic
and diluted - .06 - - -
Cash dividends .52 .76 .76 .76 .76
Stockholders' equity 12.81 11.72 13.31 13.71 14.19
YEAR-END COMMON SHARES OUTSTANDING,
NET OF TREASURY STOCK (000's) 14,531 13,481 13,481 13,364 13,364
FINANCIAL POSITION (AT DECEMBER 31)
Current assets $ 202,799 $ 185,414 $ 208,270 $ 162,052 $ 207,252
Properties, net 234,167 234,392 108,165 201,666 225,760
Deferred income tax assets, net 19,448 16,218 24,843 21,871 16,531
Other assets 13,792 13,565 34,489 22,340 22,684
------------ ------------ ------------ ------------ -----------
$ 470,206 $ 449,589 $ 375,767 $ 407,929 $ 472,227
============ ============ ============ ============ ===========
Current liabilities $ 95,216 $ 73,587 $ 81,636 $ 84,617 $ 113,495
Long-term liabilities 41,851 40,182 25,964 32,058 30,526
Long-term debt 147,038 138,004 88,705 108,026 138,514
Minority interest - 39,759 - - -
Stockholders' equity 186,101 158,057 179,462 183,228 189,692
------------ ------------ ------------ ------------ -----------
$ 470,206 $ 449,589 $ 375,767 $ 407,929 $ 472,227
============ ============ ============ ============ ===========
</TABLE>
<PAGE>
30
QUARTERLY FINANCIAL INFORMATION
The following quarterly information is unaudited, but includes all adjustments
which management considers necessary for a fair presentation of such
information. For interim quarterly statements, income taxes were estimated using
the best available information for projected results for the entire year.
<TABLE>
<CAPTION>
Quarter
---------------------------------------------
(in thousands of dollars except per share amounts) First Second Third Fourth Year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Revenues $ 109,205 $ 120,255 $ 127,745 $ 129,743 $ 486,948
Gross profit 2,774 12,066 23,258 18,131 56,229
Net income (loss) (2,276) 2,921 7,160 6,616 14,421
PER COMMON SHARE
Basic net income (loss) (0.17) 0.22 0.53 0.47 1.06
Diluted net income (loss) (0.17) 0.22 0.53 0.46 1.05
Dividends .19 .11 .11 .11 .52
Stock Price
High 9 5/16 13 3/8 14 3/8 16 1/4 16 1/4
Low 6 1/16 6 1/8 10 5/8 10 7/8 6 1/16
1998
Revenues $ 103,493 $ 106,502 $ 104,315 $ 106,475 $ 420,785
Gross profit (loss) (2,681) (2,940) (5,130) 2,465 (8,286)
Income (loss) from continuing operations (6,593) (7,126) (6,753) (2,988) (23,460)
Income (loss) from discontinued operations 27,074 - - (4,015) 23,059
Cumulative effect of accounting change - - - 743 743
Net income (loss) 20,481 (7,126) (6,753) (6,260) 342
PER COMMON SHARE
Basic and diluted net income (loss):
Income (loss) from continuing operations (.49) (.53) (.50) (.22) (1.74)
Income (loss) from discontinued operations 2.01 - - (.30) 1.71
Cumulative effect of accounting change - - - .06 .06
Net income (loss) 1.52 (.53) (.50) (.46) .03
Dividends .19 .19 .19 .19 .76
Stock Price
High 16 1/16 16 7/8 12 5/8 10 5/16 16 7/8
Low 13 3/16 11 1/16 8 3/4 7 5/8 7 5/8
</TABLE>
<PAGE>
EXHIBIT 21.1
Subsidiaries of Pope & Talbot, Inc. (the registrant)
<TABLE>
<CAPTION>
NAME OF CORPORATION STATE OR OTHER JURISDICTION
OF INCORPORATION
------------------------------------------------------------------------------------------
<S> <C> <C>
1) Pope & Talbot International Ltd. British Columbia
2) Pope & Talbot Ltd., a subsidiary of Pope & British Columbia
Talbot International Ltd.
3) Harmac Pacific Inc. British Columbia
4) Pope & Talbot FSC, Inc. Oregon
5) Pope & Talbot Wis., Inc. Delaware
6) Penn Timber, Inc. Oregon
7) Pope & Talbot Relocation Services, Inc. Oregon
8) Pope & Talbot Pulp Sales USA, Inc. Oregon
9) Pope & Talbot Pulp Sales Europe SPRL, owned Belgium
89 percent by Pope & Talbot Pulp Sales USA, Inc.
and 11 percent by Pope & Talbot, Inc.
</TABLE>
All subsidiaries of the registrant do business under the name of the
corporation.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K into the Company's previously
filed Registration Statements on Form S-8, File No.'s 333-92255, 33-34996,
333-04223, 333-72737 and 33-64764.
ARTHUR ANDERSEN LLP
Portland, Oregon
March 17, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K into the Company's previously
filed Registration Statements on Form S-8, File No.'s 333-92255, 33-34996,
333-04223, 333-72737 and 33-64764.
PricewaterhouseCoopers LLP
Portland, Oregon
March 17, 2000
<TABLE> <S> <C>
<PAGE>
<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, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 22,719
<SECURITIES> 10,649
<RECEIVABLES> 74,099
<ALLOWANCES> 0
<INVENTORY> 84,466
<CURRENT-ASSETS> 202,799
<PP&E> 457,537
<DEPRECIATION> 232,129
<TOTAL-ASSETS> 470,206
<CURRENT-LIABILITIES> 95,216
<BONDS> 147,038
0
0
<COMMON> 15,451
<OTHER-SE> 170,650
<TOTAL-LIABILITY-AND-EQUITY> 470,206
<SALES> 486,948
<TOTAL-REVENUES> 486,948
<CGS> 430,719
<TOTAL-COSTS> 430,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,063
<INCOME-PRETAX> 23,256
<INCOME-TAX> 11,422
<INCOME-CONTINUING> 11,834
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,421
<EPS-BASIC> 1.06
<EPS-DILUTED> 1.05
</TABLE>
<PAGE>
EXHIBIT 99.1
AUDITORS' REPORT
To the Shareholders of Harmac Pacific Inc.
We have audited the consolidated statements of financial position of Harmac
Pacific Inc. as at December 31, 1998 and 1997 and the consolidated statements of
operations and deficit and changes in financial position for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1998
and 1997 and the results of its operations and the changes in its financial
position for the years then ended in accordance with generally accepted
accounting principles. As required by the British Columbia Company Act, we
report that, in our opinion, these principles have been consistently applied.
Vancouver, Canada PRICEWATERHOUSECOOPERS LLP
January 26, 1999 Chartered Accountants
