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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File Number 1-7852
POPE & TALBOT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-0777139
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1500 SW 1st Avenue, Portland, Oregon 97201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 228-9161
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Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
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Common Shares, par value $1.00 New York Stock Exchange
Common Shares, par value $1.00 Pacific Stock Exchange
8-3/8% Debentures, Due June 1, 2013 None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $191,607,390 as of March 19, 1998 ($15.00 per share).
13,481,441
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(Number of shares of common stock outstanding as of March 19, 1998)
Part I and Part II incorporate specified information by reference from the
annual report to shareholders for the year ended December 31, 1997 and from the
Company's Current Report on Form 8-K dated March 6, 1998. Part III incorporates
specified information by reference from the proxy statement for the annual
meeting of shareholders on April 30, 1998.
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PART I
This Annual Report of Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about the Company's industry, management's beliefs and certain
assumptions made by the Company's management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and variations
of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results may differ materially from
those expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Factors That May Affect
Future Results" in the Management's Discussion and Analysis of Results of
Operations and Financial Condition incorporated by reference from the Company's
Annual Report to Shareholders for the year ended December 31, 1997, as well as
those noted in "Environmental Matters" and "Legal Proceedings" below. Unless
required by law, the Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. However, readers should carefully review the report and
documents the Company files from time to time with the Securities and Exchange
Commission, particularly its Quarterly Reports on Form 10-Q and any current
Reports on Form 8-K.
ITEM 1. BUSINESS
INTRODUCTION
Pope & Talbot, Inc. (the Company) is engaged principally in the wood
products and pulp products businesses. The Company's wood products business
involves the manufacture and sale of standardized and specialty lumber
and wood chips. In its pulp products business, the Company manufactures and
sells bleached kraft pulp for newsprint, tissue and writing paper, and brokers
wood chips. In January 1998, the Company announced it had entered into a
definitive agreement to sell its private label tissue business to PLAINWELL,
INC. (Plainwell). The sale of this business was completed on March 6, 1998, and
the tissue business results for 1997, 1996 and 1995 have been shown as
discontinued tissue operations. In December 1995, the Company entered into a
definitive agreement to sell its disposable diaper business to Paragon Trade
Brands, Inc. (Paragon). The sale of this business was completed on February 8,
1996, and the disposable diaper business results for 1995 have been reflected as
discontinued diaper operations. A gain on the sale of the discontinued diaper
business was reported in the first quarter of 1996. During 1997, wood products
accounted for approximately 75 percent of the Company's revenues from continuing
operations of $329.9 million, and bleached kraft pulp and brokered wood chips
accounted for 25 percent. Discontinued tissue operations revenues were $136.2
million in 1997.
The Company, a Delaware corporation, was originally incorporated as a
California corporation in 1940. It is the successor to a partnership formed in
San Francisco, California in 1849 that acquired its first timberlands and opened
a lumber mill in the Seattle, Washington area in 1853. Subsequently, the Company
developed a lumber business based on timberland and facilities in the U.S.
Pacific Northwest, British Columbia, Canada, and the Black Hills region of South
Dakota and Wyoming.
Since the mid-1980s, the Company has reduced its dependency on timber from
the Pacific Northwest, where environmental concerns have sharply restricted the
availability and increased the cost of public timber. At the same time, the
Company has increased its operations in regions presently having more stable
timber supplies, namely in British Columbia and the Black Hills region of South
Dakota and Wyoming. In 1985, the Company distributed its timber and land
development properties in the State of Washington to its shareholders through
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interests in a newly formed master limited partnership. In 1989, the Company
sold its Oregon sawmill, and the Company has since sold its remaining Oregon
timberlands. In 1992, the Company acquired a sawmill in Castlegar, British
Columbia and related timber cutting rights. At the end of 1995, the Company
permanently closed its Port Gamble, Washington sawmill. The Company currently
operates five sawmills with an estimated annual capacity of 560 million board
feet, of which approximately 75 percent is located in British Columbia and 25
percent in the Black Hills.
In the late 1970s, the Company expanded into the pulp business with the
purchase of its Halsey, Oregon pulp mill. The Halsey mill produces bleached
kraft pulp which is sold to writing paper, tissue and newsprint manufacturers in
the Pacific Northwest and on the open market.
In December 1997, the Company announced its tender offer to acquire a
controlling interest in Harmac Pacific Inc. (Harmac) outstanding common shares
for cash. On February 2, 1998, the Company acquired shares of Harmac common
stock which resulted in the Company holding a 53 percent controlling interest
in Harmac. Harmac, which is publicly traded on the Toronto, Vancouver and
Montreal stock exchanges, operates a pulp mill, located on the east coast of
Vancouver Island in British Columbia, Canada, which has an annual capacity to
produce 370,000 metric tons of pulp.
The businesses in which the Company is engaged are extremely competitive,
and a number of the Company's competitors are substantially larger than the
Company with correspondingly greater resources.
Environmental regulations to which the Company is subject require the
Company from time to time to incur significant operating costs and capital
expenditures. In addition, as discussed herein, environmental concerns have in
the past materially affected the availability and cost of raw materials used in
the Company's business. See "Wood Products Business," "Pulp Products Business"
and "Environmental Matters."
WOOD PRODUCTS BUSINESS
The Company's wood products business involves the manufacture and sale of
standardized and specialty lumber and wood chips. The Company's principal wood
products categories and the sales generated by each over the past three years
are set forth in the following table:
Classes of Wood Products 1997 1996 1995
------------------------ ---------- ---------- ----------
(In thousands)
Lumber $ 219,698 $ 194,930 $ 194,350
Wood chips 16,010 20,835 46,514
Logs and other 12,612 15,948 24,712
---------- ---------- ----------
Total wood products sales $ 248,320 $ 231,713 $ 265,576
========= ========== ==========
In 1997, lumber revenues increased $24.8 million, or 13 percent, over
1996, due to 10 percent higher average prices combined with a 2 percent volume
increase. Wood chip revenues in 1997 declined $4.8 million, or 23 percent, from
1996, reflecting 20 percent lower residual chip prices and 6 percent lower chip
volumes. Log sales and other were down in 1997 primarily due to the first
quarter 1996 sale of the Port Gamble sawmill. Although 1996 and 1995 lumber
revenues were comparable, the 1996 lumber revenues reflected 17 percent higher
prices than 1995 which offset 14 percent lower lumber sales volumes. The 1996
volume reduction related mainly to the permanent closure of the Company's Port
Gamble, Washington sawmill in 1995, and to a lesser degree, reduced Canadian
shipments. Wood chip revenues in 1996 were $25.7 million, or 55 percent, lower
than 1995 reflecting residual chip prices which were down nearly 50 percent from
1995 levels combined with lower chip
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volumes resulting from decreased lumber production. Log sales were down in 1996
due primarily to the 1995 Port Gamble mill closure.
The Company's lumber products consist principally of boards and dimension
lumber, some of which are specialty, value-added items, such as stress-rated
lumber. Wood chips and other similar materials are obtained as a by-product of
the Company's lumber operations.
The principal sources of raw material for the Company's wood products
operations are timber obtained through long-term cutting licenses on public
lands, logs purchased on open log markets, timber offered for sale via
competitive bidding by federal agencies, and timber purchased under long-term
contracts to cut timber on private lands.
During 1995, the Port Gamble sawmill was either shut down or operating on
a reduced one-shift basis due to a lack of acceptably priced timber in relation
to end-product prices. Prior to the mill's closure, timber harvest levels in the
mill's operating region had been significantly reduced as a result of
environmental pressures to reduce the amount of timber available for harvest. A
strong export log market further reduced domestic log supplies in the region.
These reduced log volumes, combined with weakened lumber markets, resulted in
operating losses at Port Gamble and significantly below-capacity production.
With no prospect of a resolution to the timber supply situation, the Company
permanently closed the Port Gamble sawmill in the fourth quarter of 1995. The
assets of the facility were sold in the first quarter of 1996.
Approximately 75 percent of the Company's current lumber capacity is
located in British Columbia, Canada and 25 percent in the Black Hills region of
South Dakota and Wyoming. In Canada, timber requirements are obtained primarily
from the Provincial Government of British Columbia under long-term timber
harvesting licenses which allow the Company to remove timber from defined areas
annually on a sustained yield basis. The Provincial Government of British
Columbia has the authority to modify prices and harvest volumes at any time.
Under the provincial stumpage pricing formula, wood costs are based on a
relationship to end-product prices. Approximately 30 percent of the Company's
Canadian log requirements are satisfied through open market log purchases. In
the Black Hills, the Company obtains its timber from various public and private
sources under long-term timber harvesting contracts in addition to buying logs
on open markets. Under these Black Hills contracts, prices are subject to
periodic adjustment based upon formulas set forth therein.
During 1994, the Provincial Government of British Columbia's Commission of
Resources and Environment (CORE) began reviewing the future use of the forest
resources in the province. This review was completed in 1996, and in 1997, the
related Kootenay Boundary Land Use Plan was approved. This land use plan set
aside several areas for new parks. Although no assurances can be given,
management believes that in the near term, timber supplies for the Company's
Canadian sawmills should be stable. The Company is improving its reforestation
practices and developing strategies to sustain and enhance timber supplies in
the long-term in order to mitigate the adverse effects on timber supplies of the
land being set aside.
The British Columbia government has also implemented its Forest Practices
Code (Code). This Code sets strict standards for logging activities and
reforestation responsibilities. Requirements under this Code have been phased in
beginning in 1996, with full implementation to be in place during 1998. Due to
the additional logging and reforestation requirements of this Code, the
Company's logging costs increased in 1996 and 1997, and will likely increase
further during 1998. The Code could also ultimately have a long-term unfavorable
impact on the Company's timber harvest volumes.
During the first quarter of 1996, U.S. and Canadian trade negotiators
reached an agreement establishing volume quotas on Canadian softwood lumber
shipments to the U.S. Based on this agreement, Canadian lumber producers are
assigned volume quotas specifying
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on a company by company basis the lumber volumes which may be shipped to the
U.S. tariff-free and those volumes which may be shipped to the U.S. subject to a
$51 per thousand board foot tariff. Shipment volumes in excess of these
established quotas are subject to a $102 per thousand board foot tariff. March
31, 1997, represented the end of the first fiscal year lumber quota period
related to this agreement and the Company shipped volumes in excess of its
specified quotas during the period. In June 1997, the Company was informed of
its fiscal year 1997/1998 quota volumes which applied retroactively to April 1.
The Company's updated tariff-free volume allocation for the current fiscal year
represents an 11.4 million board foot reduction from the 1996/1997 fiscal year
allocations. Partially offsetting this tariff-free allocation reduction was a
2.6 million board foot increase in the Company's volume allocation subject to
the lower $51 per thousand board foot tariff. The Company believes its volume
allocations were determined consistently with other British Columbia lumber
producers. During 1997, the Company expensed tariff charges of about $1.9
million related to shipments from the Company's Canadian sawmills into the U.S.
Because of weakened lumber markets in the last half of 1997, coupled with the
implications of this tariff agreement, the Company took a two-week shutdown at
its Midway, British Columbia sawmill in October 1997 and also extended holiday
downtime at all of its Canadian sawmills in December 1997. The Company will
continually evaluate the need for temporary shutdowns at its Canadian sawmills
in the future taking into consideration the dynamics of the lumber markets and
the impact of the tariff agreement.
Marketing and Distribution. The Company's lumber products are sold
primarily to wholesale distributors. Wood chips produced by the Company's
sawmills are sold to manufacturers of pulp and paper in the U.S. and Canada.
Logs not suitable for consumption in the Company's sawmills are sold to other
U.S. and Canadian forest products companies.
Marketing of the Company's wood products is centralized in its Portland,
Oregon office. Although the Company does not have distribution facilities at the
retail level, the Company does utilize several reload facilities around the U.S.
to assist in moving the product closer to the customer. The Company sold wood
products to numerous customers during 1997, the ten largest of which accounted
for approximately 42 percent of total wood products sales. Approximately 12
percent of the Company's revenues in 1997 were to a group of lumber wholesalers
affiliated with a single parent, namely Forest City Group.
Backlog. The Company maintains a minimal finished goods inventory of wood
products. At December 31, 1997, orders were approximately $4.6 million, compared
with approximately $9.9 million at December 31, 1996. This backlog represented
an order file for the Company which generally would be shipped within one to two
months. The decrease from 1996 reflects both lower order volume in 1997 due to a
slower market and decreased lumber sales prices. The higher order volume in 1996
was also a function of timing and poor year-end 1996 weather conditions which
delayed shipments.
Competition. The wood products industry is highly competitive, with a
large number of companies producing products that are reasonably standardized.
There are numerous competitors of the Company that are of comparable size or
larger, none of which is believed to be dominant. The principal means of
competition in the Company's wood products business are pricing and the ability
to satisfy customer demands for various types and grades of lumber.
For further information regarding amounts of revenue, operating profit and
loss and identifiable assets attributable to the wood products industry segment,
see Note 11 of "Notes to Consolidated Financial Statements" in the Company's
1997 Annual Report to Shareholders.
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PULP PRODUCTS BUSINESS
The Company's principal pulp products categories and the sales generaed by
each over the last three years are set forth in the following table:
Classes of Pulp Products 1997 1996 1995
------------------------ ---- ---- ----
(In thousands)
Bleached kraft pulp $ 75,396 $ 72,410 $ 124,361
Brokered wood chips 6,183 9,722 27,459
---------- --------- ----------
Total pulp products sales $ 81,579 $ 82,132 $ 151,820
========== ========= ==========
In 1997, pulp products revenues decreased $0.6 million from 1996. Bleached
kraft pulp revenues increased $3.0 million, or 4 percent, from 1996 to 1997
reflecting 12 percent higher sales volumes offset by 7 percent lower pulp
pricing. Lower 1997 brokered wood chip revenues resulted from a continuing
decrease in wood chip prices combined with lower volume. Pulp products revenues
decreased $69.7 million, or 46 percent, from 1995 to 1996 reflecting a dramatic
weakening of pulp markets. The Company's pulp sales prices were nearly 35
percent lower on average in 1996 than 1995. Pulp sales volume in 1996 was down 7
percent from 1995 due mainly to a two-week market induced shutdown in the first
quarter of 1996 and a brief shutdown in the 1996 third quarter caused by an
equipment failure. Lower brokered wood chip revenues reflected a significant
decrease in wood chip prices combined with lower volume in 1996 compared to
1995.
The Company owns a pulp mill at Halsey, Oregon. This mill produces
bleached kraft pulp which is sold in various forms to writing paper, tissue and
newsprint manufacturers in the Pacific Northwest and on the open market. In
conjunction with the fiber acquisition program for the pulp mill, the Company
brokers pulp chips for sale primarily into the export market. The total annual
capacity of the mill is 180,000 air dry metric tons; 175,000 metric tons were
produced in 1997, 162,000 metric tons were produced in 1996 and 175,000 metric
tons were produced in 1995.
To provide additional sales flexibility and attempt to improve margins
through higher value products, the Company initiated mill modifications, which
were completed in early 1994, to improve pulp quality and expand pulp drying
capabilities. These mill improvements have allowed the Company to expand its
pulp product offerings and to dry its total pulp production, thus providing
greater access to pulp markets within and outside the Pacific Northwest, which
has historically been the Company's primary pulp market region.
The Company has an agreement with Grays Harbor Paper L.P. (Grays Harbor),
under which the Company supplies pulp to the Grays Harbor writing grade paper
mill. Grays Harbor purchased approximately 89,000 metric tons, 100,000 metric
tons and 103,000 metric tons of pulp from the Company in 1997, 1996 and 1995,
respectively. All output from the paper mill is sold to one customer. In the
event that the paper mill's sales to its customer are adversely impacted for any
reason, sales of the Company's pulp may be adversely impacted. A significant
portion of the pulp sold to the paper mill is produced from sawdust, which has
historically been less expensive than softwood and hardwood chips. Pricing for
this pulp sold to Grays Harbor was computed using a formula based on prices for
white paper. In late 1997, the Company and Grays Harbor modified their pulp
supply contract. The modified contract, which became effective January 1, 1998,
changes the pulp pricing formula so that pulp prices are based on Southern mixed
(U.S.) bleached hardwood kraft prices rather than white paper prices. Given the
current pulp market weakness, the Company expects the new Grays Harbor pricing
formula will result in lower Grays Harbor pulp prices early in 1998, but the
Company believes that over the longer-term, pulp pricing under the new formula
will be comparable to that under the previous pricing formula.
Substantially all of the Company's wood chip and sawdust requirements for
the Halsey pulp mill are satisfied through purchases by the Company from third
parties. The Company has long-term chip supply contracts with sawmills in the
Pacific Northwest.
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Environmental concerns over timber harvests, which have caused high log
costs and led to the shutdown of the Company's Port Gamble sawmill, have also
caused reduced chip availability from historic sources at the Halsey pulp mill
over the past several years. In order to provide an adequate supply of wood
fiber for the mill, the Company has expanded its capability of using sawdust,
which historically has been less expensive than softwood chips, as a raw
material for a significant portion of the production. Additionally, the Company
continues to use an expanded geographic base to maintain an adequate supply of
chips for the approximately 40 to 50 percent of the pulp mill's production which
remains based on softwood chips. At the end of 1995, and continuing in 1996 and
1997, reduced demand for chips resulting from the weakened pulp market caused
chip prices to fall significantly from their mid-1995 highs. The Company
believes there will continue to be an adequate supply of third-party chips and
sawdust for the Halsey pulp mill in the foreseeable future.
Marketing and Distribution. The Company utilizes its own sales force and
pulp brokers to sell its pulp products. A large majority of the Company's pulp
products are sold in the Pacific Northwest. In 1997, sales to Grays Harbor
represented 45 percent of the Company's pulp revenues and the remaining nine
largest customers accounted for an additional 30 percent of pulp revenues. Grays
Harbor accounted for 11 percent of total Company revenues in 1997.
Backlog. The Company's pulp customers either enter into contracts for
periods of one to three years or purchase products without obligation for future
purchases. The contractual customers provide the Company with annual estimates
of their requirements, followed by periodic orders based on more definitive
information. As of December 31, 1997, the Company's backlog of orders believed
to be firm for both contractual and non-contractual customers was $18 million
compared to $17 million at December 31, 1996. The increase in the total backlog
of orders reflects both higher sales prices and order volumes. The backlog of
pulp orders at year-end represents orders which will be filled in the first
quarter of the following year.
Competition. The pulp industry is highly competitive, with a substantial
number of competitors having extensive financial resources, manufacturing
expertise and sales and distribution organizations, most of which are larger
than the Company, but none of which is believed to be dominant. The principal
methods of competition in the pulp market are price, quality, volume,
reliability of supply and customer service.
In December 1997, the Company announced its tender offer to acquire a
controlling interest in Harmac outstanding common shares for cash. On
February 2, 1998, the Company completed the acquisition of the common shares
which resulted in the Company holding a 53 percent controlling ownership
interest in Harmac. The Harmac pulp mill is located in Nanaimo, British
Columbia and is one of Canada's largest pulp producers with an annual capacity
of 370,000 metric tons of northern bleached softwood kraft pulp. The Harmac
pulp mill produced 340,000 metric tons in 1997, and had revenues of
$163 million.
For further information regarding amounts of revenue, operating profit and
loss and identifiable assets attributable to the pulp products industry segment,
see Note 11 of "Notes to Consolidated Financial Statements" in the Company's
1997 Annual Report to Shareholders.
DISCONTINUED OPERATIONS
As discussed previously, in March 1998, the Company sold its tissue
business to Plainwell and, in February 1996, the Company sold its disposable
diaper business to Paragon. The tissue business results for 1997, 1996 and 1995
were shown as discontinued tissue operations. The discontinued tissue business
revenues were $136.2 million in 1997, $133.6 million in 1996 and $107.0 million
in 1995. The disposable diaper business results for 1995 were reflected as
discontinued diaper operations. Revenues for the discontinued diaper business
were $144.0 million in 1995.
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Until the sale of the tissue business in March 1998, the Company produced
a line of private label consumer tissue products including towels, napkins,
bathroom tissue and facial tissue. Also, until the February 1996 sale of the
diaper business, the Company produced disposable diaper products. These products
were sold under private and controlled labels.
For further information regarding the Company's discontinued operations,
see Note 9 of "Notes to Consolidated Financial Statements" in the Company's 1997
Annual Report to Shareholders.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state, provincial and local air, water
and land pollution control, solid and hazardous waste management, disposal and
remediation laws and regulations in all areas where it has operations.
Compliance with these laws and regulations generally requires operating costs as
well as capital expenditures. It is difficult to estimate the costs related
solely to environmental matters of many capital projects which have been
completed in the past or which may be required in the future. Changes required
to comply with environmental standards will affect other areas such as facility
life and capacity, production costs, changes in raw material requirements and
costs and product value. In November 1997, the Environmental Protection Agency
(EPA) published regulations establishing standards and limitations for
non-combustion sources under the Clean Air Act and revised regulations under the
Clean Water Act. These regulations are collectively referred to as the "cluster
rules" and have been the subject of extensive discussions between the pulp and
paper industry and the EPA. The Company's primary exposure to these regulations
relates to the Company's Halsey pulp mill. Anticipated compliance capital
requirements at Halsey are estimated at $30 to $35 million with compliance
required by the end of 2000. It is estimated that during 1997, capital
expenditures for environmental controls amounted to approximately $1 million. It
is expected that capital expenditures will continue into the future and will
increase over time, particularly considering the previously discussed cluster
rules capital requirements. Based on the understanding of future compliance
standards, expenditures for such purposes, with the exception of expenditures
related to cluster rule compliance, are currently estimated to not be
significant in 1998 and 1999. However, the ultimate outcome of future compliance
is uncertain due to various factors such as the interpretation of environmental
laws, potential introduction of new environmental laws and evolving
technologies.
In response to environmental concerns in Western Oregon and Western
Washington, specifically the preservation of old-growth forests and wildlife
habitat, substantial amounts of federal timberlands have been set aside as
wilderness areas. This has affected and may continue to affect the amount and
cost of timber obtainable from public agencies in this region. Currently, the
Company's exposure in this region is the Halsey, Oregon pulp mill. The Halsey
pulp mill is affected by the decrease in timber availability since its primary
raw materials, wood chips and sawdust, are by-products of the lumber
manufacturing process. The Company believes that, based on existing wood chip
and sawdust availability both within the Willamette Valley region of Oregon and
from other sources discussed previously, wood chip and sawdust resources will be
adequate for the Company's requirements at the Halsey pulp mill in the
foreseeable future.
In British Columbia, the Company's wood products business forest resources
and related logging activities and reforestation responsibilities have been
affected by recent governmental actions. Refer to "Wood Products Business" for a
further discussion on the impact of the Provincial Government of British
Columbia's Commission of Resources and Environment (CORE) and the Forest
Practices Code (Code).
In 1992, the Company was contacted by the local governmental
owner of a vacant industrial site in Oregon on which the Company previously
conducted business. The
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owner informed the Company that the site has been identified as one containing
creosote and coal tar, and that it plans to undertake a voluntary cleanup effort
of the site. The owner has requested that the Company participate in the cost of
the cleanup. The Company is currently participating in the investigation stage
of this site with remediation and monitoring to occur over several years, likely
beginning in late 1999 or 2000. Based on preliminary findings, the Company has
estimated the likely total cost of remediation and monitoring of this site to be
in the range of $5 to $12 million and that no amount within the range is more
likely an outcome than another. The ultimate cost to the Company for site
remediation and monitoring cannot be predicted with certainty due to the unknown
magnitude of the contamination, the varying costs of alternative cleanup
methods, the cleanup time frame possibilities, the evolving nature of
remediation technologies and governmental regulations and the inability to
determine the Company's share of multi-party obligations or the extent to which
contributions will be available from other parties. The Company has established
reserves for environmental remediation and monitoring related to this site in an
amount it believes is probable and reasonably estimable. The Company has not
assumed it will bear the entire cost of remediation to the exclusion of other
known potentially responsible parties (PRPs) who may be jointly and severally
liable. The ability of other PRPs to participate has been taken into account
based generally on the parties' financial condition and probable contribution.
Certain recoveries from insurance carriers have been recorded as their receipt
is deemed probable and amounts are reasonably estimable.
EMPLOYEES
At December 31, 1997, the Company employed approximately 2,300 employees
of whom 1,900 were paid on an hourly basis and a majority of which were members
of various labor unions. Included in these numbers were approximately 800
salaried and hourly employees who were employed by the discontinued tissue
operations. Approximately 84 percent of the Company's employees from continuing
operations were associated with the Company's wood products business, 14 percent
were associated with the Company's pulp business and 2 percent were corporate
management and administration personnel.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company's foreign manufacturing operations consist of three lumber
mills located in Canada. The Company's wood products business is heavily
dependent on foreign operations in that the three Canadian sawmills account for
approximately 75 percent of the Company's lumber capacity. See "Wood Products
Business" for discussion on a U.S. and Canada agreement establishing volume
quotas on Canadian softwood lumber shipments to the U.S. The Company's primary
exports are pulp sold to Europe and brokered wood chips sold to Japan. The
Company's export sales from the U.S. were $30.5 million for 1997, $23.2 million
for 1996 and $26.3 million for 1995. Of the 1997 export sales, 39 percent were
to Japan and 50 percent were to Europe. Export sales for the discontinued tissue
operations were $1.0 million in 1997, $0.6 million in 1996 and there were no
export sales in 1995.
Financial information regarding the Company's domestic and foreign
operations is included in Note 11 of "Notes to Consolidated Financial
Statements" on page 31 of the Company's 1997 Annual Report to Shareholders.
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ITEM 2. PROPERTIES
WOOD PRODUCTS PROPERTIES
1. Mills and Plants
The following tabulation briefly states the location, character, capacity
and 1997 production of the Company's lumber mills:
Estimated Annual 1997
Location Capacity (3) Production(3)
- --------------------- ------------- -------------
Spearfish, South Dakota 112,000,000 bd. ft.(1) 108,000,000 bd. ft.
Newcastle, Wyoming 32,000,000 bd. ft.(1) 31,000,000 bd. ft.
Grand Forks, British Columbia 60,000,000 bd. ft.(2) 59,000,000 bd. ft.
Midway, British Columbia 145,000,000 bd. ft.(2) 134,000,000 bd. ft.
Castlegar, British Columbia 211,000,000 bd. ft.(2) 220,000,000 bd. ft.
(1) Based on operating two shifts, five days per week for the Spearfish, South
Dakota lumber mill and one shift, five days per week for the Newcastle,
Wyoming lumber mill.
(2) Based on operating two shifts, five days per week for the Midway and
Castlegar, British Columbia mills and one shift, five days per week for the
Grand Forks, British Columbia mill. These capacities reflect reduced
operations resulting from timber license quota limitations.
(3) Wood chips are produced as a result of the operation of the Company's
lumber mills. It is estimated that the aggregate annual capacity for such
production is 293,000 bone dry units. In 1997, 271,000 bone dry units were
produced.
The Company believes that its wood products manufacturing facilities are
adequate and suitable for current operations. The Company owns all of its wood
products manufacturing facilities.
PULP PRODUCTS PROPERTIES
The Company owns a bleached kraft pulp mill near Halsey, Oregon. In 1997,
175,000 air dry metric tons of pulp were produced, compared with an estimated
annual capacity of 180,000 metric tons. Other than future mill modifications
required by the EPA's "cluster rules," as described previously in "Environmental
Matters," the Company believes that its Halsey pulp facility is adequate and
suitable for current operations.
As discussed previously, in December 1997, the Company announced its
tender offer to acquire a controlling interest in Harmac outstanding common
shares for cash. In February 1998, the Company acquired common shares which
resulted in the Company holding a 53 percent controlling ownership interest in
Harmac. The Harmac pulp mill is located on the east coast of Vancouver Island in
Nanaimo, British Columbia. The Harmac pulp mill has an annual capacity of
370,000 metric tons of northern bleached softwood kraft pulp and produced
340,000 metric tons in 1997.
DISCONTINUED TISSUE PROPERTIES
As previously discussed, the Company's tissue business was sold to
Plainwell in March 1998. During 1997, the Eau Claire, Wisconsin and Ransom,
Pennsylvania facilities produced 54,000 tons and 53,000 tons, respectively.
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ITEM 3. LEGAL PROCEEDINGS
In 1985, stockholders of the Company approved a Plan of Distribution
pursuant to which all of the Company's timber properties and development
properties and related assets and liabilities in the State of Washington were
transferred to newly-formed Pope Resources, A Delaware Limited Partnership (the
Partnership), with interests in the Partnership distributed to the Company's
shareholders on a pro rata basis.
Upon audit, the Internal Revenue Service (IRS) challenged the distribution
value of the assets reported by the Company for federal income tax purposes. In
January 1993, the Company petitioned the United States Tax Court (Tax Court) in
order to resolve the disputed value of the distribution. The issue was tried in
the Tax Court during the third quarter 1995. The Company incurred costs
(primarily in 1995) in connection with the Tax Court litigation. In 1995, these
litigation costs, together with related tax payments and interest charges
totaling $4.9 million, net of tax benefits of $1.4 million, were recognized as a
reduction in additional paid-in capital with respect to the Partnership
transaction. In March and October 1997, the Tax Court rendered decisions
concerning the Company's tax liability arising from the Partnership transaction.
The Company is presently in the process of appealing the decision and filed
notice as such with the 9th Circuit Court of Appeals during December 1997. In
the second quarter of 1997, based on the Company's best estimate of the ultimate
tax liability, taking into consideration the Tax Court's March 1997 decision,
the Company recognized a further reduction in additional paid-in capital of $1.8
million. This charge to equity, which represents the minimum in the estimated
range of exposure to the Company, reflected tax and interest amounts totaling
$2.4 million, net of tax benefits of $0.6 million. Taking into consideration the
potential outcomes of the Company's appeal of the Tax Court decision, the
Company estimates the potential for additional equity reductions will range from
zero (if the Company is wholly successful in its appeal of the Tax Court
decision) up to $4 million (if the Tax Court decision becomes final or is
sustained on appeal). Any further tax, interest and litigation costs related to
the Partnership transaction will be recognized as a reduction in equity with
respect to the Partnership transaction.
In December 1996, the IRS proposed certain adjustments pertaining to
transactions between the Company and its wholly-owned Canadian subsidiary,
resulting in the assertion that additional taxes of approximately $7 million
were due for the tax years 1993 and 1994. The Company believes it has
substantial defenses against this claim and plans to vigorously defend its
position. Although the final outcome of this matter cannot be predicted, the
Company presently believes that the results of this claim would not have a
material adverse effect on the Company's financial position or liquidity;
however, in any given reporting period, this matter could have a material effect
on results of operations.
On December 31,1997, the Company filed a claim in the United States
District Court for the Western District of Washington in Seattle against the
Procter & Gamble Company (P&G) alleging anti-trust violations and seeking a
declaration of non-infringement and invalidity of certain P&G disposable baby
diaper patents. This claim was filed in response to assertions made by P&G to
the Company that certain disposable diaper products produced by the Company's
discontinued disposable diaper operations infringed two of P&G's inner-leg
gather patents. P&G has indicated it believes the Company is obligated to it
with respect to the sale of diapers which allegedly used the patents. The
Company has asserted in its legal action that it did not infringe any valid
claims of the P&G patents and also that P&G and another diaper supplier have
taken actions to prevent fair competition among sellers of disposable diapers.
In an infringement action against Paragon based on the same diaper patents, P&G
received a favorable judgment in the State of Delaware in December 1997. Early
in 1998, Paragon appealed the Court's decision. If P&G proceeds against the
Company with legal action related to its patent infringement assertions and is
substantially successful in such action, the outcome could have a material
adverse effect on the Company's results of operations, liquidity and financial
position. The Company intends to vigorously assert its position.
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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:
ROBERT J. DAY, 54, Senior Vice President and Chief Financial Officer
since August 1997.
ABRAM FRIESEN, 55, Vice President - Division Manager, Wood Products Division
since February 1996.
WILLIAM G. FROHNMAYER, 59, Vice President - Division Manager, Fiber Products
Division since August 1987.
All officers hold office at the pleasure of the Board of Directors.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Pope & Talbot, Inc. common stock is traded on the New York and Pacific
stock exchanges under the symbol POP. The number of shareholders at year-end
1997 and 1996 were 1,005 and 1,153, respectively. The high and low sales prices
for the common stock on the New York Stock Exchange and the dividends paid per
common share for each quarter in the last two fiscal years are shown below:
Sales price per share
--------------------- Cash dividends
High Low per share
---- --- --------------
1997
1st Quarter $ 16-7/8 $ 13-5/8 $.19
2nd Quarter 16-7/8 13-1/4 .19
3rd Quarter 22-1/8 16-5/16 .19
4th Quarter 21-7/8 13-1/2 .19
----
$.76
1996
1st Quarter $ 15-3/8 $ 13-1/4 $.19
2nd Quarter 17-5/8 13-1/4 .19
3rd Quarter 16-7/8 14-1/8 .19
4th Quarter 16-1/8 14-7/8 .19
----
$.76
ITEM 6. SELECTED FINANCIAL DATA
Information required by Item 6 of Part II is presented in the table
entitled "Five Year Summary of Selected Financial Data" on page 10 of the
Company's 1997 Annual Report to Shareholders. Such information is incorporated
herein by reference.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by Item 7 of Part II is presented on pages 11
through 17 of the Company's 1997 Annual Report to Shareholders. Such information
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Part II is incorporated by reference
to the Company's Current Report on Form 8-K dated March 6, 1998 and presented on
pages 18 through 31 of the Company's 1997 Annual Report to Shareholders.
Additionally, the required supplementary quarterly financial information is
incorporated herein by reference to page 32 of the Company's 1997 Annual Report
to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by Item 10 of Part III is presented on page 12 as
a separate item entitled "Executive Officers of the Registrant Who are Not
Directors" in Part I of this Report on Form 10-K and on pages 2 and 3 (under the
item entitled "Certain Information Regarding Directors and Officers") of the
Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on
April 30, 1998. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Part III is presented on pages 5
through 15 of the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders on April 30, 1998. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Part III is presented on page 4 and
page 6 of the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders on April 30, 1998. Such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The financial statements listed in the accompanying Index to Financial
Statements and Financial Statement Schedules are filed as part of this
annual report.
(a) (2) Schedules
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All schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the related schedule, or because the information required is
included in the financial statements and notes thereto.
(a) (3) Exhibits
The following exhibits are filed as part of this annual report.
Exhibit No.
- -----------
2.1 Asset Purchase Agreement by and among Paragon Trade Brands, Inc.,
PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot,
Wis., Inc. dated December 11, 1995. (Incorporated herein by
reference to Exhibit 2.1 to the Company's Current Report on Form
8-K filed February 8, 1996.)
2.2 Offer to Purchase and Circular, dated December 20, 1997.
(Incorporated herein by reference to Exhibit 1 to Schedule
14-D-1F filed with the Securities and Exchange Commission on
December 22, 1997 by Pope & Talbot Pulp Ltd.)
3.1 Certificate of Incorporation, as amended. (Incorporated herein by
reference to Exhibit 3(a) to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.)
3.2 Bylaws. (Incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996.)
4.1 Indenture, dated June 2, 1993, between the Company and Chemical
Trust Company of California as Trustee with respect to the
Company's 8-3/8% Debentures due 2013. (Incorporated herein by
reference to Exhibit 4.1 to the Company's registration statement
on Form S-3 filed April 6, 1993.)
4.2 Rights Agreement, dated as of April 13, 1988, between the Company
and The Bank of California, as rights agent. (Incorporated herein
by reference to Exhibit 4(e) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992.)
4.3 Revolving Credit Agreement, dated December 15, 1997, between the
Company and U.S. Bank National Association. (Incorporated herein
by reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K dated March 6, 1998.)
10.1 Executive Compensation Plans and Arrangements
10.1.1 Stock Option and Appreciation Plan. (Incorporated herein by
reference to Exhibit 10(a) to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.)
10.1.2 Executive Incentive Plan. (Incorporated herein by reference to
Exhibit 10(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.)
10.1.3 Restricted Stock Bonus Plan. (Incorporated herein by reference to
Exhibit 10(c) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.)
10.1.4 Deferral Election Plan. (Incorporated herein by reference to
Exhibit 10(d) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.)
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10.1.5 Supplemental Executive Retirement Income Plan. (Incorporated
herein by reference to Exhibit 10(e) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990.)
10.1.6 Form of Severance Pay Agreement among the Company and certain of
its executive officers. (Incorporated herein by reference to
Exhibit 10(f) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1990.)
10.1.7 1996 Non-Employee Director Stock Option Plan. (Incorporated
herein by reference to Exhibit 10.1.7 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.)
10.2 Lease agreement between the Company and Pope Resources, dated
December 20, 1985, for Port Gamble, Washington sawmill site.
(Incorporated herein by reference to Exhibit 10(g) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1990.)
10.3 Lease agreement between the Company and Shenandoah Development
Group, Ltd., dated March 14, 1988, for Atlanta diaper mill site
as amended September 1, 1988 and August 30, 1989. (Incorporated
herein by reference to Exhibit 10(h) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990.)
10.4 Lease agreement between the Company and Shenandoah Development
Group, Ltd., dated July 31, 1989, for additional facilities at
Atlanta diaper mill as amended August 30, 1989 and February 1990.
(Incorporated herein by reference to Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1990.)
10.5 Province of British Columbia Tree Farm License No. 8, dated March
1, 1995. (Incorporated herein by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.)
10.6 Province of British Columbia Tree Farm License No. 23, dated
March 1, 1995. (Incorporated herein by reference to Exhibit 10.7
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.)
10.8 Province of British Columbia Forest License A18969, dated
December 1, 1993. (Incorporated herein by reference to Exhibit
10.8 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.)
10.9 Grays Harbor Paper L.P. Second Amended and Restated Pulp Sales
Supply Contract, dated December 17, 1997. [Certain information
has been omitted therein pursuant to a request for confidential
treatment pursuant to Rule 24b-2]
11.1 Statement showing computation of per share earnings.
13.1 Portions of the annual report to shareholders for the year ended
December 31, 1997 which have been incorporated by reference in
this report.
21.1 Listing of parents and subsidiaries.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
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The undersigned registrant hereby undertakes to file with the Commission a copy
of any agreement not filed under exhibit item (4) above on the basis of the
exemption set forth in the Commission's rules and regulations.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on December 15, 1997 reporting the
tender offer to acquire a controlling interest in Harmac Pacific Inc. A
second Current Report on Form 8-K was filed on December 23, 1997 reporting
the mailing of a tender offer to purchase to the holders of the
outstanding shares of Harmac Pacific Inc.
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INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Annual
Report
to
Shareholders
------------
Report of Independent Public Accountants 17
Consolidated balance sheets at December 31, 1997 and 1996 18
Consolidated statements of income for each of the three years
in the period ended December 31, 1997 19
Consolidated statements of stockholders' equity for each of the
three years in the period ended December 31, 1997 20
Consolidated statements of cash flows for each
of the three years in the period ended December 31, 1997 21
Notes to consolidated financial statements 22-31
Supplementary information:
Quarterly financial information (unaudited) 32
All schedules are omitted since the required information is not present
or is not present in amounts sufficient to require submission of the schedule,
or because the information required is included in the financial statements and
notes thereto.
The consolidated financial statements listed in the above index are
included in the Annual Report to Shareholders of Pope & Talbot, Inc. for the
year ended December 31, 1997. The financial information listed in the above
index has been incorporated by reference to the Company's Current Report on Form
8-K dated March 6, 1998, except for the supplementary quarterly financial
information (unaudited) which has been incorporated by reference to the
Company's 1997 Annual Report to Shareholders. With the exception of the items
referred to in Items 1, 6, 7 and 8, the 1997 Annual Report to Shareholders is
not to be deemed filed as part of this report.
17
18
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K into the Company's previously
filed Registration Statement No.'s 33-34996, 333-04223 and 33-64764 on Form S-8.
ARTHUR ANDERSEN LLP
Portland, Oregon
March 30, 1998
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Portland, State of Oregon, on this 30th day of March, 1998.
POPE & TALBOT, INC.
BY: \s\ Peter T. Pope
-------------------------------------
Peter T. Pope, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Chairman of the Board and
\s\ Peter T. Pope Chief Executive Officer March 30, 1998
- ----------------------------------- -------------------------------- --------------
Peter T. Pope
\s\ Gordon P. Andrews Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Gordon P. Andrews
\s\ Hamilton W. Budge Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Hamilton W. Budge
\s\ Charles Crocker Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Charles Crocker
\s\ Michael Flannery President and Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Michael Flannery
\s\ Warren E. McCain Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Warren E. McCain
\s\ Robert Stevens Miller, Jr. Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Robert Stevens Miller, Jr.
\s\ Hugo G. L. Powell Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Hugo G. L. Powell
\s\ Brooks Walker, Jr. Director March 30, 1998
- ----------------------------------- -------------------------------- --------------
Brooks Walker, Jr.
Senior Vice President and
\s\ Robert J. Day Chief Financial Officer March 30, 1998
- ----------------------------------- -------------------------------- --------------
Robert J. Day
\s\ Robert L. Bluhm Financial Controller March 30, 1998
- ----------------------------------- -------------------------------- --------------
Robert L. Bluhm
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