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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File Number 1-7852
POPE & TALBOT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-0777139
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(State or other jurisdiction (IRS Employer
of incorporation Identification No.)
or organization)
1500 SW 1st Avenue,
Portland, Oregon 97201
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (503) 228-9161
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
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Common Shares, par value $1.00 New York Stock Exchange,
Pacific Stock Exchange
Rights to purchase Series A Junior New York Stock Exchange,
Participating Cumulative Pacific Stock Exchange
Preferred Stock
8-3/8% Debentures, Due June 1, 2013 None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $89,610,745 as of March 19, 1999 ($7.00 per share).
13,481,441
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(Number of shares of common stock outstanding as of March 19, 1999)
Part I and Part II incorporate specified information by reference from the
annual report to shareholders for the year ended December 31, 1998. Part III
incorporates specified information by reference from the proxy statement for the
annual meeting of shareholders to be held on April 29, 1999.
PART I
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about the Company's industry, management's beliefs and certain
assumptions made by the Company's management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and variations
of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results may differ materially from
those expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth under "Factors That May Affect Future
Results" in the Management's Discussion and Analysis of Results of Operations
and Financial Condition incorporated by reference from the Company's Annual
Report to Shareholders for the year ended December 31, 1998, as well as those
noted in "Environmental Matters" and "Legal Proceedings" below. Unless required
by law, the Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. However, readers should carefully review the reports and
documents the Company files from time to time with the Securities and Exchange
Commission, particularly its Quarterly Reports on Form 10-Q and any Current
Reports on Form 8-K.
Item 1. Business
Introduction
Pope & Talbot, Inc. (the Company) is engaged principally in the wood
products and pulp products businesses. The Company's wood products business
involves the manufacture and sale of standardized and specialty lumber and wood
chips. In its pulp products business, the Company manufactures and sells
bleached kraft pulp for newsprint, tissue and high-grade coated and uncoated
paper. Wood products accounted for approximately 52 percent of the Company's
1998 revenues from continuing operations of $420.8 million and bleached kraft
pulp accounted for 48 percent. In February 1998, the Company acquired a 53
percent controlling ownership interest in Harmac Pacific Inc. (Harmac). The
Company's interest in Harmac was subsequently increased to 60 percent in
December 1998 through an open market purchase of Harmac common stock. Harmac,
which is publicly traded on the Toronto, Vancouver and Montreal stock exchanges,
operates a pulp mill located on the east coast of Vancouver Island at Nanaimo,
British Columbia, Canada.
In the first quarter of 1998, the Company sold its private label tissue
business to PLAINWELL, INC. The tissue business results for 1998, 1997 and 1996
have been reported as discontinued tissue operations. The Company sold its
disposable diaper business in February 1996, and recorded a gain on the sale.
Results of operations related to the diaper business were reflected as
discontinued operations in 1995 and prior periods. In the first quarter of 1996,
the Company also sold its sawmill located in Port Gamble, Washington.
The Company, a Delaware corporation, was originally incorporated as a
California corporation in 1940. It is the successor to a partnership formed in
San Francisco, California in 1849 that acquired its first timberlands and opened
a lumber mill in the Seattle, Washington area in 1853. Subsequently, the Company
developed a lumber business based on timberland
2
and facilities in the U.S. Pacific Northwest, British Columbia, Canada and the
Black Hills region of South Dakota and Wyoming.
Since the mid-1980s, the Company has reduced its dependency on timber from
the Pacific Northwest, where environmental concerns have sharply restricted the
availability of and increased the cost of public timber. At the same time, the
Company has increased its operations in regions presently having more stable
timber supplies, namely in British Columbia and the Black Hills region of South
Dakota and Wyoming. In 1985, the Company distributed its timber and land
development properties in the State of Washington to its shareholders through
interests in a newly formed master limited partnership. In 1989, the Company
sold its Oregon sawmill, and the Company has since sold its remaining Oregon
timberlands. In 1992, the Company acquired a sawmill in Castlegar, British
Columbia and related timber cutting rights. At the end of 1995, the Company
permanently closed its Port Gamble, Washington sawmill. The Company currently
operates five sawmills.
In the late 1970s, the Company expanded into the pulp business with the
purchase of the Halsey, Oregon pulp mill. The Halsey mill produces bleached
kraft pulp which is sold to writing paper, tissue and newsprint manufacturers in
the U.S., Europe and Asia.
The businesses in which the Company is engaged are extremely competitive,
and a number of the Company's competitors are substantially larger than the
Company with correspondingly greater resources.
Environmental regulations to which the Company is subject require the
Company from time to time to incur significant operating costs and capital
expenditures. In addition, as discussed herein, environmental concerns have in
the past materially affected the availability and cost of raw materials used in
the Company's business. See "Wood Products Business", "Pulp Products Business"
and "Environmental Matters".
Wood Products Business
The Company's wood products business involves the manufacture and sale of
boards and dimension lumber, some of which are specialty items, such as
stress-rated lumber. Wood chips and other similar materials obtained as a
by-product of the Company's lumber operations are also sold. During the last
three years, revenues from lumber sales were approximately 85 percent or more of
total wood products revenues with the balance of revenues from the sale of logs
and wood chips. The principal sources of raw material for the Company's wood
products operations are timber obtained through long-term cutting licenses on
public lands, logs purchased on open log markets, timber offered for sale via
competitive bidding by federal agencies and timber purchased under long-term
contracts to cut timber on private lands.
Approximately 75 percent of the Company's current lumber capacity is
located in British Columbia, Canada and 25 percent in the Black Hills region of
South Dakota and Wyoming. In Canada, timber requirements are obtained primarily
from the Provincial Government of British Columbia under long-term timber
harvesting licenses which allow the Company to remove timber from defined areas
annually on a sustained yield basis. The Provincial Government of British
Columbia has the authority to modify prices and harvest volumes at any time.
Under the provincial stumpage pricing formula, wood costs are based on a
relationship to end-product prices. Approximately 25 percent of the Company's
Canadian log requirements are satisfied through open market log purchases. In
the Black Hills, the Company obtains its timber from various public and private
sources under long-term timber harvesting contracts in addition to buying logs
on open markets. Under these Black Hills contracts, prices are subject to
periodic adjustment based upon formulas set forth therein.
3
The Provincial Government of British Columbia's Commission of Resources and
Environment issued the Kootenay Boundary Land Use Plan in 1997. This land use
plan set aside several new wilderness areas. Although no assurances can be
given, management believes that in the near-term, timber supplies for the
Company's Canadian sawmills should be relatively stable. The Company has
improved its reforestation practices to sustain and enhance timber supplies in
the long-term to mitigate the adverse effects of forest restrictions.
The British Columbia government has also implemented its Forest Practices
Code (Code). This Code sets strict standards for logging activities and
reforestation responsibilities. Requirements under this Code have been phased in
beginning in 1996, with full implementation in place during 1998. The Code could
ultimately have a long-term unfavorable impact on the Company's timber harvest
volumes.
During 1996, U.S. and Canadian trade negotiators reached an agreement
establishing volume quotas on Canadian softwood lumber shipments to the U.S.
Based on this agreement, Canadian lumber producers are assigned quotas of lumber
volumes which may be shipped to the U.S. tariff-free. Incremental volumes are
subject to a two-tier tariff of $52 per thousand board feet and $104 per
thousand board feet. The first annual period subject to quotas and tariffs ended
March 31, 1997. The Company's tariff-free volume was reduced by 11.4 million
board feet from the 1996/1997 fiscal year to the 1997/1998 fiscal year, and then
by another 11.6 million board feet for the 1998/1999 fiscal year. As a partial
offset, the Company received increases in its allocation at the lower $52 per
thousand board feet tariff from the 1996/1997 fiscal year to the 1998/1999
fiscal year. During 1998 and 1997, the Company expensed tariff charges of
approximately $2.9 million and $1.9 million, respectively, related to shipments
from the Company's Canadian sawmills into the U.S. Because of weakened lumber
markets in 1998 and the last half of 1997, coupled with the implications of this
tariff agreement, the Company was forced to take several shutdowns during those
years. The Company continually evaluates the need for temporary shutdowns in
balancing the economics of sales prices, production costs and tariffs.
Marketing and Distribution. The Company's lumber products are sold
primarily to wholesale distributors. Wood chips produced by the Company's
sawmills are sold to manufacturers of pulp and paper in the U.S. and Canada.
Logs not suitable for consumption in the Company's sawmills are sold to other
U.S. and Canadian forest products companies.
Marketing of the Company's wood products is centralized in its Portland,
Oregon office. Although the Company does not have distribution facilities at the
retail level, the Company does utilize several reload facilities around the U.S.
to assist in moving the product closer to the customer. The Company sold wood
products to numerous customers during 1998, the ten largest of which accounted
for approximately 39 percent of total wood products sales.
Backlog. The Company maintains a minimal finished goods inventory of wood
products. At December 31, 1998, orders were approximately $5.1 million, compared
with approximately $4.6 million at December 31, 1997. This backlog represented
an order file for the Company which generally would be shipped within one to two
months.
Competition. The wood products industry is highly competitive, with a large
number of companies producing products that are reasonably standardized. There
are numerous competitors of the Company that are of comparable size or larger,
none of which is believed to be dominant. The principal means of competition in
the Company's wood products business are pricing and the ability to satisfy
customer demands for various types and grades of lumber.
For further information regarding amounts of revenue, operating profit and
other financial information attributable to the wood products business, see Note
12 of "Notes to Consolidated Financial Statements" in the Company's 1998 Annual
Report to Shareholders.
4
Pulp Products Business
The Company owns a pulp mill located in Halsey, Oregon and a 60% interest
in Harmac which owns a pulp mill in Nanaimo, British Columbia. The Halsey mill
produces bleached kraft pulp which is sold in various forms to writing paper,
tissue and newsprint manufacturers in the Pacific Northwest and on the open
market. In conjunction with the fiber acquisition program for the Halsey pulp
mill, the Company brokers wood chips for sale primarily into the export market.
The Harmac mill supplies pulp to all sectors of the paper market, for products
ranging from newsprint and tissue to high-grade coated and uncoated paper.
The Company has an agreement with Grays Harbor Paper L.P. (Grays Harbor),
under which the Halsey mill supplies pulp to the Grays Harbor writing grade
paper mill. Grays Harbor purchased approximately 60,000 metric tons, 89,000
metric tons and 100,000 metric tons of pulp from the Company in 1998, 1997 and
1996, respectively. All output from the paper mill is sold to one customer. In
the event that the paper mill's sales to its customer are adversely impacted for
any reason, sales of the Company's pulp may be adversely impacted. A significant
portion of the pulp sold to the paper mill is produced from sawdust, which has
historically been less expensive than softwood and hardwood chips. In 1997 and
1996, pricing for pulp sold to Grays Harbor was computed using a formula based
on prices for white paper. In late 1997, the Company and Grays Harbor modified
their pulp supply contract. The modified contract, which became effective
January 1, 1998, changed the pulp pricing formula so that pulp prices are based
on southern mixed (U.S.) bleached hardwood kraft prices rather than white paper
prices. The Company believes that over the longer-term, pulp pricing under the
new formula will be comparable to that under the previous pricing formula.
Softwood fiber (wood chips and sawdust), particularly in the quantities
necessary to support world-scale pulp facilities, is in increasingly short
supply in the Pacific Northwest. Substantially all of the Company's wood chip
and sawdust requirements for the Halsey pulp mill are satisfied through
purchases by the Company from third parties. The Company has long-term chip
supply contracts with sawmills in the Pacific Northwest. To provide an adequate
supply of wood fiber for the mill, the Company has expanded its capability of
using sawdust as a raw material for a significant portion of the production.
Additionally, the Company continues to use an expanded geographic base to
maintain an adequate supply of chips for the approximately 30 to 40 percent of
the pulp mill's production which remains based on softwood chips. The Company
believes that, based on existing wood chip and sawdust availability both within
the Willamette Valley region of Oregon and from other sources, fiber resources
will be adequate for the Company's requirements at the Halsey pulp mill in the
foreseeable future.
With an annual capacity of 380,000 metric tons, the Company's Harmac pulp
mill is one of the largest producers of market pulp in Canada. Harmac produced
354,000 metric tons of pulp in 1998, of which 335,000 metric tons were produced
in the period subsequent to February 2, 1998. Harmac manufactures a wide range
of high-quality kraft pulp made from custom blends of western hemlock, balsam,
western red cedar and Douglas fir. Harmac's products are marketed globally
through sales offices in Portland, Oregon and Brussels, Belgium and through
agency sales offices around the world.
Harmac has a long-term fiber supply agreement with MacMillan Bloedel
Limited (MacMillan Bloedel) that provides for at least 80 percent of its fiber
requirements through 2019. Under this contract, fiber is purchased at market, or
at prices determined under a formula intended to reflect fair market value of
the fiber and which takes into account the net sales value of pulp sold by
Harmac. To run the Harmac mill at full capacity, additional fiber is required to
supplement the base supply from MacMillan Bloedel.
5
MacMillan Bloedel has agreed that it will supply, in addition to the
minimum volumes to which it is committed under the Chip and Pulp Log Supply
Agreement, the fiber required to fulfill the balance of Harmac's operating
requirements, provided that such fiber is available in the market without
detriment to MacMillan Bloedel's own operations. In addition, Harmac has entered
into an arrangement with an independent lumber producer in the interior of
British Columbia to provide pulp fiber incremental to that provided by MacMillan
Bloedel. Finally, improved utilization and recovery of available raw materials,
through means such as the recently completed chip conditioning system, will help
to ensure that adequate fiber is available. The Company's management is also
evaluating various other initiatives to secure sources for the balance of
Harmac's fiber requirements over the long term. To a very limited degree, Harmac
acquired wood chips from the Company's Canadian sawmills in 1998.
Marketing and Distribution. The Company utilizes its own sales force and
pulp brokers to sell its pulp products to paper manufacturers worldwide. In
1998, approximately 41 percent of the pulp segment's sales volume was shipped to
Europe, 33 percent to North America, 24 percent to Asia and 2 percent to Latin
America. Sales in 1998 to Grays Harbor represented 13 percent of pulp revenues
and the remaining nine largest customers accounted for an additional 40 percent
of pulp revenues.
In 1998, approximately 59 percent of pulp products were sold to customers
at market prices under long-term or "evergreen" contracts, renewable each year.
The balance of the mills' pulp is sold on a spot basis. By establishing and
maintaining long-term contractual relationships, the Company is better able to
forecast and regulate production than would be the case if it relied entirely on
the spot markets.
Backlog. The Company's pulp customers either enter into contracts for
periods of one to three years or purchase products without obligation for future
purchases. The contractual customers provide the Company with annual estimates
of their requirements, followed by periodic orders based on more definitive
information. As of December 31, 1998, the Company's backlog of orders believed
to be firm for both contractual and non-contractual customers was $37.9 million
compared to $18 million at December 31, 1997. The increase in the total backlog
of orders is primarily due to the inclusion of Harmac's backlog orders of $23.9
million in the 1998 amounts. The backlog of pulp orders at year-end represents
orders which will be filled in the first quarter of the following year.
Competition. The pulp industry is highly competitive, with a substantial
number of competitors having extensive financial resources, manufacturing
expertise and sales and distribution organizations, many of which are larger
than the Company, but none of which is believed to be dominant. Canada and the
Nordic countries produce substantially more market pulp than they consume, with
the surplus being sold in Western Europe, the United States and Japan and other
Asian countries. Canada, Finland, Norway and Sweden are the principal suppliers
of northern bleached softwood kraft pulp to world markets. The United States is
a large exporter of hardwood and southern softwood pulps, as well as a
significant importer of northern bleached softwood kraft pulp. Latin America
also exports both hardwood and softwood pulps.
The principal methods of competition in the pulp market are price, quality,
volume, reliability of supply and customer service. The Company's competitive
advantages include the strength of its northern softwood fiber and the variety
and consistent quality of the pulps it produces. In addition, Harmac has the
operational flexibility provided by its three separate production lines in
combination with the three principal species of fiber available in the region.
For further information regarding amounts of revenue, operating profit and
loss and other financial information attributable to the pulp products business,
see Note 12 of "Notes to Consolidated Financial Statements" in the Company's
1998 Annual Report to Shareholders.
6
Discontinued Operations
Until the sale of the tissue business in March 1998, the Company produced a
line of private label consumer tissue products including towels, napkins,
bathroom tissue and facial tissue. Also, until the February 1996 sale of the
diaper business, the Company produced disposable diaper products. These products
were sold under private and controlled labels. The tissue business results for
1998, 1997 and 1996 were shown as discontinued tissue operations. Revenues from
these operations were $8.3 million in 1998, $136.2 million in 1997 and $133.6
million in 1996.
For further information regarding the Company's discontinued operations,
see Note 10 of "Notes to Consolidated Financial Statements" in the Company's
1998 Annual Report to Shareholders.
Environmental Matters
The Company is subject to federal, state, provincial and local air, water
and land pollution control, solid and hazardous waste management, disposal and
remediation laws and regulations in all areas where it has operations.
Compliance with these laws and regulations generally requires operating costs as
well as capital expenditures. It is difficult to estimate the costs related
solely to environmental matters of many capital projects which have been
completed in the past or which may be required in the future. Changes required
to comply with environmental standards will affect other areas such as facility
life and capacity, production costs, changes in raw material requirements and
costs and product value. In April 1998, the Environmental Protection Agency
(EPA) published regulations establishing standards and limitations for
non-combustion sources under the Clean Air Act and revised regulations under the
Clean Water Act. These regulations are collectively referred to as the "Cluster
Rules" and have been the subject of extensive discussions between the pulp and
paper industry and the EPA. The Company's exposure to these regulations relates
to the Company's Halsey pulp mill. The capital costs to comply with these new
regulations at the Halsey mill are anticipated to be $35 million, with
compliance required by the first quarter of 2001. It is estimated that during
1998 and 1997, capital expenditures at Halsey for environmental controls
amounted to approximately $1.5 million and $1 million, respectively.
Based on the understanding of future compliance standards, the Company's
expenditures for such purposes, with the exception of expenditures related to
Cluster Rule compliance, are currently estimated to not be significant in 1999
and 2000. However, the ultimate outcome of future compliance is uncertain due to
various factors such as the interpretation of environmental laws, potential
introduction of new environmental laws and evolving technologies.
The preservation of old-growth forests and wildlife habitat has affected
and may continue to affect the amount and cost of timber obtainable from public
agencies in Oregon and Western Washington. The Halsey pulp mill is affected by
the decrease in timber availability since its primary raw materials, wood chips
and sawdust, are by-products of the lumber manufacturing process.
In British Columbia, the Company's wood products business forest resources
and related logging activities and reforestation responsibilities have been
affected by governmental actions over the past several years. Refer to "Wood
Products Business" for the discussion on the impact of the Provincial Government
of British Columbia's Commission of Resources and Environment and the Forest
Practices Code.
7
The major environmental issue for pulp producers in coastal British
Columbia is the management of wastewater, air emissions and solid waste in
compliance with the extensive body of applicable environmental protection laws
and regulations. Harmac has in place a comprehensive environmental management
program, comprising modern pollution abatement and control technologies,
detailed operating procedures and practices, early warning systems, scheduled
equipment inspections and emergency response planning. Regular independent
audits ensure that the environmental program is being implemented effectively
and that all regulated requirements are being met.
Recent legislation in British Columbia governing contaminated sites became
effective in April 1997. If a triggering event occurs in respect of any property
that has been used for industrial or commercial purposes, the regulations
require, among other things, a site profile to be prepared in order to determine
whether the site in question is potentially contaminated, in which case
remediation may be required under government supervision. Pulp mills are subject
to these regulations and past and present owners or operators of mill sites may
face remediation costs if contaminated areas are found. Triggering events would
include the sale of the property or the decommissioning of the mill. The Company
cannot assess the magnitude of costs it may be required to incur in order to
comply with this legislation if a triggering event should occur.
See "Item 3. Legal Proceedings" for a discussion of certain environmental
legal proceedings.
Employees
At December 31, 1998, the Company, including Harmac, employed 2117
employees of whom 1685 were paid on an hourly basis and a majority of which were
members of various labor unions. Approximately 59 percent of the Company's
employees were associated with the Company's wood products business, 38 percent
were associated with the Company's pulp business and 3 percent were corporate
management, marketing and administration personnel.
Geographic Areas
For information regarding the Company's revenues and long-lived assets by
geographic area, see Note 12 of "Notes to Consolidated Financial Statements" in
the Company's 1998 Annual Report to Shareholders.
8
Item 2. Properties
The Company leases 38,000 square feet of office space in Portland, Oregon
for its corporate administrative and sales functions.
Wood Products Properties
The following tabulation briefly states the location, character, capacity
and 1998 production of the Company's lumber mills:
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Estimated Annual 1998
Location Capacity (3) Production(3)
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Spearfish, South Dakota 113,000,000 bd. ft.(1) 110,000,000 bd. ft.
Newcastle, Wyoming 35,000,000 bd. ft.(1) 34,000,000 bd. ft.
Grand Forks, British Columbia 68,000,000 bd. ft.(2) 65,000,000 bd. ft.
Midway, British Columbia 154,000,000 bd. ft.(2) 146,000,000 bd. ft.
Castlegar, British Columbia 225,000,000 bd. ft.(2) 209,000,000 bd. ft.
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(1) Based on operating two shifts, five days per week for the Spearfish, South
Dakota lumber mill and one shift, five days per week for the Newcastle,
Wyoming lumber mill.
(2) Based on operating two shifts, five days per week for the Midway and
Castlegar, British Columbia mills and one shift, five days per week for the
Grand Forks, British Columbia mill. These capacities reflect reduced
operations resulting from timber license quota limitations.
(3) Wood chips are produced as a result of the operation of the Company's
lumber mills. It is estimated that the aggregate annual capacity for such
production is 285,000 bone dry units. In 1998, 270,000 bone dry units were
produced.
The Company believes that its wood products manufacturing facilities are
adequate and suitable for current operations. The Company owns all of its wood
products manufacturing facilities.
Pulp Products Properties
The Company owns a bleached kraft pulp mill near Halsey, Oregon. In 1998,
158,000 metric tons of pulp were produced, compared with an estimated annual
capacity of 180,000 metric tons. Other than future mill modifications required
by the EPA's "Cluster Rules," as described previously in "Environmental
Matters," the Company believes that its Halsey pulp facility is adequate and
suitable for current operations.
The Harmac pulp mill is located on a 1,000-acre site owned by Harmac at
Nanaimo on the east coast of Vancouver Island in British Columbia. The Harmac
pulp mill has an annual capacity of 380,000 metric tons of NBSK pulp and
produced 354,000 metric tons in 1998.
9
Item 3. Legal Proceedings
In 1985, pursuant to a Plan of Distribution, the Company transferred all of
the Company's timber properties, development properties and related assets and
liabilities in the State of Washington to newly-formed Pope Resources, a
Delaware Limited Partnership (the Partnership). Interests in the Partnership
were distributed to the Company's shareholders on a pro rata basis. Taxes
payable of $10.3 million at the time of distribution were charged to
stockholders' equity. Upon subsequent audit, the Internal Revenue Service (IRS)
challenged the distribution value of the assets reported by the Company for
federal income tax purposes.
In 1993, the Company petitioned the U.S. Tax Court (Tax Court) to resolve
the disputed value of the distribution. In 1997, the Tax Court ruled on the
Company's tax liability with respect to the distribution, and the Company
appealed. In January 1999, the U.S. Court of Appeals for the Ninth Circuit
upheld the U.S. Tax Court ruling as to the distribution value of the assets
contributed by the Company. As a result of the decision by the Ninth Circuit,
the Company recognized in 1998 an additional reduction in stockholders' equity
of $3.2 million, which represented the balance of tax, interest and litigation
costs previously paid and deferred.
In December 1997, the Company filed an action against the Proctor & Gamble
Company (P&G) alleging anti-trust violations and seeking a declaration of
non-infringement and invalidity of certain P&G disposable diaper patents. In
that action, P&G filed a counter claim against the Company alleging infringement
of the same patents. This action was filed in response to assertions made by P&G
to the Company that certain disposable diaper products produced by the Company's
discontinued disposable diaper operations infringed two of P&G's inner-leg
gather patents. Additionally, the companies have had a dispute regarding P&G's
use and attempt to register the trademark "Gentle Touch" for which the Company
has common law and statutory rights. In November 1998, the Company settled with
P&G on all of these matters.
The IRS has assessed the Company additional tax of approximately $5.3
million pertaining to transactions between the Company and its wholly-owned
Canadian subsidiary during its 1993 tax year. The Company, which has filed a
petition with the Tax Court, believes it has substantial defenses against this
claim and plans to vigorously defend its position. The Company has established
reserves for this matter in amounts it believes are probable and reasonably
estimable. Although the final outcome of this matter cannot be predicted, the
Company presently believes that the results of this claim will not have a
material effect on the Company's financial position or liquidity; however, in
any given reporting period, this matter could have a material effect on results
of operations.
In 1992, the Company was contacted by the local governmental owner of a
vacant industrial site in Oregon on which the Company previously conducted
business. The owner informed the Company that the site is contaminated by
creosote and, to a lesser extent, hydrocarbons, and that the owner planned to
undertake a voluntary cleanup effort of the site. The owner has requested that
the Company participate in the cost of the cleanup. The Company is currently
participating in the investigation stage of this site with remediation and
monitoring to occur over several years, likely beginning in 2001. Based on
preliminary findings, the Company has estimated the likely cost of remediation
and monitoring to be in the range of $15 to $20 million. The Company has
established reserves for environmental remediation and monitoring related to
this site in an amount it believes is probable and reasonably estimable. The
Company has not assumed it will bear the entire cost of remediation to the
exclusion of the other known potentially responsible party (PRP) who may be
jointly and severally liable. The ability of the other PRP to participate has
been taken into account based generally on the PRP's financial condition and
probable contribution. The ultimate cost to the Company for site
10
remediation and monitoring cannot be predicted with certainty due to the unknown
magnitude of the contamination, the varying costs of alternative cleanup
methods, the cleanup time frame possibilities, the evolving nature of
remediation technologies and governmental regulations and the inability to
determine the Company's share of multi-party obligations or the extent to which
contributions will be available from other parties. Anticipated recoveries from
insurance carriers have been accrued when their receipt is deemed probable and
amounts are reasonably estimable.
In 1998, the Washington Department of Ecology (WDOE) requested the Company
undertake an assessment to determine whether and to what extent its former mill
site at Port Gamble, Washington may be contaminated. The Company is performing
the investigation and expects that it will be completed in 1999. In addition,
WDOE and the EPA have requested the Company to perform an investigation of
sediments in the adjacent bay to determine the extent of wood waste or hazardous
substances present in the near shore zone adjacent to the former mill. This
investigation also should be completed in 1999. Depending on the outcome of
these investigations, the Company may face additional claims or demands for
actions.
The Company has tendered the defense of the above environmental claims to a
number of insurance carriers which issued comprehensive general liability
policies to the Company from 1959-1985. In 1995, the Company filed a declaratory
judgment action in the U.S. District Court for the District of Oregon to obtain
a decision that the insurance carriers were obligated to defend the Company and
indemnify it for any environmental liabilities incurred as a result of certain
operations of the Company during that period.
In March 1999, the Company and the insurance carriers agreed to dismiss the
federal lawsuit and refile in state court, in Multnomah County Circuit Court,
Oregon. The Company expects that the case will be tried, if necessary, in the
year 2001. The Company has concluded settlements with several insurance carriers
and is engaged in settlement discussions with other insurance carriers. If it is
determined that the insurance carriers are obligated to pay the Company's
defense and indemnity obligations, there are more than sufficient policy limits
available to meet the Company's estimated liabilities.
In December 1998, the Company filed a North American Free Trade Agreement
(NAFTA) Notice of Intent that could permit the Company to proceed, if it so
chooses, with a claim against the Canadian Federal Government. The complaint
arises from the Company's assertion that its duty-free export quota under the
Canada/U.S. Softwood Lumber Agreement has been unfairly reduced each year since
the agreement came into effect.
The NAFTA contains a special process that permits NAFTA investors who have
been harmed by government actions which are inconsistent with the provisions of
NAFTA's Investment Chapter to seek compensation before an impartial
international arbitration panel. If the two disputing parties are unable to
resolve this dispute, the Company could be entitled to start an Investor-State
claim against Canada no sooner than ninety-one days after the Notice of Intent
was served. There can be no assurance as to when the claim will be resolved.
11
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT WHO ARE NOT DIRECTORS
In addition to the executive officers who are also directors of the
Company, the following executive officers are not directors:
Robert J. Day, age 56, has been Senior Vice President, Chief Financial
Officer of the Company since August 1997. From July 1977 to March 1995, Mr. Day
was employed at Simpson Investment Company, a privately-held forest products
company where he served as Corporate Controller, Vice President Planning and
Controller and Vice President Treasurer.
Abram Friesen, age 56, has been Vice President - Division Manager, Wood
Products since February 1996. From 1987 to 1996, Mr. Friesen was President of
Pope & Talbot Ltd., a wholly-owned subsidiary of the Company.
Ralph Leverton, age 51, has been Vice President - Division Manager, Pulp
Products since September 1998. Mr. Leverton was formerly Vice President,
Finance, Chief Financial Officer and Secretary of Harmac Pacific Inc. from May
1994 to April 1998.
PART II
Item 5. Market for the Company's Common Stock and Related Security
Holder Matters
Pope & Talbot, Inc. common stock is traded on the New York and Pacific
stock exchanges under the symbol POP. The number of shareholders at year-end
1998 and 1997 were 952 and 1,005, respectively. Additional information required
by Item 5 of Part II is presented in the table entitled "Quarterly Financial
Information" on page 31 of the Company's 1998 Annual Report to Shareholders.
Such information is incorporated herein by reference.
Item 6. Selected Financial Data
Information required by Item 6 of Part II is presented in the table
entitled "Five Year Summary of Selected Financial Data" on page 30 of the
Company's 1998 Annual Report to Shareholders. Such information is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by Item 7 of Part II is presented on pages 8
through 13 of the Company's 1998 Annual Report to Shareholders. Such information
is incorporated herein by reference.
12
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7a of Part II is presented on pages 20 and
23 of the Company's 1998 Annual Report to Shareholders. Such information is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 of Part II is presented on pages 14
through 29 of the Company's 1998 Annual Report to Shareholders. Such information
is incorporated herein by reference. Additionally, the required supplementary
quarterly financial information is presented on page 31 of the Company's 1998
Annual Report to Shareholders and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers
The information required by Item 10 of Part III is presented on page 12 as
a separate item entitled "Executive Officers of the Registrant Who are Not
Directors" in Part I of this Report on Form 10-K, on pages 2 and 3 (under the
item entitled "Certain Information Regarding Directors and Officers") and on
page 17 (under the item entitled "Section 16(a) - Beneficial Ownership
Compliance") of the Company's Definitive Proxy Statement for the Annual Meeting
of Shareholders on April 29, 1999. Such information is incorporated herein by
reference.
Item 11. Executive Compensation
The information required by Item 11 of Part III is presented on pages 5
through 15 of the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders on April 29, 1999. Such information is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 of Part III is presented on page 4 and
page 6 of the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders on April 29, 1999. Such information is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
Not applicable
13
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
Annual Report
to
Shareholders
------------------------------------------------------------------------
Report of Independent Public Accountants 14
Consolidated balance sheets at December 31,
1998 and 1997 15
Consolidated statements of stockholders' equity
for each of the three years in the period
ended December 31, 1998 16
Consolidated statements of income for each of
the three years in the period ended
December 31, 1998 17
Consolidated statements of cash flows for each
of the three years in the period ended
December 31, 1998 18
Notes to consolidated financial statements 19-29
The consolidated financial statements listed above are included in the
Annual Report to Shareholders of Pope & Talbot, Inc. for the year ended December
31, 1998. With the exception of the items referred to in Items 1, 5, 6, 7, 7a
and 8, the 1998 Annual Report to Shareholders is not to be deemed filed as part
of this report.
The report of PricewaterhouseCoopers LLP on the financial statements of
Harmac as of and for the year ended December 31, 1998, which report has been
relied upon by Arthur Andersen LLP in their report listed above, is filed as
Exhibit 99.1 to this Form 10-K.
(a)(2) Schedules
All schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the related
schedule, or because the information required is included in the financial
statements and notes thereto.
(a)(3) Exhibits
The following exhibits are filed as part of this annual report.
Exhibit No.
- -----------
3.1. Certificate of Incorporation, as amended. (Incorporated herein by
reference to Exhibit 3(a) to the Company's Annual Report on Form
10-K for the year ended December 31, 1992).
3.2. Bylaws. (Incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996).
14
4.1. Indenture, dated June 2, 1993, between the Company and Chemical
Trust Company of California as Trustee with respect to the
Company's 8-3/8% Debentures due 2013. (Incorporated herein by
reference to Exhibit 4.1 to the Company's registration statement
on Form S-3 filed April 6, 1993).
4.2. Rights Agreement, dated as of April 3, 1998, between the Company
and Chase-Mellon Shareholder Services, L. L. C., as rights agent.
(Incorporated herein by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K filed on April 7, 1998).
4.3. Indenture, dated as of October 5, 1994, between Harmac Pacific
Inc. and Montreal Trust Company of Canada as Trustee with respect
to the Company's 8% convertible unsecured subordinated debentures
due 2004.
10.1. Executive Compensation Plans and Arrangements
10.1.1. Stock Option and Appreciation Plan (as amended). (Incorporated
herein by reference to Exhibits 99.1 and 99.2 to the Company's
Form S-8 filed on February 22, 1999).
10.1.2. Executive Incentive Plan, as amended. (Incorporated herein by
reference to Exhibit 10(b) to the Company's Annual Report on Form
10-K for the year ended December 31, 1992).
10.1.3. Restricted Stock Bonus Plan. (Incorporated herein by reference to
Exhibit 10(c) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992).
10.1.4. Deferral Election Plan. (Incorporated herein by reference to
Exhibit 10(d) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992).
10.1.5. Supplemental Executive Retirement Income Plan. (Incorporated
herein by reference to Exhibit 10(e) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990).
10.1.6. Form of Severance Pay Agreement among the Company and certain of
its executive officers. (Incorporated herein by reference to
Exhibit 10.1.6 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998).
10.1.7. 1996 Non-Employee Director Stock Option Plan. (Incorporated herein
by reference to Exhibit 10.1.7 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996).
10.1.8. Special Non-Employee Director Stock Retainer Fee Plan.
(Incorporated herein by reference to Exhibit 99.5 to the Company's
Form S-8 filed on February 22, 1999).
10.1.9. Employment Agreement with Ralph Leverton, dated November 30, 1998.
10.1.10. Separation Agreement with William G. Frohnmayer, dated May 6,
1998.
15
10.2. Lease agreement between the Company and Pope Resources, dated
December 20, 1985, for Port Gamble, Washington sawmill site.
(Incorporated herein by reference to exhibit 10(g) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1990).
10.3. Lease agreement between the Company and Shenandoah Development
Group, Ltd., dated March 14, 1988, for Atlanta diaper mill site as
amended September 1, 1988 and August 30, 1989. (Incorporated
herein by reference to Exhibit 10(h) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990).
10.4. Lease agreement between the Company and Shenandoah development
Group, Ltd., dated July 31, 1989, for additional facilities at
Atlanta diaper mill as amended August 30, 1989 and February 1990.
(Incorporated herein by reference to Exhibit 10(1) to the
Company's Annual Report on Form 10-K for the year ended December
31, 1990).
10.5. Province of British Columbia Tree Farm License No. 8, dated March
1, 1995. (Incorporated herein by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).
10.6. Province of British Columbia Tree Farm License No. 23, dated March
1, 1995. (Incorporated herein by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).
10.7. Province of British Columbia Forest License A18969, dated December
1, 1993. (Incorporated herein by reference to Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).
11.1. Statement showing computation of per share earnings.
13.1. Portions of the Annual Report to Shareholders for the year ended
December 31, 1998 which have been incorporated by reference in
this report.
18.1. Letter regarding change in accounting principle.
21.1. List of subsidiaries.
23.1. Consent of Arthur Andersen LLP.
23.2. Consent of PricewaterhouseCoopers LLP.
27.1. Financial Data Schedule.
99.1. Report of PricewaterhouseCoopers LLP
16
The undersigned registrant hereby undertakes to file with the Commission a
copy of any agreement not filed under exhibit item (4) above on the basis of the
exemption set forth in the Commission's rules and regulations.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended December
31, 1998.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Portland, State of Oregon, on this 24th day of March, 1999.
POPE & TALBOT, INC.
By: /s/ PETER T. POPE
-------------------------------------
Peter T. Pope, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 24, 1999, by the following persons on behalf of
the registrant and in the capacities indicated.
Chairman of the Board and
\s\ PETER T. POPE Chief Executive Officer
- ----------------------------------- -----------------------------------
Peter T. Pope
\s\ GORDON P. ANDREWS Director
- ----------------------------------- -----------------------------------
Gordon P. Andrews
\s\ HAMILTON W. BUDGE Director
- ----------------------------------- -----------------------------------
Hamilton W. Budge
\s\ CHARLES CROCKER Director
- ----------------------------------- -----------------------------------
Charles Crocker
\s\ MICHAEL FLANNERY President and Director
- ----------------------------------- -----------------------------------
Michael Flannery
\s\ KENNETH G. HANNA Director
- ----------------------------------- -----------------------------------
Kenneth G. Hanna
\s\ ROBERT STEVENS MILLER, JR. Director
- ----------------------------------- -----------------------------------
Robert Stevens Miller, Jr.
\s\ HUGO G. L. POWELL Director
- ----------------------------------- -----------------------------------
Hugo G. L. Powell
\s\ BROOKS WALKER, JR. Director
- ----------------------------------- -----------------------------------
Brooks Walker, Jr.
Senior Vice President and
\s\ ROBERT J. DAY Chief Financial Officer
- ----------------------------------- -----------------------------------
Robert J. Day
\s\ GERALD L. BRICKEY Financial Controller
- ----------------------------------- -----------------------------------
Gerald L. Brickey
18