<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 19, 1999
REGISTRATION NO 333-84519
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PLUM CREEK TIMBER COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2411 91-1912863
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
999 THIRD AVENUE, SUITE 2300 PAUL A. SWEGLE, ESQ.
SEATTLE, WASHINGTON, 98104-4096 DIRECTOR, LAW
(206) 467-3600 999 THIRD AVENUE, SUITE 2300
(ADDRESS, INCLUDING ZIP CODE, AND SEATTLE, WASHINGTON 98104-4096
TELEPHONE NUMBER, INCLUDING AREA (206) 467-3600
CODE, OF REGISTRANT'S PRINCIPAL (NAME, ADDRESS, INCLUDING ZIP CODE,
EXECUTIVE OFFICES) AND TELEPHONE NUMBER INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
</TABLE>
------------------------
<TABLE>
<S> <C> <C>
COPIES TO:
GREGG A. NOEL PAUL C. PRINGLE
SKADDEN, ARPS, SLATE, MEAGHER BROWN & WOOD LLP
& FLOM LLP 555 CALIFORNIA STREET
300 SOUTH GRAND AVENUE, SUITE 3400 SAN FRANCISCO, CALIFORNIA 94104
LOS ANGELES, CALIFORNIA 90071 (415) 772-1200
(213) 687-5000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of the Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
other than securities being offered only in connection with dividend or interest
reinvestment plans, please check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS (Subject to Completion)
Issued October 19, 1999
5,000,000 Shares
PlumCreek Logo
Plum Creek Timber Company, Inc.
COMMON STOCK
-------------------------
PLUM CREEK TIMBER COMPANY, INC. IS OFFERING 5,000,000 SHARES OF ITS COMMON
STOCK.
-------------------------
OUR COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE AND THE PACIFIC
EXCHANGE UNDER THE SYMBOL "PCL". ON OCTOBER 15, 1999, THE LAST SALE PRICE OF OUR
COMMON STOCK REPORTED ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE WAS $28 PER
SHARE.
-------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 12.
-------------------------
PRICE $ A SHARE
-------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PLUM CREEK
PUBLIC COMMISSIONS TIMBER
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total........................................ $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to an additional
750,000 shares to cover any over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares to purchasers on
, 1999.
-------------------------
Joint Bookrunning Managers
MORGAN STANLEY DEAN WITTER MERRILL LYNCH & CO.
-------------------------
GOLDMAN, SACHS & CO.
, 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 12
Forward-Looking Statements.................................. 17
Use of Proceeds............................................. 17
Price Range of Common Stock and Distribution Policy......... 18
Capitalization.............................................. 19
Unaudited Pro Forma Condensed Consolidated Financial
Statements................................................ 20
Selected Financial Data..................................... 34
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 37
The REIT Conversion......................................... 51
Business.................................................... 53
Federal and State Regulations............................... 66
Management.................................................. 71
Principal Stockholders...................................... 73
Material Federal Income Tax Consequences.................... 75
Description of Capital Stock................................ 87
Underwriters................................................ 92
Legal Matters............................................... 93
Experts..................................................... 94
Where You Can Find More Information......................... 94
Index to Financial Statements............................... F-1
</TABLE>
i
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary with the more detailed information
about us and our financial statements, including the notes to those financial
statements, included in this prospectus and in the documents incorporated by
reference in this prospectus. When we refer to "we," "us" or "our" in this
prospectus, we mean Plum Creek Timber Company, Inc. and, where appropriate, its
consolidated and unconsolidated subsidiaries and its predecessor, Plum Creek
Timber Company, L.P. When we refer to the "corporation" in this prospectus, we
mean Plum Creek Timber Company, Inc. and its consolidated subsidiaries. Our
manufacturing operations are conducted through unconsolidated subsidiaries.
Unless this prospectus states otherwise, all information assumes that the
underwriters do not exercise the over-allotment option.
PLUM CREEK TIMBER COMPANY, INC.
We are the fifth largest owner of private timberlands in the United States
with a forest resource base of approximately 3.3 million acres. Our diverse
timber holdings are located in four distinct regions and are strategically
situated near end-markets for our products. As of December 31, 1998, we estimate
that our timber portfolio contained approximately 35.6 million cunits, as
summarized below. A cunit is a standard unit of measurement of volume equal to
one hundred cubic feet of timber.
<TABLE>
<CAPTION>
ACRES CUNITS
REGION (STATES) (OWNED) (IN MILLIONS) PRIMARY SPECIES
--------------- --------- ------------- --------------------
<S> <C> <C> <C>
Cascade Region............................ 307,000 5.0 Douglas-fir
Washington Hemlock
Rocky Mountain Region..................... 1,586,000 12.3 Douglas-fir
Montana Larch
Idaho Pine
Northeast Region.......................... 905,000 13.8 Spruce
Maine Firs
Birch
Maple
Southern Region........................... 525,000 4.5 Southern Yellow Pine
Louisiana
Arkansas
</TABLE>
Our disciplined growth strategy has allowed us to expand and diversify our
timber holdings, as well as increase our cash flow. Over the last decade, we
have increased our timber holdings from approximately 1.4 million acres to
approximately 3.3 million acres at the end of 1998. For the same period, our
inventory of standing timber increased from approximately 19.4 million cunits to
approximately 35.6 million cunits. In addition, our EBITDA, defined as operating
income before depreciation, depletion and amortization, grew from $97 million in
1990 to approximately $210 million in 1998. EBITDA does not take into account
capital expenditures, does not represent cash provided by operating activities
in accordance with generally accepted accounting principles and does not
indicate the cash available to fund cash needs, including distributions to
stockholders.
OUR INDUSTRY
The timber industry provides raw material and conducts resource management
activities for the paper and forest products industry, including the planting,
fertilizing, thinning, and cutting of trees and the marketing of logs. Logs are
marketed and sold either as sawlogs to lumber and other wood products
1
<PAGE> 5
manufacturers or as pulplogs to pulp and paper manufacturers. The timber
industry possesses several unique characteristics that distinguish it from the
broader paper and forest products industry which we believe make timber an
attractive asset class, including the following:
- Renewable Resource -- Timber is a growing and renewable resource that, if
properly managed, increases in value as it grows and regenerates over
time. Larger diameter trees are more valuable than smaller trees because
they may be converted to higher value end-use products such as lumber and
plywood.
- Predictable and Improving Growth Rates -- Predictable biological growth
is an attractive feature of timberland assets because it contributes to
predictable, long-term harvest planning. The development and application
of intensive forest management practices continue to improve biological
growth rates.
- Harvest Flexibility -- Timberland owners have flexibility to increase
their harvests when prices are high and decrease their harvests when
prices are low, allowing timberland owners to maximize the long-term
value of their growing resource base.
- Historical Real Price Appreciation -- Due to growing demand combined with
limitations on supply caused by environmental restrictions, urban sprawl
and overcutting, prices for Douglas-fir, Ponderosa Pine and Southern
Yellow Pine timber have exceeded inflation by 2% to 4% per year, from
1967 to 1997.
OUR GROWTH STRATEGY
Our growth strategy is guided by specific operating objectives, including
maximizing the value of our current timberlands through intensive forest
management, expanding our resource base through acquisitions and maintaining our
leadership role in environmentally responsible resource management. To support
our growth strategy, we have made selective investments in manufacturing
facilities which help to create competitive local markets for our timber. These
facilities produce a variety of value-added lumber and panel products. To
further support our growth strategy, we recently converted from a master limited
partnership to a real estate investment trust or REIT. Our growth strategy
includes the following key elements:
FOCUS ON MAXIMIZING THE VALUE OF OUR RESOURCE BASE THROUGH INTENSIVE
MANAGEMENT OF OUR TIMBERLANDS. We view our timber resource base as a renewable
asset with substantial inherent value. We seek to manage our timberlands in a
manner that optimizes the balance among current cash flows, the biological
growth of our timber, which, depending on species and region, averages between
2% and 12% annually, and prudent environmental management. Our harvest
management approach employs advanced forest management practices, including the
use of a computerized timber inventory system, thinning and fertilization, and
the development and use of genetically improved seedlings.
PURSUE ACQUISITIONS OF HIGH QUALITY TIMBER ASSETS. The United States timber
market is highly fragmented. We believe that, due to the desire among some
forest product companies to sell their timberland assets and the difficulties
faced by some small timberland owners in efficiently managing their timberlands,
there will continue to be numerous timberland acquisition opportunities. We
believe we are well positioned to compete for high quality timberland assets
because:
- We are an attractive strategic partner for integrated forest product
companies seeking to sell their timberlands because we do not compete
with their pulp or paper manufacturing operations and we are willing to
enter into long-term supply agreements;
- We can structure acquisitions on a tax-efficient basis through the
issuance of common stock, limited partnership interests in our operating
partnership, or installment notes, giving sellers the ability to defer
some or all of the taxes otherwise payable upon a sale;
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<PAGE> 6
- The geographic reach of our operations enhances our awareness of new
acquisition opportunities and our knowledge of environmental concerns,
market dynamics, timber productivity and other factors important in
valuing timberlands and operations in each region; and
- Our reputation for environmental leadership makes us attractive to
sellers concerned with continued responsible environmental resource
management.
Since the beginning of 1990, we have established a successful acquisition
record having acquired 867,000 acres in the Rocky Mountain Region, 905,000 acres
in the Northeast Region and 529,000 acres, plus approximately 9,000 leased
acres, in the Southern Region. Each of these acquisitions has been accretive to
our cash flow, and together they have enhanced our operating flexibility and
reduced our exposure to regional economic fluctuations.
REALIZE THE VALUE OF SELECTED PROPERTIES THROUGH SALE OR EXCHANGE. In
addition to intensively managing our timberlands, we continually review our
timberland portfolio to identify properties that may have higher and better uses
than as commercial timberland. At this time, we have identified approximately
150,000 acres of properties located in recreational areas or near expanding
population centers that may be better suited for conservation, residential or
recreational purposes. We have transferred approximately 20,000 acres of what we
call "higher and better use properties" to an unconsolidated subsidiary. Our
unconsolidated subsidiary expects to sell or exchange these properties within
the next five years. Our strategy for the remaining 130,000 acres is to realize
the value of these properties, through sales or exchanges, over the next ten to
fifteen years. Our on-going review process evaluates properties based on a
number of factors such as proximity to population centers and major
transportation routes, and the presence of special ecological features.
In addition, we may occasionally exchange timberlands which have high
environmental or other public values for lands of equal value that are more
suitable for commercial timber management. We may also, from time to time, sell
less strategic timberlands to other forest products companies.
MAINTAIN ENVIRONMENTAL LEADERSHIP. We believe that environmentally sound
management practices contribute to our growth and value by providing greater
predictability in the management of our assets. Our forestry and mill practices
follow a set of environmental principles aimed at the sound management of all
natural resources, including soils, air, watersheds, fisheries and wildlife
habitats. These principles are reflected in our habitat planning efforts. In
1996, we implemented a comprehensive habitat conservation plan covering
approximately 170,000 acres of our timberlands in the Cascade Region. We are
currently developing a habitat conservation plan for the bull trout and other
native fish species covering approximately 1.7 million acres in Montana, Idaho
and Washington, as well as a plan for the red-cockaded woodpecker covering
approximately 260,000 acres in Arkansas and Louisiana.
THE REIT CONVERSION
On July 1, 1999, in order to better align our legal structure with our
long-term growth objectives, we converted from a master limited partnership to a
REIT. The ownership and management of our timberlands is now conducted through
an operating partnership, which is wholly owned by us. We believe that our new
structure has the following advantages:
- We have a greater capacity to compete for acquisitions due to our ability
to structure acquisitions on a tax efficient basis, including through the
issuance of our common stock and limited partnership interests in our
operating partnership;
- We expect to have a lower cost of capital than we did as a master limited
partnership;
3
<PAGE> 7
- We can attract a broader base of investors as a REIT than we could as a
master limited partnership;
- We maintain substantially all of the advantages of single-layer taxation
enjoyed under our prior master limited partnership structure with respect
to the treatment of taxable income; and
- Unlike the treatment of distributions for most REITs, we anticipate that
a significant portion of the distributions to our stockholders will
continue to be taxable to the stockholders at long-term capital gains
rates for Federal income tax purposes. The maximum Federal long-term
capital gains rate for individuals is 20%.
In order to comply with the asset and income requirements for qualification
as a REIT under the Internal Revenue Code, we have transferred our manufacturing
and marketing operations, including our sawmills, plywood mills and a medium
density fiberboard facility and our operations relating to the sale of higher
and better use properties, to several unconsolidated subsidiaries. Two of our
unconsolidated subsidiaries purchase standing timber from our operating
partnership and its subsidiaries. Our unconsolidated subsidiaries sell some of
this purchased timber to mills owned by third-parties and convert the remaining
logs to lumber, plywood, and other wood products, including medium density
fiberboard. We believe the proximity of the manufacturing facilities to our
timberlands increases the value of our timberlands.
Provisions of the Internal Revenue Code limit the voting stock that a REIT
may own in other corporations. As a result, members of our senior management
have purchased all of the voting stock of our unconsolidated subsidiaries. The
REIT is entitled to approximately 99% of the dividends from these corporations.
Our unconsolidated subsidiaries are not consolidated for accounting purposes and
are subject to income tax at the corporate level of approximately 40%. The
discussions in this prospectus related to our manufacturing and marketing
activities, as well as our efforts to sell or exchange "higher and better use
properties," refer to the operations of our unconsolidated subsidiaries.
Had this structure been in place in fiscal 1998, the pro forma effect on
our operating results would have been a reduction in revenues of approximately
$466.5 million with an increase in net income of approximately $14.1 million.
The reduction in revenues is due to the transfer of our manufacturing operations
to unconsolidated subsidiaries. The increase in net income is primarily due to
the recording of a tax benefit related to the combined book loss of the
unconsolidated subsidiaries and the elimination of nonrecurring REIT conversion
costs. See "Unaudited Pro Forma Condensed Consolidated Financial Statements."
4
<PAGE> 8
The chart below summarizes our current structure:
[ORGANIZATIONAL CHART]
RECENT DEVELOPMENTS
THIRD QUARTER EARNINGS
Earnings for our third quarter were $45.6 million, or $0.72 per share,
compared with $16.0 million, or $0.16 per unit, last year. Earnings for the nine
months ended September 30, 1999 were $86.0 million, or $1.32 per share, compared
with $53.5 million, or $0.61 per unit last year. Due to our July 1, 1999
conversion from a master limited partnership to a REIT, our third quarter
earnings include a one-time, non-cash tax benefit of $14.0 million, or $0.22 per
share, from the required transfer of manufacturing operations to our
unconsolidated subsidiaries. The reported earnings per share/unit are not
comparable to prior years since REIT earnings represent income allocable per
share, while historical partnership earnings per unit represented earnings
allocable to limited partners after the deduction of our former general
partner's interest and incentive allocation.
As a result of our conversion to a REIT, our financial results are now
reported in accordance with accounting principles for REITs. Therefore, reported
revenues are not comparable with prior periods because REIT revenues exclude
revenues from our unconsolidated subsidiaries. Reflecting that change our
revenues for the third quarter of 1999 were $52.0 million, compared with $174.5
million last year. Reported revenues for the first nine months of 1999 were
$414.6 million, compared with $510.6 million last year. On a comparable basis,
including the unconsolidated subsidiaries, revenues for the quarter would have
been $200.8 million and revenues for the nine months ended September 30, 1999
would have been $563.3 million, as compared with our revenues for the third
quarter of 1998 which were $174.5 million and for the nine months ended
September 30, 1998 which were $510.6 million.
EBITDA, defined as operating income before depreciation, depletion and
amortization, was $73.9 million for the third quarter and $191.9 million for the
nine months ended September 30, 1999. The figure is inclusive of the
unconsolidated subsidiaries, and compares to $50.5 and $151.3 million for the
comparable year-earlier periods.
5
<PAGE> 9
Our board of directors also declared a third quarter dividend to
stockholders of $0.57 per share, payable on November 24, 1999, to stockholders
of record as of November 12, 1999.
Summarized below is unaudited financial data for the quarters and nine
months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
(MLP) (REIT) (MLP) (REIT/MLP)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<S> <C> <C> <C> <C>
Revenues..................................... $ 174,476 $ 51,999 $ 510,600 $ 414,569
Operating Income............................. 32,101 33,270 101,027 116,386
Interest Expense -- Net...................... 14,426 13,165 43,535 49,604
Income Before Income Taxes and Equity in
Earnings of Unconsolidated Subsidiaries and
Preferred Stock Dividends.................. 16,416 19,714 53,974 61,096
Provision (Benefit) for Income Taxes......... 374 (14,030) 521 (13,045)
Equity in Earnings of Unconsolidated
Subsidiaries and Preferred Stock
Dividends.................................. -- 11,904 -- 11,904
General Partner Interest..................... 8,498 -- 25,097 17,162
Net Income Allocable to
Unitholders/Stockholders................... 7,544 45,648 28,356 68,883
Net Income per Unit/Share.................... 0.16 0.72 0.61 1.32
Dividends Declared Per Unit/Share............ 0.57 0.57 1.71 1.71
Weighted Average Number of Units/Shares
outstanding -- Basic and Diluted........... 46,323,300 63,456,575 46,323,300 52,034,293
</TABLE>
During the quarter, the continued strong United States economy and housing
market pushed overall lumber and plywood prices significantly higher, and
improved log prices for our Northwest timber operations.
As a result, prices for our Northwest lumber products were 13% above the
third quarter of 1998, with Southern Region lumber prices up 8% over the year
ago period. Strong demand in industrial markets pushed plywood prices 20% above
the third quarter of 1998, and better overall demand drove medium density
fiberboard prices up 4% from a year ago.
Domestic log prices in the Cascade Region averaged 19% above the prior year
third quarter due to strong lumber markets, while export log markets were
generally stable. Rocky Mountain Region log prices were up 3% over the third
quarter of 1998 from strong product markets. Log prices in the Southern Region
were weaker than in the third quarter of 1998 by 9% and pulpwood prices in the
Southern Region were weaker than in the third quarter of 1998 by 5%, due to a
general oversupply of logs related to dry weather and favorable harvesting
conditions throughout the region. Northeast Region log and pulpwood prices were
unchanged from the second quarter of 1999.
SALE OF TIMBERLANDS
On October 5, 1999, we signed a letter of intent to sell 91,000 acres of
our timberlands near St. Maries, Idaho to Crown Pacific Limited Partnership for
approximately $73 million. The transaction is expected to close on or about
January 15, 2000 and is subject to the signing of a definitive purchase and sale
agreement, the approval of our board of directors, the approval of Crown Pacific
Limited Partnership's board of directors, and customary federal regulatory
review.
-------------------------
Our principal executive offices are located at 999 Third Avenue, Suite
2300, Seattle, Washington 98104-4096, and our telephone number is (206)
467-3600.
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<PAGE> 10
THE OFFERING
The following summarizes our offering of common stock. We are presenting
the information as if the underwriters do not exercise the over-allotment
option.
Common stock offered............. 5,000,000 shares.
Common stock outstanding after
the offering..................... 68,456,575 shares. Includes outstanding
special voting stock which may be converted
into 634,566 shares of common stock.
Use of proceeds.................. Repayment of a portion of our outstanding
debt and for general business purposes,
including the possible acquisition of
forest products companies, timberlands or
other forestry-related assets.
New York Stock Exchange and
Pacific Exchange Symbol.......... "PCL"
Risk Factors..................... For a discussion of risks that you should
consider, see "Risk Factors" beginning on
page 12. These risks include financial,
operational, regulatory and other risks
associated with our business.
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<PAGE> 11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth, for the periods and at the dates indicated,
summary combined historical financial data for Plum Creek Timber Company, L.P.,
summary unaudited pro forma condensed consolidated financial data for Plum Creek
Timber Company, Inc. after giving effect to the conversion of the partnership, a
publicly traded master limited partnership, into a publicly traded real estate
investment trust, and summary unaudited pro forma condensed consolidated
financial data as adjusted for the corporation after giving effect to both the
conversion and the equity offering along with the related use of proceeds for
the repayment of debt. The summary combined historical financial data for each
of the three years in the period ending December 31, 1998 are derived from and
should be read in conjunction with the audited financial statements included
elsewhere in this prospectus. The related combined historical financial data for
the six months ended June 30, 1998 and 1999 is derived from the historical
unaudited combined financial statements of the partnership included elsewhere in
this prospectus which, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the results for the unaudited interim periods. Interim results may not be
indicative of results that may be expected for any other interim period or for
the year as a whole. The summary unaudited pro forma condensed consolidated
financial information is derived from and should be read in conjunction with the
pro forma financial information contained elsewhere in this prospectus. See
"Unaudited Pro Forma Condensed Consolidated Financial Statements." The pro forma
results of operations are not necessarily indicative of results of operations
that will occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
1996(1) 1997 1998(2) 1998(2) 1998 1999 1999
--------- --------- --------- --------- -------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues......................... $ 633,741 $ 725,571 $ 699,370 $ 232,825(3) $336,124 $362,570 $110,903(3)
Cost of Goods Sold(4)............ 429,897 503,259 505,366 73,904 239,768 257,907 38,468
Depreciation, Depletion, and
Amortization................... 56,945 70,243 69,287 44,301 31,876 34,988 20,480
Operating Income................. 164,988 173,281 141,087 139,121 68,926 83,116 64,643
Interest Expense -- Net.......... 48,850 59,251 59,580 40,971 29,109 36,439 26,612
Income Before Income Taxes and
Equity in Earnings of
Unconsolidated Subsidiaries and
Preferred Stock Dividends...... 224,990 111,776 75,953 98,192 37,558 41,382 38,008
Provision for Income Taxes....... 1,391 80 517 -- 147 985 --
Equity in Earnings (Loss) of
Unconsolidated Subsidiaries and
Preferred Stock Dividends(5)... -- -- -- (8,692) -- -- 5,196
General Partner Interest......... 27,777 31,918 33,713 -- 16,599 17,162 --
Net Income Allocable to
Unitholders/Stockholders....... 195,822 79,778 41,723 89,500 20,812 23,235 43,204
Net Income Per Unit/Per Share.... 4.71 1.72 0.90 1.41 0.45 0.50 0.68
Cash Distributions Declared per
Unit........................... 2.02 2.20 2.28 -- 1.14 1.14 --
Weighted Average Units/Shares
Outstanding.................... 41,620 46,323 46,323 63,457 46,323 46,323 63,457
</TABLE>
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
1996(1) 1997 1998(2) 1998(2) 1998 1999 1999
--------- --------- --------- --------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOW DATA:
EBITDA(6)........................ $ 221,933 $ 243,524 $ 210,374 $ 209,510 $100,802 $118,104 $117,294
Capital Expenditures(7).......... 19,280 28,348 64,340 64,340 35,955 12,193 12,193
Net Cash Provided by Operating
Activities..................... 171,948 189,976 164,004 153,961 83,249 64,897 56,170
Net Cash Used in Investing
Activities..................... (419,241) (28,080) (65,834) (66,240) (35,645) (11,381) (12,810)
Net Cash Provided by (Used in)
Financing Activities........... 283,581 (150,407) (119,758) (105,410) (48,845) (71,121) (56,745)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
------------------------------------- ----------------------------------------
PRO FORMA PRO FORMA
1996 1997 1998 1999 1999 AS ADJUSTED(8)
---------- ---------- ---------- ---------- ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital................ $ 152,988 $ 158,262 $ 129,587 $ 115,353 $ 71,379 $ 113,719
Total Assets................... 1,336,434 1,300,897 1,438,243 1,399,925 1,212,587(9) 1,254,927
Total Debt..................... 780,800 763,400 961,008 960,803 790,683(9) 700,683
Partners' Capital/Stockholders'
Equity....................... 491,648(10) 470,337 405,415 374,956 388,912 521,252
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
PRO FORMA
1996 1997 1998 1998
---- ---- ---- ----------
<S> <C> <C> <C> <C>
OPERATING DATA:
Northwest Timberlands Fee Timber Harvested (MMBF)(11)..... 577 512 495 495
Northeast Timberlands Fee Timber Harvested (M Tons)....... 131 131
Southern Timberlands Fee Timber Harvested (M Cunits)...... 127 799 764 764
Lumber Production (MMBF).................................. 461 582 635 635
Plywood Production (MMSF) ( 3/8" basis)(12)............... 297 312 323 323
MDF Production (MMSF) ( 3/4" basis)....................... 113 127 132 132
</TABLE>
9
<PAGE> 13
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- --------------------
1996(1) 1997 1998(2) 1998 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SEGMENT DATA:(13)
Northern Resources
Revenues.................................. $196,427 $158,535 $131,625 $ 56,970 $ 76,922
EBITDA(6)................................. 151,784 128,996 103,431 41,791 54,740
Operating Income.......................... 119,767 98,792 73,715 29,114 40,213
Southern Resources
Revenues.................................. 7,115 54,780 68,800 30,729 25,880
EBITDA(6)................................. 11,046 72,047 69,098 35,102 21,740
Operating Income.......................... 8,149 54,313 53,568 27,775 15,017
Lumber
Revenues.................................. 239,252 294,839 281,614 137,132 168,046
EBITDA(6)................................. 30,172 46,181 15,704 10,660 18,618
Operating Income.......................... 18,596 34,667 2,599 4,351 10,280
Panel
Revenues.................................. 138,947 149,618 154,640 78,171 84,643
EBITDA(6)................................. 14,329 18,466 24,958 10,682 18,460
Operating Income.......................... 5,305 8,462 14,360 5,202 13,018
Land Sales
Revenues.................................. 42,324 17,884 32,813 8,410 7,079
EBITDA(6)................................. 35,434 13,963 26,598 7,107 6,159
Operating Income.......................... 35,434 13,963 26,598 7,107 6,159
Other
Revenues.................................. 9,676 49,915 29,878 24,712 --
EBITDA(6)................................. (1,526) (474) (1,973) 238 --
Operating Income.......................... (1,682) (1,152) (2,247) 195 --
</TABLE>
- -------------------------
(1) Included in 1996 results of operations was a gain of $105,700 related to
the sale of 107,000 acres of timberland in northeast Washington and
northern Idaho and the impact of that sale from October 12, 1996. Results
also include the impact of the acquisition from Riverwood International
Corporation of 538,000 acres of timberland and related assets in Louisiana
and Arkansas from October 19, 1996.
(2) Results include the impact of the acquisition of 905,000 acres of
timberland in Maine from November 12, 1998.
(3) Reflects the reduction of revenues related to the manufacturing operations,
harvesting activities and some higher and better use lands that were
transferred to the unconsolidated subsidiaries.
(4) Amounts include depreciation, depletion and amortization.
(5) The unaudited pro forma summary financial information of the unconsolidated
subsidiaries, on a combined basis, as of periods indicated are summarized
as follows
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1998 JUNE 30, 1999
----------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues............................ $662,357 $324,382 $353,017
Depreciation and Amortization....... 25,416 12,438 14,723
Operating Income.................... 672 465 17,448
Interest Expense -- Net............. 18,913 9,676 9,952
</TABLE>
10
<PAGE> 14
In accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock," our revenue related to the sale of timber to
our unconsolidated subsidiaries will be deferred until the logs or finished
goods are sold outside the group of unconsolidated subsidiaries. Therefore,
all of our sales to the unconsolidated subsidiaries will also be included
in the revenue of the unconsolidated subsidiaries in the period in which
the timber, in the form of either whole logs, lumber, plywood or other wood
products, is sold outside the group of unconsolidated subsidiaries. Revenue
related to sales between the unconsolidated subsidiaries is eliminated in
preparing the summary combined financial information of the unconsolidated
subsidiaries. Our reported revenues that were also included in the revenues
of the unconsolidated subsidiaries amounted to $195,812 for the year ended
December 31, 1998 and $101,350 for the six months ended June 30, 1999.
(6) EBITDA is defined as operating income before depreciation, depletion, and
amortization. Pro forma amounts include EBITDA from unconsolidated
subsidiaries. EBITDA for our segments excludes some unallocated items such
as corporate overhead expenses. EBITDA is provided because management
believes EBITDA provides useful information for evaluating our ability to
make cash distributions. EBITDA should not be construed as an alternative
to operating income (as an indicator of our operating performance) or as an
alternative to cash flows from operating activities (as a measure of
liquidity).
(7) Does not include $181,148 related to the Maine timberland acquisition in
1998 or $560,740 related to the Riverwood acquisition in 1996. Pro forma
amounts include capital expenditures of $52,015 related to the
unconsolidated subsidiaries for the year ended December 31, 1998 and
$11,844 for the six months ended June 30, 1999.
(8) Amounts have been adjusted to reflect the proceeds of the equity offering
used for the repayment of debt.
(9) Reflects the transfer of certain assets and liabilities related to the
manufacturing operations, harvesting activities and some higher and better
use lands to the unconsolidated subsidiaries. Pro forma, total assets would
be $1,426,482 and total debt would be $960,803 at June 30, 1999, if the
unconsolidated subsidiaries were included as if consolidated with the
corporation for financial reporting purposes.
(10) The partnership issued 5.7 million units during 1996 for net proceeds of
$144,297.
(11) The Northwest timberlands include fee timber harvested from the Rocky
Mountain and Cascade Regions.
(12) Does not include 111 million square feet, 200 million square feet and 37
million square feet for the years ended December 31, 1998, 1997 and 1996
related to the production at the Joyce, Louisiana, plywood facility which
was closed in July 1998.
(13) We are organized into eight business units on the basis of both product
line and geographic region. The eight business units have been aggregated
into five reportable segments based on similar long-term economic
characteristics. The five segments are: Northern Resources (which includes
the Cascade, Rocky Mountain and Northeast Region timberland business
units), Southern Resources (Southern timberland business unit), Lumber
(which includes our Northwest and Southern lumber business units), Panel
(which includes our plywood and medium density fiberboard operations) and
Land Sales (timberlands which may be sold for conservation, residential or
recreational purposes). Other includes data related to a plywood plant that
was permanently closed in 1998 and a chip facility that was sold in 1998.
11
<PAGE> 15
RISK FACTORS
You should carefully consider the following risks as well as the other
information contained or incorporated by reference in this prospectus before
purchasing the common stock.
THE CYCLICAL NATURE OF THE FOREST PRODUCTS INDUSTRY COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS
Our results of operations are affected by the cyclical nature of the forest
products industry. Prices and demand for logs and manufactured wood products are
subject to cyclical fluctuations. The demand for logs and wood products is
primarily affected by the level of new residential construction activity and, to
a lesser extent, repair and remodeling activity and other industrial uses. These
activities are, in turn, subject to fluctuations due to, among other factors:
- changes in domestic and international economic conditions;
- interest rates;
- population growth; and
- weather conditions.
Decreases in the level of residential construction activity generally
reduce demand for logs and wood products. This results in lower revenues,
profits and cash flows. In addition, our results of operations are subject to
global economic changes as global supplies of wood fiber shift in response to
changing economic conditions. For example, economic weakness throughout Asia
over the last two years has caused export quality North American logs normally
sold into the Japanese market to remain in, or be directed into, domestic
markets, causing oversupply in our domestic markets. Asian economic weakness has
caused European and Canadian producers to direct larger volumes of competing
wood products into United States markets, thereby lowering prices in our
markets. We believe that these conditions will continue to impact our business
for the near-term. We have also entered into several long-term supply agreements
with various forest product companies, which provide for market-based pricing
for our products. Price fluctuations for products subject to these agreements
may adversely affect our earnings. For example, we have entered into a long-term
supply agreement with Stone Container Corporation which provides for
market-based pricing for wood chips, subject to minimum and maximum prices until
December 31, 1999. If market prices for wood chips remain at current levels,
which are below the minimum level set by the supply agreement, our earnings
related to this agreement will be reduced starting in year 2000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Events and Trends Affecting Operating Results -- Stone Container
Corporation."
OUR CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE
REITs are required to distribute 95% of their net taxable income. Unlike
ordinary income such as rent, the Internal Revenue Code does not require REITs
to distribute capital gain income. Accordingly, we do not believe that the
Internal Revenue Code will require us to distribute any material amounts of cash
since the majority of our income comes from timber sales, which is treated as
capital gain. The amount of our distributions to stockholders are determined
quarterly by our board of directors, in its sole discretion, based on our
results of operations, cash flow and capital requirements, economic conditions,
tax considerations and other factors, including future acquisitions, harvest
levels and changes in the price and demand for our products. Consequently, our
distribution levels may fluctuate.
OUR ABILITY TO HARVEST TIMBER MAY BE SUBJECT TO LIMITATIONS WHICH COULD
ADVERSELY AFFECT OUR OPERATIONS
Weather conditions, timber growth cycles, access limitations and regulatory
requirements associated with the protection of wildlife and water resources may
restrict harvesting of our timberlands, as may other factors, including damage
by fire, insect infestation, disease, prolonged drought and natural
12
<PAGE> 16
disasters. As is common in the forest products industry, we do not maintain
insurance coverage with respect to damage to our timberlands.
Much of our Northwest timberlands are intermingled among sections of
Federal land managed by the United States Forest Service. In many cases, access
is only, or most economically, achieved through a road or roads built across
adjacent Federal land. In order to access these intermingled timberlands, we
have obtained from time to time either temporary or permanent access rights
across Federal lands. This process has often been, and will likely continue to
be, affected by, among other things, the requirements of the Endangered Species
Act, the National Environmental Policy Act and the Clean Water Act. We currently
lack legal access to approximately 10% of the merchantable timber, by volume, in
our Northwest timberlands. Access and regulatory restrictions may delay or
prevent us from harvesting some of our timberlands. See "Federal and State
Regulations."
Our revenues, net income and cash flow from our operations are dependent to
a significant extent on the pricing for our products and our continued ability
to harvest timber at adequate levels. In addition, our ability to accelerate the
harvest of significant amounts of timber in order to fund distributions to
stockholders may be limited by the terms of our long-term debt agreements and
lines of credit.
HARVEST LEVELS IN SOME OF OUR REGIONS ARE EXPECTED TO DECLINE
Harvest levels in our Rocky Mountain Region are expected to remain
relatively stable over the next two years. By the year 2000, we anticipate that
we will have nearly completed the conversion of slower growing forests to
younger, more productive stands in our Rocky Mountain Region, at which time we
anticipate a moderate reduction in the region's harvest levels. We expect
harvest levels in our Cascade Region to decline for the foreseeable future as
the conversion process approaches completion in that region. Harvest levels in
our Southern Region for the years 2000 to 2003 are expected to be moderately
lower compared to 1998 harvest levels as we complete the conversion of mature
second growth pine timberlands in this region into intensively managed pine
plantations. In light of the numerous factors that affect harvest levels, our
harvest levels in any given year may be lower than we expect.
OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL AND MAY ADVERSELY AFFECT OUR
ABILITY TO MANAGE OUR EXISTING BUSINESS
We intend to continue to pursue a disciplined acquisition strategy as one
means of increasing the value of our assets. We cannot predict whether we will
be successful in consummating any additional acquisitions since general economic
or industry conditions may not be conducive to our acquisition strategy or we
may not be able to identify and acquire any further assets or businesses on
economically acceptable terms. Moreover, even if acquisitions are made, we
cannot predict what the consequences of these acquisitions would be on our
ability to manage our existing business.
Our acquisition strategy involves numerous risks, including difficulties
inherent in the integration of new operations and systems, the diversion of
management's attention from other business concerns and the potential loss of
key employees of acquired businesses. Acquisitions also may involve the
expenditure of significant funds. Depending upon the nature, size and timing of
future acquisitions, we likely would be required to secure additional financing.
This additional financing may not be available on acceptable terms or at all.
Further, if we issue common stock, preferred stock or operating partnership
units to fund our acquisitions, the value of our outstanding common stock may be
diluted.
PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW MAY PREVENT A
CHANGE IN CONTROL
Some provisions of our certificate of incorporation may discourage a third
party from seeking to gain control of us. The ownership limitations described in
our certificate of incorporation could have the effect of delaying, deferring,
or limiting a change of control in which holders of common stock might receive a
13
<PAGE> 17
premium for their shares over the then prevailing market price. The following is
a summary of provisions of our certificate of incorporation which may have this
effect:
The Ownership Limit
In order for us to maintain our qualification as a REIT, not more than 50%
of the value of our outstanding shares of capital stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code). For the purpose of preserving our REIT qualification, our certificate of
incorporation prohibits ownership either directly or under the applicable
attribution rules of the Internal Revenue Code of more than 5% of the lesser of
the total number of shares of common stock outstanding or the value of the
outstanding shares of common stock by any stockholder other than by some
designated persons agreed to by us (the "Ownership Limit"). The Ownership Limit
may have the effect of discouraging an acquisition of control of us without the
approval of our board of directors.
The Ownership Limit in our certificate of incorporation also restricts the
transfer of our common stock. For example, if any transfer of common stock would
- result in any person owning, directly or indirectly, common stock in
excess of the Ownership Limit,
- result in our common stock being owned by fewer than 100 persons, or
- result in our being "closely held" (as defined in the Internal Revenue
Code), then
the common stock so transferred will be designated as "excess stock" and will be
transferred automatically to a trust effective on the day before the transfer of
this common stock. These transfer restrictions, however, allow specific persons
designated in our certificate of incorporation to beneficially own, in the
aggregate, up to 27% of our outstanding common stock. This exception will be
permanently reduced to the extent that these persons sell their shares of common
stock or special voting stock or to the extent that new issuances of common
stock reduce their percentage of beneficial ownership.
The Special Voting Stock
We have issued shares of special voting stock which entitle holders to vote
as a separate class on many transactions, including amendments to our
certificate of incorporation, issuances of more than 20% of our outstanding
common stock for non-cash consideration, dissolution, mergers and the sale of
all or substantially all of our assets, as well as amendments to our bylaws
proposed by stockholders. In addition, holders of the special voting stock are
entitled to designate, for nomination purposes only, a number of nominees for
our board of directors, which taken together with any previously elected
designees, would constitute a majority of our board.
The Preferred Stock
Our certificate of incorporation authorizes our board of directors to issue
up to 75 million shares of preferred stock. Upon issuance, our board of
directors will establish the preferences and rights for this preferred stock.
These preferences and rights may include the right to elect additional
directors. The issuance of preferred stock could have the effect of delaying or
preventing a change in control of us even if a change in control were in our
stockholders' best interests.
Section 203 of the Delaware General Corporation Law
Section 203 of the Delaware General Corporation Law generally prohibits us
from engaging in business transactions with a person or entity that owns 15% or
more of our voting stock. A business transaction may include mergers, asset
sales and other transactions resulting in financial benefit to the person or
entity that owns 15% or more of our voting stock.
14
<PAGE> 18
The Classified Board of Directors
Our board of directors is divided into three classes. The term of the first
class expires in 2000, the second class in 2001 and the third class in 2002.
Directors of each class will be elected for a three-year term upon the
expiration of the initial term of each class. The staggered terms for directors
may adversely affect the stockholders' ability to effect a change in control,
even if a change in control were in their best interests.
IF WE FAIL TO QUALIFY AS A REIT, WE WOULD BE SUBJECT TO TAX AT CORPORATE RATES
AND WOULD NOT BE ABLE TO DEDUCT DISTRIBUTIONS TO STOCKHOLDERS WHEN COMPUTING OUR
TAXABLE INCOME
If in any taxable year we fail to qualify as a REIT:
- we would be subject to Federal and state income tax on our taxable income
at regular corporate rates of approximately 40%;
- we would not be allowed to deduct distributions to stockholders in
computing taxable income; and
- unless we were entitled to relief under the Internal Revenue Code, we
would also be disqualified from treatment as a REIT for the four taxable
years following the year during which we lost qualification.
If we fail to qualify as a REIT, we might need to borrow funds or liquidate
some investments in order to pay the additional tax liability. Accordingly,
funds available for investment or distribution to our stockholders would be
reduced for each of the years involved.
Qualification as a REIT involves the application of highly technical and
complex provisions of the Internal Revenue Code to our operations and the
determination of various factual matters and circumstances not entirely within
our control. There are only limited judicial or administrative interpretations
of these provisions. Although we operate in a manner consistent with the REIT
qualification rules, we cannot assure you that we are or will remain so
qualified.
OUR TIMBERLANDS ARE SUBJECT TO EXTENSIVE FEDERAL AND STATE ENVIRONMENTAL
REGULATIONS
We are subject to regulation under, among other laws, the Clean Air Act,
the Clean Water Act, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response Compensation and Liability Act of 1980, the
National Environmental Policy Act, and the Endangered Species Act, as well as
similar state laws and regulations. Violations of various statutory and
regulatory programs that apply to our operations could result in civil
penalties, remediation expenses, potential injunctions, cease and desist orders
and criminal penalties. We engage in the following activities which are subject
to regulation:
- the generation of air emissions;
- the discharge of industrial wastewater and storm water;
- the generation and disposal of both hazardous and nonhazardous wastes;
and
- forest practices, including harvesting, planting and road building.
Laws and regulations protecting the environment have generally become more
stringent in recent years and could become more stringent in the future. Some
environmental statutes impose strict liability, rendering a person liable for
environmental damage without regard to the person's negligence or fault. These
laws or future legislation or administrative or judicial action with respect to
protection of the environment may adversely affect our business.
The Endangered Species Act and similar state laws protect species
threatened with possible extinction. A number of species on our timberlands have
been and in the future may be protected under
15
<PAGE> 19
these laws, including the northern spotted owl, marbled murrelet, gray wolf,
grizzly bear, mountain caribou, bald eagle, red-cockaded woodpecker, bull trout,
and various salmon species. Our Northwest timberlands are often intermingled
with Federal land in or near areas that include the habitats of a number of
threatened or endangered species such as the northern spotted owl, bull trout
and grizzly bear. Protection of threatened and endangered species may include
restrictions on timber harvesting, road building and other forest practices on
private, Federal and state land containing the affected species. See "Federal
and State Regulations."
ADVERSE ECONOMIC FACTORS AFFECTING FOREIGN ECONOMIES COULD HAVE AN ADVERSE
AFFECT ON OUR LOG EXPORT BUSINESS
Our export log business is substantially dependent on market and economic
conditions in the major Asian economies, particularly Japan. Accordingly, this
business may be affected by, among other things, fluctuations in exchange rates,
the availability of substitute products and changes in building practices. In
1998 and the first three months of 1999, all of our export log sales from the
Cascade Region were made to customers in Japan. Cascade Region export log
revenues accounted for approximately 3% of our total revenues for the first six
months of 1999, 3% in 1998, and 6% in 1997. Cascade Region export log sales
represented approximately 6% of our operating income for the first six month of
1999, 6% in 1998, and 11% in 1997.
OUR SETTLEMENT OF UNITHOLDER LITIGATION MAY RESULT IN A NON-CASH EXPENSE WHICH
COULD ADVERSELY AFFECT OUR NET INCOME
On April 9, 1999, we and our former general partner settled litigation
relating to our conversion to a REIT. Under this settlement agreement, our
former general partner has agreed to pay eligible unitholders up to $30 million
if we do not meet specified five-year financial targets. This payment would be
made, if at all, on or about April 15, 2004. The Securities and Exchange
Commission's Staff Accounting Bulletin No. 79 provides that any payment made by
our former general partner as part of this settlement will be accounted for as a
deemed capital contribution by the former general partner to us, followed by a
non-cash expense by us. The Staff Accounting Bulletin requires that payments
made by a principal shareholder of a corporation be expensed by the corporation
if the corporation receives any benefit as a result of such payment. Therefore,
we will record a non-cash expense in the period in which, and to the extent
that, it appears probable that a payment is required. Although any payments by
our former general partner, as described above, will cause a corresponding
reduction in our net income, it will have no impact on our cash flow.
POSSIBLE DISRUPTION OF BUSINESS DUE TO THE YEAR 2000 PROBLEM
The year 2000 problem results from an inability of some computer systems to
accurately recognize dates on and after the year 2000. As a result, beginning on
January 1, 2000, computer systems and software used by many companies and
organizations in a wide variety of industries will produce erroneous results or
fail unless they have been modified or upgraded to process date information
correctly. Year 2000 compliance efforts may involve significant time and
expense, and uncorrected problems could materially adversely affect our
business.
The year 2000 problem poses the following principal risks to our business:
- disruptions due to our failure to achieve year 2000 readiness; and
- disruptions due to the failure of third parties to achieve year 2000
readiness.
In 1997, we adopted a year 2000 plan to identify and address both internal
and external year 2000 issues. As part of the plan, we have identified all of
our major application and processing systems and have sought external and
internal resources to replace and test those systems. We are evaluating
16
<PAGE> 20
customers and vendors that have significant relationships with us to determine
whether they are adequately preparing for the year 2000. In addition, we are
evaluating the need for contingency plans to reduce the impact of some potential
events that may occur. Any failure of these remediation efforts could result in
a disruption of our operations. Consequently, these failures could have a
material adverse effect on our business.
FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference includes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Some of the
forward-looking statements can be identified by the use of forward-looking words
such as "believes," "expects," "may," "will," "should," "seeks,"
"approximately," "intends," "plans," "estimates," or "anticipates," or the
negative of those words or other comparable terminology. Forward-looking
statements involve inherent risks and uncertainties. A number of important
factors could cause actual results to differ materially from those in the
forward-looking statements, including those factors discussed in "Risk Factors."
Some factors include fluctuations in government regulations and economic
conditions and competition in our domestic and export markets. In addition,
factors that could cause our actual results to differ from those contemplated by
our projected, forecasted, estimated, or budgeted results as reflected in
forward-looking statements relating to our operations and business include the
following possibilities:
- the failure to achieve the expected competitive advantages of operating
as a REIT;
- an unanticipated reduction in the demand for timber products; and
- the failure to make strategic acquisitions.
Accordingly, actual results may not conform to the forward-looking
statements contained in this prospectus.
USE OF PROCEEDS
We estimate that we will receive net cash proceeds from this offering of
approximately $132.3 million after deducting estimated underwriting discounts
and commissions and estimated offering expenses, assuming a public offering
price of $28 per share, the last sale price of our common stock reported on the
New York Stock Exchange Composite Tape on October 15, 1999. If the underwriters
exercise their over-allotment option in full, we estimate that we will receive
net cash proceeds from this offering of approximately $152.3 million.
We intend to contribute the net proceeds from this offering to our
wholly-owned operating partnership, through which we own substantially all of
our timberland assets. Our operating partnership intends to use the net proceeds
of this offering as follows:
- approximately $90 million to repay outstanding debt under our line of
credit, which matures on December 13, 2001 and bears a floating rate of
interest (5.77% as of June 30, 1999); and
- the remainder for general business purposes, which may include:
-- repayment of additional outstanding debt;
-- the acquisition of forest products companies, timberlands or other
forestry-related assets; and
-- working capital needs.
We routinely review opportunities to acquire forest products companies,
timberlands or other forestry-related assets.
17
<PAGE> 21
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION POLICY
Our common stock trades on the New York Stock Exchange and the Pacific
Exchange under the symbol "PCL." The following table sets forth the quarterly
high and low sales prices for our predecessor's limited partnership units as
reported on the New York Stock Exchange Composite Tape for the years 1997 and
1998 and the first two quarters of 1999, as well as quarterly distributions
declared for each quarter during the same period. The table sets forth the
quarterly high and low sales prices of the corporation's common stock as
reported on the New York Stock Exchange Composite Tape for the third and fourth
quarters of 1999, through October 15, 1999, as well as the quarterly
distribution declared for the third quarter of 1999.
<TABLE>
<CAPTION>
DISTRIBUTIONS
DECLARED
HIGH LOW PER UNIT/SHARE
----- ----- ---------------
<S> <C> <C> <C>
1997
First quarter.......................................... $29 1/4 $25 7/8 $0.55
Second quarter......................................... $32 1/2 $26 3/4 $0.55
Third quarter.......................................... $36 $31 11/16 $0.55
Fourth quarter......................................... $34 3/8 $28 $0.55
1998
First quarter.......................................... $34 7/8 $30 $0.57
Second quarter......................................... $34 1/4 $28 3/16 $0.57
Third quarter.......................................... $31 1/8 $23 7/16 $0.57
Fourth quarter......................................... $29 $24 13/16 $0.57
1999
First quarter.......................................... $29 7/16 $25 1/2 $0.57
Second Quarter......................................... $32 1/8 $25 3/4 $0.57
Third Quarter.......................................... $31 7/8 $26 1/8 $0.57
Fourth Quarter (through October 15, 1999).............. $30 3/8 $27 3/4 --
</TABLE>
The last sale price of our common stock reported on the New York Stock
Exchange Composite Tape on October 15, 1999 appears on the cover page of this
prospectus. Our board of directors has declared a third quarter distribution of
$0.57 per share to be paid on November 24, 1999 to stockholders of record as of
November 12, 1999. Purchasers of the shares of common stock in this offering
will receive this distribution if they are holders of record on November 12,
1999.
Our distribution policy is determined by our board of directors. As stated
above, our most recent quarterly REIT distribution was $0.57 per share,
equivalent to $2.28 on an annualized basis. Future distributions will be
determined by our board of directors, in its sole discretion, based on our
results of operations, cash flow and capital requirements, economic conditions,
tax considerations and other factors, including harvest levels and future
acquisitions.
18
<PAGE> 22
CAPITALIZATION
The following table sets forth our short-term debt and total capitalization
on a consolidated basis and on a pro forma basis at June 30, 1999, after giving
effect to the consummation of our conversion to a REIT. The "Pro Forma As
Adjusted" column sets forth our pro forma short-term debt and capitalization at
June 30, 1999, after giving effect to the issuance of 5,000,000 shares of common
stock in this offering at $28 per share, the last sale price of our common stock
reported on the New York Stock Exchange Composite Tape on October 15, 1999, and
the application of the net proceeds.
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
----------- ---------- -----------
(UNAUDITED IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Current portion of long-term debt............... $ 26,950 $ 5,685 $ 5,685
---------- ---------- ----------
Total short-term debt........................ $ 26,950 $ 5,685 $ 5,685
========== ========== ==========
Long-term debt:
Senior Notes due 2007........................... $ 99,488 $ 39,795 $ 39,795
Senior Notes due 2009........................... 150,000 150,000 150,000
Senior Notes due 2011........................... 176,803 176,803 176,803
Senior Notes due 2016........................... 200,000 200,000 200,000
First Mortgage Notes due 2007................... 89,162 -- --
Line of Credit.................................. 218,400 218,400 128,400
---------- ---------- ----------
Total long-term debt......................... 933,853 784,998 694,998
---------- ---------- ----------
Total stockholders' equity........................ 374,956 388,912(1) 521,252(1)
---------- ---------- ----------
Total capitalization.............................. $1,308,809 $1,173,910 $1,216,250
========== ========== ==========
</TABLE>
- -------------------------
(1) We have 75 million shares of preferred stock authorized with none
outstanding, 300 million shares of common stock authorized with 63,456,575
shares outstanding, including 634,566 shares of common stock issuable upon
conversion of our outstanding special voting stock. See "Description of
Capital Stock."
19
<PAGE> 23
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements of Plum Creek Timber Company, Inc. reflect the conversion of Plum
Creek Timber Company, L.P., a publicly traded master limited partnership, to a
publicly traded real estate investment trust. In order to qualify as a REIT for
tax purposes, some of the partnership's assets and associated liabilities
related to the manufacturing operations, the harvesting activities, and some
higher and better use lands were transferred to several unconsolidated
subsidiaries in exchange for preferred stock and nonvoting common stock.
Therefore, the manufacturing and harvesting operations and some higher and
better use land sales are no longer accounted for on a combined/consolidated
basis with the activities of the corporation. Instead, the financial statements
of the corporation reflect the net activities of the manufacturing and
harvesting operations along with some higher and better use land sales through
its preferred stock and nonvoting common stock ownership.
The unaudited pro forma condensed consolidated balance sheet assumes the
conversion occurred on June 30, 1999. The unaudited pro forma condensed
consolidated statements of income and cash flows assume the conversion occurred
on January 1, 1998.
The unaudited pro forma condensed consolidated financial statements are not
necessarily indicative of the operating results or financial position that would
have been achieved had the conversion occurred on the indicated dates and should
not be construed as representative of future operating results, cash flows or
financial position.
The unaudited pro forma condensed consolidated financial statements and
accompanying notes should be read in conjunction with the historical financial
statements and related notes.
20
<PAGE> 24
PLUM CREEK TIMBER COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------
CORPORATE
PARTNERSHIP SUBSIDIARIES PRO FORMA
HISTORICAL(A) FORMATION(B) OTHER CORPORATION
------------- ------------ -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents........... $ 96,188 $ $ (1,905)(c) $ 94,283
Inventories......................... 46,095 (46,095)
Other Current Assets................ 53,382 (51,957) 13,020(d) 14,445
---------- --------- -------- ----------
195,665 (98,052) 11,115 108,728
Timber and Timberlands -- Net......... 1,015,007 (6,947) 1,008,060
Property, Plant and Equipment --
Net................................. 178,037 (176,869) 1,168
Investment in Unconsolidated
Subsidiaries and Preferred Stock.... 72,232 4,304(e) 87,674
9,233(f)
1,905(c)
Other Assets.......................... 11,216 (4,259) 6,957
---------- --------- -------- ----------
Total Assets................ $1,399,925 $(213,895) $ 26,557 $1,212,587
========== ========= ======== ==========
LIABILITIES
Current Liabilities................... 80,312 (55,983) 13,020(d) 37,349
Long-Term Debt........................ 715,453 (148,855) 566,598
Line of Credit........................ 218,400 218,400
Other Liabilities..................... 10,804 (9,057) (419)(e) 1,328
---------- --------- -------- ----------
Total Liabilities........... 1,024,969 (213,895) 12,601 823,675
---------- --------- -------- ----------
Commitments and Contingencies
CAPITAL
Partners' Capital/Stockholders'
Equity.............................. 374,956 4,723(e) 388,912
9,233(f)
---------- --------- -------- ----------
Total Liabilities and
Partners'
Capital/Stockholders'
Equity................... $1,399,925 $(213,895) $ 26,557 $1,212,587
========== ========= ======== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
21
<PAGE> 25
PLUM CREEK TIMBER COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------
CORPORATE
PARTNERSHIP SUBSIDIARIES PRO FORMA
HISTORICAL(a) FORMATION(g) OTHER CORPORATION
------------- ------------ -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................ $ 699,370 $(466,545) $ $ 232,825
----------- --------- -------- -----------
Costs and Expenses:
Cost of Goods Sold................ 505,366 (431,462) 73,904
Selling, General and
Administrative................. 52,917 (33,641) 524(h) 19,800
----------- --------- -------- -----------
Total Costs and
Expenses............... 558,283 (465,103) 524 93,704
----------- --------- -------- -----------
Operating Income.................... 141,087 (1,442) (524) 139,121
Interest Expense.................... (60,622) 18,913 (302)(i) (42,011)
Reorganization Costs................ (4,763) 4,763(j)
Other Expense -- Net................ 251 929 (98)(k) 1,082
----------- --------- -------- -----------
Income before Income Taxes and
Equity in Earnings (Loss) of
Unconsolidated Subsidiaries and
Preferred Stock Dividends......... 75,953 18,400 3,839 98,192
Provision for Income Taxes.......... 517 (517)
----------- --------- -------- -----------
Income (Loss) before Equity in
Earnings (Loss) of Unconsolidated
Subsidiaries and Preferred Stock
Dividends......................... 75,436 18,917 3,839 98,192
Equity in Earnings (Loss) of
Unconsolidated Subsidiaries and
Preferred Stock Dividends......... (8,692)(l) (8,692)
----------- --------- -------- -----------
Net Income.......................... $ 75,436 $ 18,917 $ (4,853) $ 89,500
General Partner Interest............ 33,713 (33,713)(m)
----------- --------- -------- -----------
Net Income Allocable to Unitholders/
Stockholders...................... $ 41,723 $ 18,917 $ 28,860 $ 89,500
=========== ========= ======== ===========
Net Income per Unit................. $ 0.90
===========
Net Income per Common Share --
Basic and Diluted................. $ 1.41
===========
Weighted average number of Units
outstanding -- Basic and
Diluted........................... 46,323,300
Weighted average number of REIT
Shares outstanding -- Basic and
Diluted........................... 63,456,575(m)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
22
<PAGE> 26
PLUM CREEK TIMBER COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------
CORPORATE
PARTNERSHIP SUBSIDIARIES PRO FORMA
HISTORICAL(a) FORMATION(g) OTHER CORPORATION
------------- ------------ -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................ $ 336,124 $(219,746) $ $ 116,378
----------- --------- -------- -----------
Costs and Expenses:
Cost of Goods Sold................ 239,768 (202,747) 37,021
Selling, General and
Administrative................. 27,430 (16,318) 11,112
----------- --------- -------- -----------
Total Costs and
Expenses............... 267,198 (219,065) 48,133
----------- --------- -------- -----------
Operating Income.................... 68,926 (681) 68,245
Interest Expense.................... (29,576) 9,676 (242)(i) (20,142)
Reorganization Costs................ (1,748) 1,748(j)
Other Expense -- Net................ (44) 440 70(k) 466
----------- --------- -------- -----------
Income before Income Taxes and
Equity in Earnings (Loss) of
Unconsolidated Subsidiaries and
Preferred Stock Dividends......... 37,558 9,435 1,576 48,569
Provision for Income Taxes.......... 147 (147)
----------- --------- -------- -----------
Income (Loss) before Equity in
Earnings (Loss) of Unconsolidated
Subsidiaries and Preferred Stock
Dividends......................... 37,411 9,582 1,576 48,569
Equity in Earnings (Loss) of
Unconsolidated Subsidiaries and
Preferred Stock Dividends......... (4,390)(l) (4,390)
----------- --------- -------- -----------
Net Income.......................... $ 37,411 $ 9,582 $ (2,814) $ 44,179
General Partner Interest............ 16,599 (16,599)(m)
----------- --------- -------- -----------
Net Income Allocable to Unitholders/
Stockholders...................... $ 20,812 $ 9,582 $ 13,785 $ 44,179
=========== ========= ======== ===========
Net Income per Unit................. $ 0.45
===========
Net Income per Common Share --
Basic and Diluted................. $ 0.70
===========
Weighted average number of Units
outstanding -- Basic and
Diluted........................... 46,323,300
Weighted average number of REIT
Shares outstanding -- Basic and
Diluted........................... 63,456,575(m)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
23
<PAGE> 27
PLUM CREEK TIMBER COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------
CORPORATE
PARTNERSHIP SUBSIDIARIES PRO FORMA
HISTORICAL(a) FORMATION(g) OTHER CORPORATION
------------- ------------ -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<S> <C> <C> <C> <C>
Revenues............................ $ 362,570 $(251,667) $ $ 110,903
----------- --------- -------- -----------
Costs and Expenses:
Cost of Goods Sold................ 257,907 (219,439) 38,468
Selling, General and
Administrative................. 21,547 (14,239) 484(h) 7,792
----------- --------- -------- -----------
Total Costs and
Expenses............... 279,454 (233,678) 484 46,260
Operating Income.................... 83,116 (17,989) (484) 64,643
Interest Expense.................... (37,049) 9,952 (125)(i) (27,222)
Reorganization Costs................ (5,053) 5,053(j)
Other Expense -- Net................ 368 19 223(k) 587
(23)(n)
----------- --------- -------- -----------
Income before Income Taxes and
Equity in Earnings (Loss) of
Unconsolidated Subsidiaries and
Preferred Stock Dividends......... 41,382 (8,018) 4,644 38,008
Provision for Income Taxes.......... 985 (985)
----------- --------- -------- -----------
Income (Loss) before Equity in
Earnings (Loss) of Unconsolidated
Subsidiaries and Preferred Stock
Dividends......................... 40,397 (7,033) 4,644 38,008
Equity in Earnings (Loss) of
Unconsolidated Subsidiaries and
Preferred Stock Dividends......... 5,196(l) 5,196
----------- --------- -------- -----------
Net Income.......................... $ 40,397 $ (7,033) $ 9,840 $ 43,204
General Partner Interest............ 17,162 (17,162)(m)
----------- --------- -------- -----------
Net Income Allocable to Unitholders/
Stockholders...................... $ 23,235 $ (7,033) $ 27,002 $ 43,204
=========== ========= ======== ===========
Net Income per Unit................. $ 0.50
===========
Net Income per Common Share -- Basic
and Diluted....................... $ 0.68
===========
Weighted average number of Units
outstanding -- Basic and
Diluted........................... 46,323,300
Weighted average number of REIT
Shares outstanding -- Basic and
Diluted........................... 63,456,575(m)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
24
<PAGE> 28
PLUM CREEK TIMBER COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------
CORPORATE
PARTNERSHIP SUBSIDIARIES PRO FORMA
HISTORICAL(a) FORMATION(o) OTHER CORPORATION
------------- ------------ ------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................... $ 75,436 $ 18,917 $(4,853)(p) $ 89,500
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities:
Depreciation, Depletion and Amortization... 69,287 (24,986) 44,301
Loss on Asset Dispositions -- Net.......... 805 (805)
Working Capital Changes:
Accounts Receivable..................... (3,309) 3,309
Inventories............................. 6,974 (6,974)
Timber Contract Deposits and Other
Current Assets........................ 551 (1,051) (500)
Accounts Payable........................ 2,330 (2,079) 251
Other Accrued Liabilities............... 4,554 1,082 98(p) 5,734
Other...................................... 7,376 (1,393) 8,692(p) 14,675
--------- -------- ------- ---------
Net Cash Provided By Operating Activities.... 164,004 (13,980) 3,937 153,961
--------- -------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Business Acquisitions...................... (12,353) 9,413 (2,940)
Additions to Properties.................... (54,927) 42,602 (12,325)
Investments in Unconsolidated
Subsidiaries............................ (1,905)(q) (1,905)
Advances from (to) Unconsolidated
Subsidiaries............................ (50,635) 1,905(q) (49,070)
(340)(r)
Proceeds from Asset Dispositions........... 1,446 (1,446)
--------- -------- ------- ---------
Net Cash Used In Investing Activities........ (65,834) (66) (340) (66,240)
--------- -------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash Distributions......................... (140,358) (140,358)
Retirement of Long-Term Debt............... (18,400) 14,046 (4,354)
Borrowings on Lines of Credit.............. 695,000 302(i) 695,302
Repayments on Lines of Credit.............. (656,000) (656,000)
--------- -------- ------- ---------
Net Cash Used In Financing Activities........ (119,758) 14,046 302 (105,410)
--------- -------- ------- ---------
Increase (Decrease) In Cash and Cash
Equivalents................................ (21,588) 3,899 (17,689)
Cash and Cash Equivalents:
Beginning of Period........................ 135,381 135,381
--------- -------- ------- ---------
End of Period.............................. $ 113,793 $ $ 3,899 $ 117,692
========= ======== ======= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
25
<PAGE> 29
PLUM CREEK TIMBER COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------
CORPORATE
PARTNERSHIP SUBSIDIARIES PRO FORMA
HISTORICAL(A) FORMATION(O) OTHER CORPORATION
------------- ------------ ------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................... $ 37,411 $ 9,582 $(2,814)(p) $ 44,179
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities:
Depreciation, Depletion and Amortization... 31,876 (12,223) 19,653
Loss on Asset Dispositions -- Net.......... 421 (421)
Working Capital Changes:
Accounts Receivable..................... (5,900) 5,900
Inventories............................. 15,026 (15,026)
Timber Contract Deposits and Other
Current Assets........................ (3,834) 2,692 (1,142)
Accounts Payable........................ 3,153 (3,043) 110
Other Accrued Liabilities............... 1,156 2,199 (70)(p) 3,285
Other...................................... 3,940 (1,759) 4,390(p) 6,571
--------- -------- ------- ---------
Net Cash Provided By Operating Activities.... 83,249 (12,099) 1,506 72,656
--------- -------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Business Acquisitions...................... (9,413) 9,413
Additions to Properties.................... (26,542) 20,588 (5,954)
Investments in Unconsolidated
Subsidiaries............................ (1,905)(q) (1,905)
Advances from (to) Unconsolidated
Subsidiaries............................ (31,639) 1,905(q) (29,734)
Proceeds from Asset Dispositions........... 310 (310)
--------- -------- ------- ---------
Net Cash Used In Investing Activities........ (35,645) (1,948) (37,593)
--------- -------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash Distributions......................... (69,445) (69,445)
Retirement of Long-Term Debt............... (18,400) 14,047 (4,353)
Borrowings on Lines of Credit.............. 388,000 242(i) 388,242
Repayments on Lines of Credit.............. (349,000) (349,000)
--------- -------- ------- ---------
Net Cash Used In Financing Activities........ (48,845) 14,047 242 (34,556)
--------- -------- ------- ---------
Increase (Decrease) In Cash and Cash
Equivalents................................ (1,241) 1,748 507
Cash and Cash Equivalents:
Beginning of Period........................ 135,381 135,381
--------- -------- ------- ---------
End of Period.............................. $ 134,140 $ $ 1,748 $ 135,888
========= ======== ======= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
26
<PAGE> 30
PLUM CREEK TIMBER COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------
CORPORATE
PARTNERSHIP SUBSIDIARIES PRO FORMA
HISTORICAL(a) FORMATION(o) OTHER CORPORATION
------------- ------------ ------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.......................... $ 40,397 $(7,033) $ 9,840(p) $ 43,204
Adjustments to Reconcile Net Income
to Net Cash Provided By Operating
Activities:
Depreciation, Depletion and
Amortization................... 34,988 (14,508) 20,480
Gain on Asset
Dispositions -- Net............ (120) 120
Working Capital Changes:
Accounts Receivable............ (11,260) 11,260
Inventories.................... 9,868 (9,868)
Timber Contract Deposits and
Other Current Assets......... (1,415) 1,647 232
Accounts Payable............... (455) 179 (276)
Other Accrued Liabilities...... (8,659) 6,061 (223)(p) (2,821)
Other............................. 1,553 (1,006) (5,196)(p) (4,649)
--------- ------- ------- ---------
Net Cash Provided By Operating
Activities........................ 64,897 (13,148) 4,421 56,170
--------- ------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Properties........... (12,193) 6,903 (5,290)
Advances to Unconsolidated
Subsidiaries................... (7,194) (326)(r) (7,520)
Proceeds from Asset
Dispositions................... 812 (812)
--------- ------- ------- ---------
Net Cash Used In Investing
Activities........................ (11,381) (1,103) (326) (12,810)
--------- ------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash Distributions................ (70,916) (70,916)
Retirement of Long-Term Debt...... (18,605) 14,251 (4,354)
Borrowings on Lines of Credit..... 310,900 125(i) 311,025
Repayments on Lines of Credit..... (292,500) (292,500)
--------- ------- ------- ---------
Net Cash Used In Financing
Activities........................ (71,121) 14,251 125 (56,745)
--------- ------- ------- ---------
Increase (Decrease) In Cash and Cash
Equivalents....................... (17,605) 4,220 (13,385)
Cash and Cash Equivalents:
Beginning of Period............... 113,793 113,793
--------- ------- ------- ---------
End of Period..................... $ 96,188 $ $ 4,220 $ 100,408
========= ======= ======= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
27
<PAGE> 31
PLUM CREEK TIMBER COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)
NOTE 1. BASIS OF PRESENTATION
On June 8, 1998, the partnership announced that the Board of Directors of
its general partner had authorized the partnership to seek approval from its
unitholders to convert its structure from a publicly traded master limited
partnership into a publicly traded REIT. On April 19, 1999, the partnership's
unitholders approved the conversion, which was completed on July 1, 1999.
Prior to the conversion, the partnership owned 98% of Plum Creek
Manufacturing, L.P. and 96% of Plum Creek Marketing, Inc. The general partner of
the partnership, Plum Creek Management Company, L.P., managed the businesses of
the partnership, Plum Creek Manufacturing and Plum Creek Marketing and owned the
remaining 2% general partner interest in Plum Creek Manufacturing and 4% of Plum
Creek Marketing.
In connection with the conversion, the partnership formed Plum Creek Timber
Company, Inc., a corporation that operates under the laws governing REITs, the
operating partnership and several taxable corporations.
The conversion was accomplished through the simultaneous merger of the
partnership into the operating partnership and the merger of the general partner
into the corporation. In the first merger, which was conditioned upon the
simultaneous consummation of the second merger, the partnership was merged into
the operating partnership, a wholly-owned subsidiary of the corporation, and the
general partner interest in the partnership was cancelled. In addition, the
units of limited partnership held by the unitholders were converted into 73% of
the common stock of the corporation. In the second merger, the general partner
was merged into the corporation and the outstanding equity interests of the
general partner were converted into 26% of our common stock and 634,566 shares
of special voting stock.
As a result of the conversion, the partnership's outstanding units were
converted on a one-for-one basis into 46,323,300 shares of common stock.
Additionally, the equity interests in the general partner were converted into
16,498,709 shares of common stock and 634,566 shares of special voting stock.
The special voting stock is convertible into common stock at the option of the
holder on a one-for-one basis and is entitled to receive the same dividends as
common stock. The special voting stock is included in the denominator in
computing basic and diluted earnings per share.
Furthermore, in order to qualify as a REIT, some of the partnership's
assets and associated liabilities related to the manufacturing operations and
harvesting activities, along with some higher and better use lands, were
transferred to one of several corporations, collectively referred to as the
unconsolidated subsidiaries. Following the transfers, the corporation is
entitled to approximately 99% of the economics of the unconsolidated
subsidiaries through a combination of preferred stock and nonvoting common
stock. The remaining approximate 1% of the economics and 100% voting control of
the unconsolidated subsidiaries are owned by four individuals who are also
officers of the corporation.
The accompanying unaudited pro forma condensed consolidated financial
statements have been prepared based upon the corporation consolidating with the
operating partnership and Plum Creek Manufacturing. The basis for the
consolidation is that the corporation, or a wholly-owned subsidiary thereof, is
the general partner of the operating partnership and Plum Creek Manufacturing
and has control over the operating partnership and Plum Creek Manufacturing. The
unconsolidated subsidiaries are not consolidated with the corporation because
the corporation neither directly nor indirectly has any
28
<PAGE> 32
PLUM CREEK TIMBER COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)
voting rights with respect to the unconsolidated subsidiaries. The corporation's
nonvoting common stock investment in the unconsolidated subsidiaries was
accounted for using the equity method of accounting in accordance with APB No.
18, "The Equity Method of Accounting for Investments in Common Stock." The basis
for using the equity method is that the corporation receives substantially all
of the economic benefit from the unconsolidated subsidiaries. The corporation's
preferred stock investment in the unconsolidated subsidiaries was accounted for
using the cost method of accounting. Additionally, the footnotes to the pro
forma financial statements include summarized financial information of the
unconsolidated subsidiaries on a combined basis.
Conversion costs of $4,763 have been recorded by the partnership for the
year ended December 31, 1998, $1,748 for the six months ended June 30, 1998 and
$5,053 for the six months ended June 30, 1999. The conversion costs have been
eliminated from the unaudited pro forma condensed consolidated statements of
income and cash flows because they represent nonrecurring expenditures.
The exchange of units for common stock in connection with the merger of the
partnership into the operating partnership was accounted for as a reorganization
with amounts being recorded at historical cost. The general partner's sole
activity was related to its management and investment in the partnership and its
subsidiaries. As a result, the general partnership's assets were limited to, and
comprised of, its investment in the partnership, Plum Creek Manufacturing, and
Plum Creek Marketing, along with related cash and certain long-term incentive
award plan assets (which are held in a grantor trust formed by the general
partner). The exchange of the general partnership interest in the partnership
for common stock and special voting stock in connection with the second merger
was accounted for as a reorganization with amounts being recorded at historical
cost. The exchange of the general partner's interest in Plum Creek Manufacturing
and Plum Creek Marketing for common stock and special voting stock in connection
with the second merger was accounted for as a purchase of a minority interest in
accordance with APB No. 16. "Business Combinations" with amounts being recorded
at fair value. As a result of the combination of reorganization accounting and
purchase accounting for the minority interest, along with other related
adjustments, pro forma Stockholders' Equity as of June 30, 1999 was computed as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Limited Partners' Capital (historical at June 30, 1999)..... $377,284
General Partner's Capital (historical at June 30, 1999)..... (2,328)
--------
Partners' Capital (historical at June 30, 1999)............. $374,956
Purchase of minority interest (2% interest in Manufacturing
and 4% interest in Marketing)............................. 4,723
Recording of deferred tax assets relating to a change in tax
status.................................................... 9,233
--------
Pro Forma Stockholders' Equity.............................. $388,912
========
</TABLE>
The accompanying unaudited pro forma condensed consolidated financial
statements and related notes have not been audited. In management's opinion, all
adjustments considered necessary for the fair presentation of the results of
operations, financial position and cash flows for the unaudited pro forma
condensed consolidated financial statements have been reflected. Results for the
periods for which unaudited pro forma condensed consolidated statements are
provided are not necessarily indicative of those to be expected in future
periods. All significant affiliated transactions have been eliminated.
29
<PAGE> 33
PLUM CREEK TIMBER COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)
NOTE 2. PRO FORMA ADJUSTMENTS
(a) See Notes to Plum Creek Timber Company, L.P. Combined Financial
Statements for the basis of presentation of our Historical Financial Statements.
(b) Reflects the transfer of certain of the partnership's assets and
related liabilities of the manufacturing operations, harvesting activities, and
certain timberlands, to the unconsolidated subsidiaries. The net book value
associated with the transfer has been recorded under Investment in
Unconsolidated Subsidiaries and Preferred Stock.
As of the balance sheet date we had the following outstanding debt
obligations, which include the current portion of $26,950:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Senior Notes due 2007....................................... $113,700
First Mortgage Notes due 2007............................... 101,900
Senior Notes due 2009....................................... 150,000
Senior Notes due 2011....................................... 176,803
Senior Notes due 2016....................................... 200,000
Line of Credit.............................................. 218,400
--------
$960,803
========
</TABLE>
In connection with the formation of the unconsolidated subsidiaries, the
unconsolidated subsidiaries assumed $170,120 in total of the above indebtedness
of the corporation. The $170,120 indebtedness consists of the First Mortgage
Notes (which are collateralized by some of the manufacturing facilities), and
$68,220 face value of the Senior Notes due 2007.
(c) Represents related party notes receivable issued to various members of
management as part of the conversion. The proceeds from the notes were used by
management to purchase their approximate 1% economic ownership interest in the
unconsolidated subsidiaries. Management's purchase of their ownership interest
in the unconsolidated subsidiaries was accounted for as a capital contribution
on the books of the unconsolidated subsidiaries. Accordingly, the related party
notes receivable have been reclassified to Investment in Unconsolidated
Subsidiaries and Preferred Stock. The notes are due in 10 years, payable on
demand, and bear a fixed market rate of interest, which is payable annually.
Management does not anticipate repayment in the near term.
(d) Reflects the recording of the assets and liabilities associated with
deferred compensation. These assets (which are held in a grantor trust) and
liabilities were assumed as a result of the merger of the general partner into
the corporation.
(e) The exchange of the general partner's 2% general partner interest in
Plum Creek Manufacturing and 4% interest in Plum Creek Marketing for shares of
common stock is subject to purchase accounting in accordance with APB No. 16,
"Business Combinations." The basis step-up associated with this purchase is
computed based on the difference between the book value and fair value of the
general partner's minority interest in Plum Creek Manufacturing and Plum Creek
Marketing. As a result of
30
<PAGE> 34
PLUM CREEK TIMBER COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)
these purchases, the historical minority interest related to Plum Creek
Manufacturing and Plum Creek Marketing in the amount of $419 is eliminated.
The basis step-up of approximately $4,304 was allocated to Property, Plant
and Equipment of the unconsolidated subsidiaries, and as a result, has been
accordingly reflected in the corporation's Investment in Unconsolidated
Subsidiaries and Preferred Stock. The basis step-up will be depreciated over
approximately ten years. Current period depreciation expense of $426 has been
reflected in computing the combined pro forma equity earnings reported by the
corporation related to its investment in the unconsolidated subsidiaries for the
year ended December 31, 1998 and $213 for the six months ended June 30, 1998 and
1999.
(f) Represents the recording of a deferred tax asset as a result of
transferring the manufacturing operations and the harvesting activities from a
nontaxable partnership to the unconsolidated subsidiaries. The deferred tax
asset of $9,233 represents the tax effect of temporary differences (primarily
self insurance and employee benefit accruals) at the conversion date. In
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," a one-time adjustment was recorded for the net temporary
differences as of the conversion date. This deferred tax benefit has not been
included in the pro forma statements of income due to its nonrecurring nature,
and as a result, has been credited directly to Stockholders' Equity. No
adjustment has been made for the corporation's temporary differences (including
its share of the operating partnership's differences) because, as a REIT, the
corporation anticipates that it will not have to pay any significant
corporate-level tax.
Current period income tax (benefit) expense of ($10,809) has been reflected
in computing the combined pro forma equity in earnings related to its investment
in the unconsolidated subsidiaries for the year ended December 31, 1998,
($5,434) for the six months ended June 30, 1998 and $1,021 for the six months
ended June 30, 1999. The income tax provision was calculated using a combined
federal and state statutory tax rate of 40%.
(g) Reflects the reduction in revenues and expenses associated with the
manufacturing operations and costs of harvesting timber. These activities are
now conducted by the unconsolidated subsidiaries and are reported by the
corporation as Equity in Earnings (Loss) of Unconsolidated Subsidiaries and
Preferred Stock Dividends.
(h) Reflects an expense of $864 for the year ended December 31, 1998 and
$811 for the six months ended June 30, 1999 related to a management incentive
plan that was previously a cost incurred by the general partner. On a pro forma
basis, $524 of this expense for the year ended December 31, 1998 and $484 for
the six months ended June 30, 1999 has been allocated to the corporation and the
remainder has been reflected in computing the combined pro forma equity earnings
reported by the corporation related to its investment in the unconsolidated
subsidiaries. The allocation was based on an approximation of time anticipated
to be devoted by management to the various unconsolidated subsidiaries.
(i) Reflects the increase in interest expense as a result of increased
borrowings under the corporation's line of credit for conversion costs not paid
as of December 31, 1998, June 30, 1998 and June 30, 1999. The assumed
incremental interest rate is 6%.
(j) Reflects the elimination of REIT conversion costs that were expensed in
the partnership's historical financial statements. These costs are not reflected
in the pro forma income statements because
31
<PAGE> 35
PLUM CREEK TIMBER COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)
they represent nonrecurring expenditures. Total REIT conversion costs are
estimated to be $9,816. Amounts of $4,763 have been recorded by the partnership
for the year ended December 31, 1998, $1,748 for the six months ended June 30,
1998 and $5,053 for the six months ended June 30, 1999. Conversion costs include
estimated allowances for legal, investment advisory, fairness opinion, tax and
financial advisory, solicitation, printing, consent fees for lender waivers, and
other costs. Conversion costs are being expensed in the historical financial
statements in the period incurred.
(k) To eliminate the minority interest associated with the general
partner's ownership interest in Plum Creek Manufacturing and Plum Creek
Marketing.
(l) Represents the equity income (loss) and preferred stock dividends of
the unconsolidated subsidiaries. As a result of the conversion, the assets and
related liabilities of the manufacturing operations and harvesting activities
along with some higher and better use lands were transferred to the
unconsolidated subsidiaries. On a combined basis the unaudited pro forma
financial position of the unconsolidated subsidiaries as of June 30, 1999 is
summarized as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Current Assets.............................................. $ 99,802
Noncurrent Assets........................................... 236,521
Current Liabilities......................................... 55,983
Noncurrent Liabilities...................................... 157,912
</TABLE>
The current and noncurrent liabilities include $170,120 of indebtedness.
The $170,120 indebtedness consists of the First Mortgage Notes (which are
collateralized by some of the manufacturing facilities), and $68,220 face value
of the Senior Notes due 2007.
The unaudited pro forma results of operations of the unconsolidated
subsidiaries, on a combined basis, as of periods indicated are summarized as
follows:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1998 JUNE 30, 1999
----------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues......................... $662,357 $324,382 $353,017
Gross Profit..................... 672 465 17,448
Interest Expense................. 18,913 9,676 9,952
Income Tax Expense (Benefit)..... (10,809) (5,434) 1,021
Net Income (Loss)................ (8,780) (4,434) 5,249
</TABLE>
Gross profit includes depreciation and amortization expense of $25,416 for
the year ended December 31, 1998, $12,438 for the six months ended June 30,
1998, and $14,723 for the six months ended June 30, 1999. The Income Tax Expense
(Benefit) amount includes a tax benefit of $2,973 for the year ended December
31, 1998 and $1,486 for the six months ended June 30, 1998 and 1999, related to
the transfer of certain timberlands to the unconsolidated subsidiaries in
exchange for an installment note receivable. The related interest expense of
$7,433 for the year ended December 31, 1998 and $3,717 for the six months ended
June 30, 1998 and 1999, associated with the installment note has been
eliminated.
32
<PAGE> 36
PLUM CREEK TIMBER COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)
In accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock," the revenue of the corporation related to the sale
of timber to the unconsolidated subsidiaries will be deferred until the logs or
finished goods are sold outside the group of unconsolidated subsidiaries.
Therefore, all sales by the corporation to the unconsolidated subsidiaries are
also included in the revenue of the unconsolidated subsidiaries in the period in
which the timber (in the form of either whole logs, lumber, plywood or other
wood products) is sold outside the unconsolidated subsidiaries. Revenue related
to sales between the unconsolidated subsidiaries is eliminated in preparing the
summarized combined financial information of the unconsolidated subsidiaries.
Revenues reported by the corporation that were also included in the revenues of
the unconsolidated subsidiaries amounted to $195,812 for the year ended December
31, 1998, $104,637 for the six months ended June 30, 1998 and $101,350 for the
six months ended June 30, 1999.
(m) Reflects the elimination of the general partner's allocation as a
result of converting its general partner interest to a combination of common
stock and special voting stock. In exchange for its general partner interest the
general partner received 16,498,709 shares of common stock and 634,566 shares of
special voting stock which is convertible into common stock.
(n) Reflects the decrease in interest income as a result of decreased cash
in the amount of $864 for payment related to a management incentive plan for the
year ended December 31, 1998. See note (h).
(o) Reflects the effect of the transfer of the manufacturing operations and
harvesting activities to the unconsolidated subsidiaries.
(p) Reflects the effect of certain non-cash pro forma adjustments discussed
above on the unaudited pro forma condensed consolidated statement of cash flows.
(q) Represents management's 1% contribution to the unconsolidated
subsidiaries and the related effect on the unconsolidated subsidiaries' advance.
(r) Represents the portion of the Management Incentive Plan paid by the
unconsolidated subsidiaries.
33
<PAGE> 37
SELECTED FINANCIAL DATA
The following table sets forth, for the periods and at the dates indicated,
selected combined historical financial data for Plum Creek Timber Company, L.P.,
and selected unaudited pro forma condensed consolidated financial data for Plum
Creek Timber Company, Inc. after giving effect to the conversion of the
partnership, a publicly traded master limited partnership, into a publicly
traded real estate investment trust. The selected combined historical financial
data for each of the three years in the period ending December 31, 1998 are
derived from and should be read in conjunction with the audited financial
statements included elsewhere in this prospectus. The related combined
historical financial data for the six months ended June 30, 1998 and 1999 is
derived from the historical unaudited combined financial statements of the
partnership included elsewhere in this prospectus which, in the opinion of
management, include all adjustments, consisting of normal recurring adjustments,
necessary for a fair statement of the results for the unaudited interim periods.
Interim results may not be indicative of results that may be expected for any
other interim period or for the year as a whole. The selected unaudited pro
forma condensed consolidated financial data is derived from and should be read
in conjunction with the pro forma financial data contained elsewhere in this
prospectus. See "Unaudited Pro Forma Condensed Consolidated Financial
Statements." The pro forma results of operations are not necessarily indicative
of results of operations that will occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
PRO FORMA
1994 1995(1) 1996(2) 1997 1998(3) 1998(3)
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues................. $ 578,657 $ 585,074 $ 633,741 $ 725,571 $ 699,370 $ 232,825(4)
Operating Income......... 164,134 158,976 164,988 173,281 141,087 139,121
Interest
Expense -- Net......... (46,521) (45,763) (48,850) (59,251) (59,580) (40,971)
Other Income (Expense) --
Net.................... (4,477) (1,910) 108,852 (2,254) (5,554) 42
---------- ---------- ---------- ---------- ---------- ----------
Income Before Income
Taxes and Equity in
Earnings of
Unconsolidated
Subsidiaries and
Preferred Stock
Dividends.............. 113,136 111,303 224,990 111,776 75,953 98,192
Provision for Income
Taxes.................. 924 572 1,391 80 517 --
---------- ---------- ---------- ---------- ---------- ----------
Equity in Earnings (Loss)
of Unconsolidated
Subsidiaries and
Preferred Stock
Dividends(5)........... -- -- -- -- -- (8,692)
Net Income............... 112,212 110,731 223,599 111,696 75,436 89,500
General Partner
Interest............... 16,325 22,487 27,777 31,918 33,713 --
---------- ---------- ---------- ---------- ---------- ----------
Net Income Allocable to
Unit/Shareholders...... $ 95,887 $ 88,244 $ 195,822 $ 79,778 $ 41,723 $ 89,500
========== ========== ========== ========== ========== ==========
Net Income per
Unit/Share............. $ 2.36 $ 2.17 $ 4.71 $ 1.72 $ 0.90 $ 1.41
Cash Distributions
Declared per
Unit/Share............. 1.67 1.96 2.02 2.20 2.28 --
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
PRO FORMA
1998 1999 1999
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues................. $ 336,124 $ 362,570 $ 110,903(4)
Operating Income......... 68,926 83,116 64,643
Interest
Expense -- Net......... (29,109) (36,439) (26,612)
Other Income (Expense) --
Net.................... (2,259) (5,295) (23)
---------- ---------- ----------
Income Before Income
Taxes and Equity in
Earnings of
Unconsolidated
Subsidiaries and
Preferred Stock
Dividends.............. 37,558 41,382 38,008
Provision for Income
Taxes.................. 147 985 --
---------- ---------- ----------
Equity in Earnings (Loss)
of Unconsolidated
Subsidiaries and
Preferred Stock
Dividends(5)........... -- -- 5,196
Net Income............... 37,411 40,397 43,204
General Partner
Interest............... 16,599 17,162 --
---------- ---------- ----------
Net Income Allocable to
Unit/Shareholders...... $ 20,812 $ 23,235 $ 43,204
========== ========== ==========
Net Income per
Unit/Share............. $ 0.45 $ 0.50 $ 0.68
Cash Distributions
Declared per
Unit/Share............. 1.14 1.14 --
</TABLE>
34
<PAGE> 38
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
PRO FORMA
1994 1995(1) 1996(2) 1997 1998(3) 1998(3)
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW AND OTHER DATA
EBITDA(6)................ $ 218,277 $ 213,073 $ 221,933 $ 243,524 $ 210,374 $ 209,510
Depreciation, Depletion
and Amortization....... 54,143 54,097 56,945 70,243 69,287 44,301
Capital
Expenditures(7)........ 25,837 30,683 19,280 28,348 64,340 64,340
Net Cash Provided by
Operating Activities... 155,115 165,214 171,948 189,976 164,004 153,961
Net Cash Used in
Investing Activities... (20,907) (25,712) (419,241) (28,080) (65,834) (66,240)
Net Cash Provided by
(Used in) Financing
Activities............. (107,291) (112,840) 283,581 (150,407) (119,758) (105,410)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
PRO FORMA
1998 1999 1999
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
CASH FLOW AND OTHER DATA
EBITDA(6)................ $ 100,802 $ 118,104 $ 117,294
Depreciation, Depletion
and Amortization....... 31,876 34,988 20,480
Capital
Expenditures(7)........ 35,955 12,193 12,193
Net Cash Provided by
Operating Activities... 83,249 64,897 56,170
Net Cash Used in
Investing Activities... (35,645) (11,381) (12,810)
Net Cash Provided by
(Used in) Financing
Activities............. (48,845) (71,121) (56,745)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
-------------------------------------------------------------- -----------------------
PRO FORMA
1994 1995 1996 1997 1998 1999 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working Capital...................... $ 90,511 $ 111,541 $ 152,988 $ 158,262 $ 129,587 $ 115,353 $ 71,379
Total Assets......................... 826,220 826,086 1,336,434 1,300,897 1,438,243 1,399,925 1,212,587(8)
Total Debt........................... 544,400 531,400 780,800 763,400 961,008 960,803 790,683(8)
Partners' Capital.................... 222,977 233,868 491,648(9) 470,337 405,415 374,956 388,912
</TABLE>
- -------------------------
(1) Certain reclassifications have been made for comparability purposes and
have no impact on net income.
(2) Included in 1996 results of operations was a gain of $105,700 related to
the sale of 107,000 acres of timberland in northeast Washington and
northern Idaho and the impact of that sale from October 12, 1996. Results
also include the impact of the acquisition from Riverwood International
Corporation of 538,000 acres of timberland and related assets in Louisiana
and Arkansas from October 19, 1996.
(3) Results include the impact of the acquisition of 905,000 acres of
timberland in Maine from November 12, 1998.
(4) Reflects the reduction of revenues related to the manufacturing operations,
harvesting activities and some higher and better use lands that were
transferred to the unconsolidated subsidiaries.
(5) On a combined basis the unaudited pro forma summary financial information
of the unconsolidated subsidiaries as of periods indicated are summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Revenues.................................................... $662,357 $353,017
Depreciation and Amortization............................... 25,416 14,723
Operating Income............................................ 672 17,448
Interest Expense -- Net..................................... 18,913 9,952
</TABLE>
In accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock," our revenue related to the sale of timber to
our unconsolidated subsidiaries will be deferred until the logs or finished
goods are sold outside the group of unconsolidated subsidiaries. Therefore,
all of our sales to the unconsolidated subsidiaries will also be included
in the revenue of the unconsolidated subsidiaries in the period in which
the timber, in the form of either whole logs, lumber, plywood or other wood
products, is sold outside the group of unconsolidated subsidiaries. Revenue
related to sales between the unconsolidated subsidiaries is eliminated in
preparing the summary combined financial information of the unconsolidated
subsidiaries. Our reported revenues that were also included in the revenues
of the unconsolidated subsidiaries amounted to $195,812 for the year ended
December 31, 1998 and $101,350 for the six months ended June 30, 1999.
35
<PAGE> 39
(6) EBITDA is defined as operating income before depreciation, depletion, and
amortization. Pro forma amounts include EBITDA from unconsolidated
subsidiaries. EBITDA for our segments excludes some unallocated items such
as corporate overhead expenses. EBITDA is provided because management
believes EBITDA provides useful information for evaluating our ability to
make cash distributions. EBITDA should not be construed as an alternative
to operating income (as an indicator of our operating performance) or as an
alternative to cash flows from operating activities (as a measure of
liquidity).
(7) Does not include $181,148 related to the Maine timberland acquisition in
1998 or $560,740 related to the Riverwood acquisition in 1996. Pro forma
amounts include capital expenditures of $52,015 related to the
unconsolidated subsidiaries for the year ended December 31, 1998 and
$11,844 for the six months ended June 30, 1999.
(8) Reflects the transfer of certain assets and liabilities related to the
manufacturing operations, harvesting activities and some higher and better
use lands to the unconsolidated subsidiaries. Pro forma total assets would
be $1,426,482 and total debt would be $960,803 at June 30, 1999, if the
unconsolidated subsidiaries were included as if consolidated with the
corporation for financial reporting purposes.
(9) The partnership issued 5.7 million units of limited partnership during 1996
for net proceeds of $144,297.
36
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and the results of our operations together with our financial
statements and the notes to those financial statements included in this
prospectus. When we refer to the "corporation" we mean Plum Creek Timber
Company, Inc. and its consolidated subsidiaries.
OVERVIEW
REIT CONVERSION. On June 8, 1998, Plum Creek Timber Company, L.P. announced
that the board of directors of its general partner had authorized the
partnership to seek approval from its unitholders to convert its structure from
a publicly traded master limited partnership to a REIT. On April 19, 1999, the
unitholders approved this conversion, and on July 1, 1999, the conversion was
completed. As a result of the conversion and in order to qualify for tax
purposes as a REIT, some of the partnership's assets and associated liabilities
related to manufacturing operations, harvesting activities and some higher and
better use lands were transferred to several unconsolidated corporate
subsidiaries. Each of our unconsolidated subsidiaries is a corporation subject
to federal and state income tax. The corporation is entitled to approximately
99% of the economics of these unconsolidated subsidiaries through a combination
of nonvoting common stock and preferred stock interests. In order to comply with
REIT qualification rules, the remaining approximate 1% of the economics and 100%
of the voting control of these unconsolidated subsidiaries are owned by four
members of our senior management.
FINANCIAL REPORTING IMPACT. As a result of the above described structural
changes, the financial reporting under the REIT structure is different than the
historical financial reporting by the partnership. Summarized below are the
major items that are reported differently under the REIT structure:
Revenues. The corporation owns and manages the timberlands and sells timber
pursuant to timber cutting contracts. In order to meet REIT income qualification
tests under the Internal Revenue Code, the corporation has entered into timber
cutting contracts with the unconsolidated subsidiaries, and, unlike the
partnership, the corporation does not recognize revenue from the harvesting and
delivery of logs. Therefore, the corporation's revenue consists primarily of
proceeds from timber cutting contracts, some qualified land sales and other
miscellaneous real estate related income. In addition, the consolidated
financial statements of the corporation do not include the revenues associated
with the manufacturing operations, primarily lumber, plywood and medium density
fiberboard sales, and some higher and better use land sales.
Costs and Expenses. The corporation's cost of goods sold and selling,
general and administrative expenses do not include the expenses associated with
the manufacturing operations, harvesting activities and some higher and better
use land sales.
Interest Expense. The corporation's interest expense does not include the
interest expense associated with approximately $170 million of debt that was
transferred to the unconsolidated subsidiaries.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries and Preferred
Stock Dividends. Approximately 99% of the net earnings or loss from the
manufacturing operations, harvesting activities and some higher and better use
land sale activities are reflected in the corporation's net income through a
single line item titled "Equity in Earnings (Loss) of Unconsolidated
Subsidiaries and Preferred Stock Dividends."
Net Income. The corporation's net income is computed similarly to the
partnership's historical net income with one exception. The exception relates to
the ongoing income tax impact associated with the operations that were
transferred to unconsolidated subsidiaries. Since our manufacturing operations,
37
<PAGE> 41
harvesting activities and some higher and better use land sales are now
conducted through unconsolidated subsidiaries, the corporation's share of the
unconsolidated subsidiaries' earnings are net of the related income tax expense
or benefit. For example, generally in a year in which the unconsolidated
subsidiaries report a consolidated loss, the corporation's net income will be
favorably impacted by its share of the unconsolidated subsidiaries' income tax
benefit. Similarly, in a year in which the unconsolidated subsidiaries report
consolidated income, the corporation's net income will be reduced by its share
of the unconsolidated subsidiaries' income tax expense.
Earnings Per Share. In general, the corporation computes its earnings per
share by dividing its net income by the weighted-average number of shares
outstanding, which include the 17,133,275 shares that were issued to the
partnership's general partner in the conversion. The partnership had
historically computed net income per unit by dividing the partnership's net
income available to unitholders by the weighted-average number of limited
partner units outstanding. Net income available to unitholders was equal to the
partnership's net income less the income allocated to the general partner, which
consisted of an incentive distribution allocation and 2% of earnings. For
example, in 1998 the general partner was allocated 45% of net income and
received 25.5% of distributions made by the partnership. Therefore, for any
given level of net income, earnings per share reported by the corporation may be
different than the per unit amounts historically reported by the partnership.
Assets and Liabilities. The corporation's balance sheet does not separately
reflect the assets and liabilities associated with the manufacturing operations,
harvesting activities and some higher and better use lands. Instead, the book
value net of related liabilities for these assets and operations is reflected in
the corporation's nonvoting common stock and preferred stock investments in the
unconsolidated subsidiaries.
Footnotes. The footnotes to the corporation's financial statements include
summarized financial information for the unconsolidated subsidiaries on a
combined basis, including revenues, gross profit, interest expense, income tax
expense (benefit) and net income (loss).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS. The
corporation's period by period comparison of operating results is similar to the
analysis provided by the partnership. The analysis is by business segment and
incorporates the operations of both the corporation and the unconsolidated
subsidiaries. The corporation continues to have the same five reportable
segments as did the partnership.
As used in this prospectus, "Northern Resources Segment" refers to our
combined timber operations in the Northwest and Northeastern United States.
"Southern Resources Segment" refers to our timber operations in the Southern
United States. "Lumber Segment" refers to our combined lumber facilities. "Panel
Segment" refers to our combined plywood and medium density fiberboard
facilities. "Land Sales Segment" refers to our higher and better use land sales.
"Other" refers to our southern plywood facility which was closed in 1998 and our
northwest chip facility which was sold in 1998.
EVENTS AND TRENDS AFFECTING OPERATING RESULTS
MARKET FORCES. The demand for logs and manufactured wood products depends
upon international and domestic market conditions, the value of the United
States dollar in foreign exchange markets, competition, the availability of
substitute products and other factors. In particular, the demand for logs,
lumber, plywood and medium density fiberboard is affected by new residential and
industrial construction, and repair and remodel activity. These activities are
subject to fluctuations due to changes in economic conditions, tariffs, interest
rates, population growth and other economic, demographic and environmental
factors. Additionally, the demand for logs is impacted by the demand for wood
chips in the pulp and paper markets.
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<PAGE> 42
CURRENT MARKET CONDITIONS. Throughout 1998 there was an excess supply of
logs and lumber in the United States market due to economic weakness in Asia.
The supply of logs in the Cascade Region increased significantly during 1998 due
to both the re-direction of export quality logs to the domestic market and an
inflow of logs from British Columbia. As a result, prices for our domestic logs
in the Cascade Region decreased in 1998 by approximately 13% from 1997 levels.
Prices for domestic logs in the Cascade Region for the first six months of 1999
improved by approximately 13% over 1998 prices, primarily due to strong lumber
markets and weather-related harvesting curtailments. Prices for domestic logs in
the Rocky Mountain Region declined modestly in 1998 compared to 1997 prices,
primarily as a result of weak lumber markets and an excess supply of logs.
Despite improving lumber and plywood markets, prices for domestic logs in the
Rocky Mountain Region have remained flat during the first six months of 1999,
primarily due to a balance of supply of and demand for logs throughout the
region as a result of favorable harvesting conditions. Pulp log and chip prices
in the Northwest remained weak during 1998 due to a world-wide excess supply of
pulp and paper. Northwest pulp log and chip prices held steady during the first
six months of 1999, as did prices for sawlogs and pulp logs in the Northeast
Region.
Sawlog prices in the Southern Region in 1998 were generally comparable to
1997. However, prices during the second half of 1998 were under downward
pressure due to weak lumber prices and an excess supply of logs. Prices weakened
further during the first six months of 1999 due to an excess supply of logs as a
result of unusually favorable harvesting conditions. Pulp log prices in the
Southern Region improved slightly in 1998 compared to 1997, primarily due to log
supply shortages in the first half of the year as a result of weather-related
harvesting curtailments. Prices for pulp logs in the Southern Region for the
first six months of 1999 declined slightly compared to 1998 prices due to an
abundant supply of logs as a result of favorable harvesting conditions.
Export log prices for the Cascade Region decreased in 1998 by approximately
16% from 1997 levels, primarily due to continued economic weakness in Asia.
Demand for export logs during 1998 remained weak due to lower Japanese housing
starts, estimated to be 1.2 million in 1998 compared to 1.4 million in 1997,
high unemployment, weakness in the Japanese yen, and low Japanese consumer
confidence. Export log prices during the first six months of 1999 generally
remained weak.
Industry composite indices for commodity lumber prices were 16% lower in
1998 than in 1997, primarily due to the worldwide excess supply of lumber.
Demand for lumber remained extremely strong during 1998 due to a robust United
States economy, low interest rates, healthy job growth and strong consumer
confidence. Both housing starts and new home sales in 1998 were approximately
10% above 1997 figures. However, due to weak Asian markets, the supply of lumber
in the United States increased. The increased supply was primarily due to the
re-direction of lumber previously sold in Japan and increased substitution of
engineered wood products. Furthermore, lumber prices in the Southern United
States have experienced greater downward pressure due to increased substitution
of Western species and engineered wood products. Industry composite indices for
commodity lumber prices for the first six months of 1999 improved by
approximately 15% over 1998 indices. This price improvement is primarily due to
the strong United States economy, which has resulted in a 7% increase in housing
starts during the first six months of 1999 compared to the same period in the
prior year, low field inventories and improving foreign markets. Lumber prices
in the Southern United States during the first six months of 1999 have only
increased slightly. Southern lumber price improvement has been limited because a
smaller percentage of Southern Yellow Pine as compared to Western species is
consumed in the housing sector and because of the continued substitution of
engineered wood products. Board prices in the repair and remodel markets
declined by over 10% in 1998 from 1997 levels. The price decline was primarily
due to increased imports from European producers, as well as increased domestic
production as a result of a shift in production from dimension lumber to boards.
Imports of European lumber increased by approximately 300% in 1998 over 1997
volumes, to approximately 4% of the United States board market.
39
<PAGE> 43
Board prices during the first six months of 1999 improved by approximately 5%
over 1998 prices, primarily due to strong repair and remodeling activity as a
result of the healthy United States economy. During 1999, European producers
continued to supply approximately 4% of the United States board market.
Industry composite indices for commodity plywood prices in 1998 were
comparable to 1997 prices. Commodity plywood prices were generally under
downward pressure during the first half of 1998 due to continued oriented strand
board capacity expansion. Oriented strand board competes with plywood in some
applications and continues to capture a significant share of the North American
structural panel market, estimated at approximately 49% in 1998. However,
commodity plywood prices improved during the second half of 1998, primarily due
to strong building activity, rising oriented strand board prices and recent
plywood plant closures. Industry composite indices for commodity plywood prices
for the first six months of 1999 improved by approximately 11% over 1998
indices. The price improvement is primarily due to strong building activity, low
field inventories, rising oriented strand board prices and declining plywood
production. Industrial and specialty grade plywood prices remained strong during
1998 and strengthened further during the first six months of 1999, primarily due
to strong consumer spending and rising commodity plywood prices.
Medium density fiberboard prices in 1998 were comparable to 1997 prices.
North American demand for medium density fiberboard continues to grow
approximately 10% per year, primarily due to increased acceptance and expanded
applications. The largest growth is occurring in applications that require
high-quality panels, such as kitchen cabinets and moldings. However, despite
improving demand, prices were generally under downward pressure during the
fourth quarter of 1998, due to increased supply resulting from three new mills
beginning operations in 1998, better operating performance by start-up mills and
the re-direction to North American markets of medium density fiberboard
previously sold in Asian markets. Medium density fiberboard prices generally
held steady during the first six months of 1999, as the continued increase in
demand was offset by higher production.
COMPARABILITY OF FINANCIAL STATEMENT PERIODS. On November 12, 1998, we
acquired 905,000 acres in Maine. On October 18, 1996, we acquired 529,000 acres,
plus approximately 9,000 lease acres in Louisiana and Arkansas. We may also,
from time to time, sell timberlands and facilities if attractive opportunities
arise. For example, on October 11, 1996, we sold 107,000 acres in northeast
Washington and northern Idaho, along with a sawmill near Colville, Idaho, to
Stimson Lumber Company for approximately $141.9 million, plus $8.7 million for
working capital. In 1996, these assets generated $61.0 million of revenues and
$15.7 million of operating income. In 1995, these assets generated $67.8 million
in revenues and $14.6 million in operating income. Accordingly, the
comparability of periods covered by our financial statements is, and in the
future may be, affected by the impact of acquisitions and divestitures.
HARVEST PLANS. We determine our harvest plans based on a number of factors,
including the economic maturity of each harvest area, timber growth rates,
market demands for various species or log sizes, and environmental
considerations.
Harvest levels in the Rocky Mountain Region averaged approximately 365
million board feet in 1998 and 1997. We expect harvest levels in 1999 and 2000
to decline slightly compared to 1998. By the year 2000, we anticipate that we
will have nearly completed the conversion of slower growing forests to younger,
more productive stands in the Rocky Mountain Region, at which time we anticipate
a moderate reduction in the region's harvest levels. Harvest levels in the
Cascade Region averaged 150 million board feet during 1995 to 1997 before
declining approximately 10% in 1998. Beginning in 1999, we expect harvest levels
in the Cascade Region to decline for the foreseeable future as the conversion of
slower growing forests to younger, more productive stands is completed. We
anticipate the harvest level in the
40
<PAGE> 44
Northeast Region, including sawlogs and pulpwood, to be approximately one
million tons in 1999 and remain stable for the foreseeable future.
Harvest levels in the Southern Region, including sawlogs and pulpwood, were
approximately 800 thousand cunits during 1997 and declined to 760 thousand
cunits during 1998. We expect the 1999 harvest volume to approximate the 1998
volume. Harvest levels for the years 2000 to 2003 will be moderately lower
compared to 1998, as we complete both the conversion of mature second growth
pine timberlands into intensively managed pine plantations and our accelerated
thinning operations, which are intended to improve growth rates. In subsequent
years, we expect harvest levels in the Southern Region to gradually increase as
we benefit from faster growing, intensively managed plantations.
Harvest plans are influenced by projections of our timber inventory,
demand, timber supply from other sources, availability of legal access and other
factors that may be outside of our control. Accordingly, actual harvest levels
may vary materially. We believe that our harvest plans are sufficiently flexible
to permit modification in response to short-term fluctuations in the markets for
logs and lumber.
STONE CONTAINER CORPORATION. A substantial portion of our wood chips
derived from manufacturing lumber and plywood in the Rocky Mountain Region are
sold to Stone Container Corporation under a long-term supply agreement. This
agreement generally provides for market-based pricing for wood chips subject to
minimum and maximum prices until December 31, 1999. If market prices for chips
remain at current levels, which are below the minimum level set by the supply
agreement, annual operating income would be reduced by approximately $11 million
starting in the year 2000. The actual impact of the phase-out of the minimum
pricing provision, however, cannot be accurately predicted, and will depend on
future market prices.
HISTORICAL RESULTS OF OPERATIONS
SIX MONTHS 1999 COMPARED TO SIX MONTHS 1998
The following table compares operating income by segment for the six months
ended June 30:
OPERATING INCOME BY SEGMENT
(UNAUDITED IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1999 1998
------- -------
<S> <C> <C>
Northern Resources.......................................... $40,213 $29,114
Southern Resources.......................................... 15,017 27,775
Lumber...................................................... 10,280 4,351
Panel....................................................... 13,018 5,202
Land Sales.................................................. 6,159 7,107
Other....................................................... -- 195
------- -------
Total Segment Operating Income.............................. 84,687 73,744
Other Costs & Eliminations.................................. (1,571) (4,818)
------- -------
Total....................................................... $83,116 $68,926
======= =======
</TABLE>
The accounting policies of the segments are substantially the same as those
described in Note 1 to Notes to Combined Financial Statements of Plum Creek
Timber Company, L.P. For segment purposes, however, inventories are stated at
the lower of average cost or market on the first-in, first-out ("FIFO")
41
<PAGE> 45
method. Therefore, the difference in computing cost of goods sold under the last
in, first out ("LIFO") and FIFO methods is included in "Other Costs &
Eliminations."
NORTHERN RESOURCES SEGMENT. Revenues increased by $28.0 million, or 28%, to
$128.2 million in the first six months of 1999, compared to $100.2 million for
the same period in 1998. This increase was primarily due to $20.5 million of
additional revenues as a result of our Maine timberland acquisition and a 16%
increase in harvest levels in the Rocky Mountain Region, offset in part by lower
harvest levels in the Cascade Region. Harvest levels in the Rocky Mountain
Region during the first six months of 1999 increased over harvest levels during
the first six months of 1998 primarily due to favorable weather conditions,
which allowed us to harvest some volume planned for later in the year.
Northern Resources Segment operating income was 31% as a percentage of its
revenues in the first six months of 1999 and 29% in the first six months of
1998. Northern Resources Segment costs and expenses increased by $16.9 million,
or 24%, to $88.0 million in 1999, compared to $71.1 million in 1998. This
increase was primarily due to $15.7 million of additional costs as a result of
our Maine timberland acquisition and increased harvest levels in the Rocky
Mountain Region, offset in part by lower harvest levels in the Cascade Region.
SOUTHERN RESOURCES SEGMENT. Revenues decreased by $11.6 million, or 20%, to
$46.5 million in the first six months of 1999, compared to $58.1 million for the
same period in 1998. This decrease was primarily due to a 20% decline in sawlog
prices, a 9% decline in pulpwood prices and a 7% decline in sawlog sales volume.
The sawlog and pulpwood price declines were primarily due to favorable
harvesting conditions and the harvesting of smaller logs. Weather conditions
during the first six months of 1999 were unusually dry compared to unusually wet
weather during the first six months of 1998. Additionally, by the end of 1998,
we had nearly completed the conversion of mature second growth pine timberlands
into intensively managed pine plantations and, as a result, average log size had
decreased. The sawlog sales volume decline was primarily due to a reduction in
the internal usage of logs and an abundant supply of logs throughout the region.
Internal usage declined due to the July 1998 closure of the Joyce, Louisiana
plywood facility and the three-month delayed start-up of the new Joyce,
Louisiana sawmill.
Southern Resources Segment operating income was 32% as a percentage of its
revenues in the first six months of 1999, and 48% in the first six months of
1998. This decline is primarily due to lower sawlog and pulpwood prices and
higher log and haul costs. Southern Resources Segment costs and expenses
increased by $1.1 million, or 4%, to $31.5 million in 1999, compared to $30.3
million in 1998, primarily due to a slight increase in log and haul costs.
LUMBER SEGMENT. Revenues increased by $30.9 million, or 23%, to $168.0
million in the first six months of 1999, compared to $137.1 million for the same
period in 1998. Excluding the incremental increase in revenues of $14.7 million
related to the May 1998 acquisition of the Meridian, Idaho remanufacturing
facility, revenues increased by $16.2 million. This increase was primarily due
to a 13% increase in lumber sales volume, offset in part by a 7% decline in
Southern lumber prices. Lumber sales volume increased primarily due to the
nearly 45% increase in production volumes at our Joyce, Louisiana sawmill and
the nearly 20% increase in production volumes at our Pablo, Montana sawmill as a
result of mill reconfiguration projects. Southern lumber prices for the first
six months of 1999 decreased compared to prices for the first six months of
1998, primarily due to a lower percentage of higher-value, wide-dimension lumber
in our sales mix, as a result of the lower volume of large diameter sawlogs
harvested on our timberlands.
Lumber Segment operating income was approximately 6% as a percentage of its
revenues in the first six months of 1999 and 3% in the first six months of 1998.
The increase was primarily due to slightly higher Northwest lumber prices,
higher lumber sales volume and lower log costs. Lumber Segment costs and
expenses increased by $25.0 million, or 19%, to $157.8 million in the second
quarter of 1999,
42
<PAGE> 46
compared to $132.8 million in the second quarter of 1998. Excluding the
incremental increase in expense of $13.8 million related to the May 1998
acquisition of the Meridian, Idaho remanufacturing facility, expenses increased
by $11.2 million. This increase of $11.2 million is primarily due to an increase
in lumber sales volume, offset in part by lower log costs in our Southern
Region.
PANEL SEGMENT. Revenues increased by $6.4 million, or 8% to $84.6 million
in the first six months of 1999, compared to $78.2 million for the same period
in 1998. This increase was primarily due to an 11% increase in plywood prices.
Plywood prices rose steadily during the first six months of 1999. The industry
composite indices for commodity plywood prices during the first six months of
1999 were 17% above the indices during the first six months of 1998. The price
improvement was primarily due to strong building activity in the United States,
rising oriented strand board prices and declining plywood production by other
manufacturers. Industrial and specialty grade plywood prices also were higher
during the first six months of 1999 compared to the first six months of 1998,
primarily due to rising commodity plywood prices and strong industrial sales
activity.
Panel Segment operating income was 15% as a percentage of its revenues in
the first six months of 1999 and 7% in the first six months of 1998. The
increase in operating income was primarily due to higher plywood prices and
slightly lower medium density fiberboard and plywood raw material costs. Panel
Segment costs and expenses decreased by $1.3 million to $71.6 million in the
second quarter of 1999, compared to $73.0 million in the second quarter of 1998.
This decrease was primarily due to a 10% decrease in medium density fiberboard
raw material costs and a 3% decrease in plywood raw material costs.
LAND SALES SEGMENT. Revenues decreased by $1.3 million, or 15%, to $7.1
million in the first six months of 1999, compared to $8.4 million in the first
six months of 1998. Land Sales Segment operating income was 87% as a percentage
of its revenues in the first six months of 1999 and 85% in the first six months
of 1998. Land Sales Segment costs and expenses decreased by $0.4 million, or 3%
to $0.9 million in the first six months of 1999, compared to $1.3 million in the
first six months of 1998.
Other Costs and Eliminations, which consists of corporate overhead,
intercompany log profit elimination and the change in the LIFO reserve,
decreased operating income by $1.6 million in the first six months of 1999,
compared to $4.8 million in the first six months of 1998. The change in Other
Costs and Eliminations of $3.2 million was primarily due to lower corporate
overhead, offset in part by a decline in the amount of intercompany log profit
recognized. Corporate overhead decreased by $8.5 million during the first six
months of 1999 compared to the first six months of 1998, primarily due to a
second quarter 1998 long-term incentive plan expense of $8.8 million. Deferred
intercompany log profit of $8.3 million was recognized during the first six
months of 1999 compared to $12.3 million during the first six months of 1998.
This decrease of $4.0 million is primarily due to the build-up of log
inventories in the Southern Resources Segment in the fourth quarter of 1997 and
the subsequent processing of these logs in the first quarter of 1998. Similar
log inventories were not built-up during the fourth quarter of 1998. The profit
on intercompany log sales is deferred until the lumber and plywood manufacturing
facilities convert existing log inventories into finished products and sell them
to third parties, at which time intercompany profit is recognized.
Interest expense increased by $7.4 million, or 25%, to $37.0 million, in
the first six months of 1999, compared to $29.6 million in the first six months
of 1998. This increase was primarily due to the issuance of $177 million of
senior notes in the fourth quarter of 1998 to finance our Maine timberland
acquisition.
Reorganization Costs of $5.1 million for the first six months of 1999 were
costs associated with our conversion into a REIT. See Note 2 of Notes to
Combined Financial Statements of Plum Creek Timber Company, L.P. Reorganization
Costs consisted of fees for legal, investment banking and tax consultants, as
well as printing and other related costs. Reorganization Costs were expensed as
incurred.
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<PAGE> 47
The income allocated to the former general partner of the partnership
increased by $0.6 million to $17.2 million in the first six months of 1999,
compared to $16.6 million for the same period in 1998. The increase was due to
the increase in the distribution paid to limited partners, which totaled $1.14
per unit during the first six months of 1999, compared to $1.12 per unit during
the first six months of 1998.
RESULTS OF FISCAL YEARS ENDED 1998, 1997, 1996
The following table compares operating income by segment for the years
ended December 31:
OPERATING INCOME BY SEGMENT
(UNAUDITED IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Northern Resources............................. $ 73,715 $ 98,792 $119,767
Southern Resources............................. 53,568 54,313 8,149
Lumber......................................... 2,599 34,667 18,596
Panel.......................................... 14,360 8,462 5,305
Land Sales..................................... 26,598 13,963 35,434
Other.......................................... (2,247) (1,152) (1,682)
-------- -------- --------
Total Segment Operating Income................. 168,593 209,045 185,569
Other Costs & Eliminations..................... (27,506) (35,764) (20,581)
-------- -------- --------
Total................................ $141,087 $173,281 $164,988
======== ======== ========
</TABLE>
The accounting policies of the segments are substantially the same as those
described in Note 1 to Notes to Combined Financial Statements of Plum Creek
Timber Company, L.P. For segment purposes, however, inventories are stated at
the lower of average cost or market on the FIFO method. Therefore, the
difference in computing cost of goods sold under the LIFO and FIFO methods is
included in "Other Costs & Eliminations."
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
NORTHERN RESOURCES SEGMENT. Revenues decreased by $23.6 million, or 9%, to
$250.3 million in 1998, compared to $273.9 million in 1997. This decrease was
primarily due to declining harvest levels in the Cascade Region, lower domestic
log prices in the Rocky Mountain and Cascade Regions, lower export log prices
and the re-direction of export quality logs to the domestic market, offset in
part by $5.8 million of additional revenues as a result of the Maine timberland
acquisition. An approximate 15% planned decline in the sawlog harvest level in
the Cascade Region decreased revenue by approximately $13 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Events and Trends Affecting Operating Results -- Harvest Plans."
Rocky Mountain Region domestic log prices decreased by 4% and Cascade Region
domestic log prices decreased by 13%, compared to 1997, primarily as a result of
weak lumber markets and an excess supply of logs. Export prices decreased by
16%, primarily due to a decline in Japanese demand for logs.
Northern Resources Segment operating income was 29% as a percentage of its
revenues in 1998 and 36% in 1997. This decrease is primarily due to the decline
in domestic and export log prices and the re-direction of export quality logs to
the domestic market. Northern Resources Segment costs and expenses increased by
$1.5 million, or 1%, to $176.6 million in 1998, compared to $175.1 million in
1997. This increase was primarily due to $4.5 million of additional costs as a
result of the Maine timberland acquisition, offset in part by decreased
harvesting costs in the Cascade Region as a result of reduced harvest levels.
44
<PAGE> 48
SOUTHERN RESOURCES SEGMENT. Revenues decreased by $0.7 million to $118.4
million in 1998, compared to $119.1 million in 1997. This decrease is primarily
due to a 7% decline in Southern domestic log sales volume, offset in part by
slightly higher Southern pulp log prices and increased in-woods chipping
operations.
Southern Resources Segment operating income was 45% as a percentage of its
revenues in 1998 and 46% in 1997. Southern Resources Segment costs and expenses
remained flat year to year, with $64.8 million of costs and expenses in each of
1998 and 1997.
LUMBER SEGMENT. Revenues decreased by $13.2 million, or 4%, to $281.6
million in 1998, compared to $294.8 million in 1997. Excluding revenues
associated with the May 1998 Meridian acquisition, 1998 revenues decreased by
$29.4 million, or 10%, to $265.4 million, compared to $294.8 in 1997. This
decrease was primarily due to lower Northwest and Southern lumber prices, offset
in part by increased Southern lumber sales volume. Northwest lumber prices
decreased by 12% and Southern lumber prices decreased by 13%, compared to 1997,
primarily due to the worldwide overproduction of lumber resulting from weak
Asian demand. Southern lumber sales volume increased by 4% compared to 1997,
primarily due to the processing of additional logs following the July 1998
Southern plywood facility closure.
Lumber Segment operating income was 1% as a percentage of its revenues in
1998 and 12% in 1997. This decrease is primarily due to the severe decline in
Northwest and Southern lumber prices. Lumber Segment costs and expenses
increased by $18.8 million, or 7%, to $279.0 million in 1998 compared to $260.2
million in 1997. This increase was primarily due to $15.7 million of additional
operating costs related to the Meridian remanufacturing plant acquisition and
increased Southern lumber sales volume.
PANEL SEGMENT. Revenues increased by $5.0 million, or 3%, to $154.6 million
in 1998, compared to $149.6 million in 1997. This increase was primarily due to
increased medium density fiberboard and plywood sales volume and higher plywood
prices. Medium density fiberboard sales volume increased by 7% compared to 1997,
primarily due to increased production as a result of operational improvements.
Plywood sales volume increased by 2% compared to 1997, primarily due to
additional shifts and improved fiber recovery. Plywood prices increased by 2%
compared to 1997, primarily due to a higher value product mix.
Panel Segment operating income was 9% as a percentage of its revenues in
1998 and 6% in 1997, primarily due to lower medium density fiberboard raw
material costs and higher plywood prices. Panel Segment costs and expenses
decreased by $0.9 million, or 1%, to $140.3 million in 1998, compared to $141.2
million in 1997. This decrease was primarily due to reduced medium density
fiberboard raw material costs, offset in part by increased medium density
fiberboard and plywood sales volume.
LAND SALES SEGMENT. Revenues increased by $14.9 million, or 83%, to $32.8
million in 1998, compared to $17.9 million in 1997. This increase was primarily
due to two large land sales consummated in the fourth quarter of 1998 for total
proceeds of $17.7 million.
Land Sales Segment operating income was 81% as a percentage of its revenues
in 1998 and 78% in 1997. Land Sales Segment costs and expenses increased by $2.3
million, or 59%, to $6.2 million in 1998, compared to $3.9 million in 1997,
primarily due to additional sales.
Other Costs and Eliminations, which consists of corporate overhead,
intercompany log profit elimination and the change in the LIFO reserve,
decreased operating income by $27.5 million in 1998, compared to $35.8 million
in 1997. The change in Other Costs and Eliminations of $8.3 million is primarily
due to a decrease in the deferral of intercompany log profit elimination, offset
in part by increased corporate overhead. The profit on intercompany log sales is
deferred until the lumber and plywood manufacturing facilities convert existing
log inventories into finished products and sell them to
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<PAGE> 49
third parties, at which time intercompany profit is recognized. During 1998,
intercompany log profit of $6.2 million was released while $7.8 million was
deferred during 1997. The increase in operating income due to intercompany log
profit is primarily due to the build-up of log inventories in Southern Resources
in the fourth quarter 1997 and the subsequent processing of these logs in the
first quarter 1998 during weather-related harvest restrictions. Similar log
inventories were not built-up during the fourth quarter 1998. The decrease in
operating income due to corporate overhead is primarily due to achieving a fifth
and final target under our 1994 Long-Term Incentive Plan and Key Employee
Long-Term Incentive Plan in April 1998. The expense related to these plans was
approximately $13.3 million in 1998, compared to $7.8 million in 1997. A portion
of the increase was offset by lower incentive compensation accruals due to lower
earnings levels.
Reorganization costs of $4.8 million were costs associated with our
conversion to a REIT. See Note 2 of Notes to Combined Financial Statements of
Plum Creek Timber Company, L.P. Reorganization costs consisted of fees for
legal, investment banking and tax consultants, as well as printing and other
related costs. Reorganization costs were expensed as incurred.
The income allocated to the former general partner of the partnership
increased by $1.8 million to $33.7 million for 1998, compared to $31.9 million
for 1997, primarily due to higher quarterly distributions to unitholders. Net
income was allocated to the former general partner based on two percent of the
partnership's net income, adjusted for the former general partner's incentive
distribution, plus the incentive distribution. The former general partner's
incentive distribution was based on the number of outstanding units times a
percentage of the per unit distribution paid to limited partners, which totaled
$2.26 per unit in 1998, compared to $2.16 per unit in 1997.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
NORTHERN RESOURCES SEGMENT. Revenues decreased by $34.9 million, or 11%, to
$273.9 million in 1997, compared to $308.8 million in 1996. This decrease was
primarily due to a decline in Rocky Mountain Region log sales volume, lower
export sales volume, and a decrease in export log sales prices. Domestic log
sales volume in the Rocky Mountain Region decreased by 14% compared to 1996, as
a result of the October 1996 sale of 107,000 acres of timberlands. Export sales
volumes decreased by 17% primarily as a result of the re-direction of export
quality logs to the domestic market due to weak export markets. Export prices
decreased by 7% compared to 1996, due to decreased demand as a result of the
weakness in Japan's domestic economy and an increase in the global supply of
logs targeted toward the Japanese market.
Northern Resources Segment operating income was 36% as a percentage of its
revenues in 1997 and 39% in 1996. This decrease was primarily due to higher log
and haul costs in the Rocky Mountain Region and lower export log sales prices.
Northern Resources Segment costs and expenses decreased by $13.9 million, or 7%,
to $175.1 million in 1997, compared to $189.0 million in 1996. This decrease was
primarily due to the decline in Rocky Mountain Region log sales volume, offset
in part by increased log and haul costs in the Rocky Mountain Region. Rocky
Mountain Region log and haul costs increased by 8% as a result of more expensive
logging methods.
SOUTHERN RESOURCES SEGMENT. Revenues increased by $100.8 million to $119.1
million in 1997, compared to $18.3 million in 1996. This increase was due to the
October 1996 Southern Region acquisition. Prior to October 1996, we had no
operations in the South.
Southern Resources Segment operating income was 46% as a percentage of its
revenues in 1997 and 45% in 1996. Southern Resources Segment costs and expenses
increased by $54.7 million to $64.8 million in 1997, compared to $10.1 million
in 1996. This increase was due to the October 1996 Southern Region acquisition.
46
<PAGE> 50
LUMBER SEGMENT. Revenues increased by $55.5 million, or 23%, to $294.8
million in 1997, compared to $239.3 million in 1996. This increase was due to
additional revenues of $83.0 million from the Southern lumber facilities and
increased lumber sales prices, offset in part by lower lumber sales volumes and
decreased Northwest chip revenues. Lumber sales prices in the Northwest
increased by 3%, primarily due to strength in the United States housing market
and the reduction in supply of preferred western species. Northwest lumber sales
volume decreased by 15% compared to 1996, primarily due to the October 1996 sale
of the Arden sawmill in Colville, Washington. Wood chip sales volume decreased
compared to 1996 due to the sale of the Arden sawmill.
Lumber Segment operating income was 12% as a percentage of its revenues in
1997 and 8% in 1996. This increase was primarily due to higher Northwest lumber
prices and the Southern Region acquisition. Lumber Segment costs and expenses
increased by $39.5 million, or 18%, to $260.2 million in 1997, compared to
$220.7 million in 1996. This increase was primarily due to $72.8 million of
additional costs related to the Southern lumber facilities, offset in part by
lower Northwest lumber sales volumes.
PANEL SEGMENT. Revenues increased by $10.7 million, or 8%, to $149.6
million in 1997, compared to $138.9 million in 1996. This increase was primarily
due to higher plywood and medium density fiberboard sales volumes, offset in
part by lower medium density sales prices. Plywood sales volume in the Northwest
increased by 8% compared to 1996, primarily as a result of increased production
due to additional production shifts and capital improvements. Medium density
fiberboard sales volume increased by 13% primarily due to greater efficiencies
from high-energy refiners that were installed in the third quarter 1995. Medium
density fiberboard sales prices decreased by 6% primarily as a result of
industry capacity expansion and aggressive pricing by start-up mills.
Panel Segment operating income was 6% as a percentage of its revenues in
1997 and 4% in 1996. Panel Segment costs and expenses increased by $7.6 million,
or 6%, to $141.2 million in 1997, compared to $133.6 million in 1996. This
increase was primarily due to higher plywood and medium density fiberboard sales
volumes, offset in part by lower medium density fiberboard raw materials and
production costs.
LAND SALES SEGMENT. Revenues decreased by $24.4 million, or 58%, to $17.9
million in 1997, compared to $42.3 million in 1996. This decrease was the result
of 3,350 acres of "higher and better use" land being sold in 1997 compared to
sales of 21,600 acres in 1996.
Land Sales Segment operating income was 78% as a percentage of its revenues
in 1997 and 84% in 1996. Land Sales Segment costs and expenses decreased by $3.0
million, or 43%, to $3.9 million in 1997, compared to $6.9 million in 1996.
Other Costs and Eliminations, which consists of corporate overhead,
intercompany log profit elimination and the change in the LIFO reserve,
decreased operating income by $35.8 million in 1997, compared to $20.6 million
in 1996. The variance of $15.2 million was primarily due to an increase in both
corporate overhead and the deferral of intercompany profit. The increase in
corporate overhead is primarily due to expense resulting from the achievement of
a unit value target under our 1994 Long-Term Incentive Plan and Key Employee
Long-Term Incentive Plan during the third quarter 1997 and the addition of the
Southern Region. The increase in deferred intercompany log profit was a result
of increasing inventory levels in 1997. Mill log inventories levels in the
Southern Region increased as a result of anticipated weather-related harvesting
curtailments during the first quarter 1998 and, in the Northwest, due to
favorable harvesting conditions during the fourth quarter 1997. The profit on
intercompany log sales is deferred until the lumber and plywood manufacturing
facilities convert existing log inventories into finished products and sell them
to third parties, at which time intercompany profit is recognized. The
achievement of a unit value target under our Long-Term Incentive Plan and Key
Employee Long-Term Incentive Plan resulted in $7.8 million of expense in 1997,
the majority of which
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<PAGE> 51
was included in selling, general and administrative expenses, compared to an
expense of $3.9 million in 1996.
Interest expense increased by $10.3 million, or 21%, to $60.4 million in
1997, compared to $50.1 million in 1996, primarily due to the issuance of $200
million of senior notes in the fourth quarter 1996 related to the Southern
Region acquisition. Gain on disposition of assets in 1996 included $105.7
million related to the Newport asset sale.
The income allocated to the former general partner of the partnership
increased by $4.1 million during 1997 compared to 1996 due to higher quarterly
distributions to unitholders and the issuance of 5.7 million additional limited
partner units in the fourth quarter of 1996, offset in part by lower net income.
Net income was allocated to the former general partner based on two percent of
the partnership's net income, adjusted for the former general partner's
incentive distribution paid, plus the incentive distribution. The incentive
distribution is based on a percentage of the quarterly distribution paid which
totaled $2.16 per unit in 1997, compared to $2.00 per unit in 1996.
EXPORT SALES. Export log and finished product sales are denominated in
United States dollars and include markets in Pacific Rim countries, principally
Japan, and to Canada and Europe. Combined export revenues as a percentage of
total revenues were 5% in 1998, 9% in 1997 and 11% in 1996.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. Any programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in the computer shutting down or performing incorrect computations. As a result,
before December 31, 1999, computer systems and software used by many companies
may need to be upgraded to comply with "Year 2000" requirements.
During the first quarter of 1997, we adopted a Year 2000 plan to identify
and address both internal and external Year 2000 issues. Our Year 2000 plan
addresses the following:
- information technology systems;
- process control systems and embedded chips used in our manufacturing
operations; and
- key business relationships.
Pursuant to our plan, we completed a company-wide assessment of our information
technology systems in 1997 to determine the impact of the Year 2000 issue. We
completed most of the necessary revisions to our systems and processes by
year-end 1998. Testing and verification of our systems and processes for Year
2000 compliance will be completed prior to January 1, 2000.
OUR STATE OF READINESS
Over the last five years, we have replaced many of our business computer
systems in order to realize cost savings and process improvements. A majority of
these replacements, all of which are Year 2000 compliant, were completed prior
to the company-wide Year 2000 issue assessment. The related costs have been
capitalized. In 1999, we completed the replacement of our payroll and human
resources systems. To replace these systems, we spent approximately $300,000 in
1998 and approximately $110,000 in 1999. These costs have been capitalized.
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Our log accounting systems have required program modifications to achieve
Year 2000 readiness. The program modifications and testing was completed in June
1999 at an approximate cost of $28,000 for 1998 and an approximate cost of
$7,000 for 1999. Our information systems personnel performed all remediation
efforts, and the related costs were expensed as incurred.
During 1998, we completed an inventory of the process control systems and
embedded chips used in our manufacturing operations and we identified the
systems that could be subject to Year 2000 problems. The systems used in the
lumber and plywood operations require minimal changes, while the medium density
fiberboard systems will require the replacement of some process control
software. The modifications and testing of the manufacturing control systems
will be completed in 1999, at an approximate cost of $33,000 for 1998 and an
approximate cost of $132,000 for 1999. These costs will be expensed as incurred.
Currently, the modifications and testing of the manufacturing process control
systems are substantially complete.
As part of our Year 2000 plan, service providers, vendors, suppliers and
customers that are critical to our operations have been notified and steps are
being undertaken to determine their Year 2000 readiness through questionnaires,
interviews, and other available means. We will continue our efforts to determine
the readiness of our key business partners and the potential impacts on our
operations if key business partners are not Year 2000 compliant by year-end
1999.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
We rely on our key business partners for materials and services. If our
business partners fail to achieve Year 2000 compliance, our ability to operate
could be adversely impacted. However, the impact would be limited to the extent
that sufficient alternate supplies of materials or services are available.
We are also dependent upon our customers for sales and cash flow. Year 2000
interruptions in our customers' operations could result in reduced sales,
increased inventory or receivable levels, and cash flow reductions. While these
events are possible, our customer base is broad enough to minimize the effects
of individual occurrences.
CONTINGENCY PLANS
We are evaluating the need for contingency plans to mitigate possible
business disruptions. Contingency plans may include increasing raw materials
inventories, securing alternate sources of supply, or modifying production
schedules. Additionally, if we determine that key business partners may fail to
achieve Year 2000 readiness, we will develop appropriate contingency plans.
SUMMARY CONCLUSION
Based on our assessments, we do not expect Year 2000 issues relating to our
information technology systems, process control systems or embedded chips used
in our manufacturing operations to have a material impact on our financial
position, results of operations or liquidity. Furthermore, we will continue to
monitor the progress of our key business partners in achieving Year 2000
compliance, and, to the extent practicable, will develop contingency plans.
However, we can give no assurance that our key business partners will achieve
Year 2000 compliance on a timely basis, or the extent to which operations may be
impacted in the event that our key business partners fail to achieve Year 2000
compliance.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1999, net cash provided by operating
activities totaled $64.9 million, compared to $83.2 million for the same period
in 1998. The decrease of $18.3 million was primarily due
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<PAGE> 53
to an unfavorable working capital variance of $21.5 million, offset in part by
higher net income and higher depreciation, depletion and amortization. The
unfavorable working capital variance is primarily due to a $14.9 million other
current liability variance, a $5.4 million accounts receivable variance and a
$5.2 million inventory variance, offset in part by a favorable $5.3 million
wages payable variance. The other current liability variance of $14.9 million
was primarily due to the second quarter 1998 long-term incentive plan expense of
$8.8 million, of which $2.4 million was funded in the third quarter of 1998 and
the remainder in the first quarter of 1999. The accounts receivable variance of
$5.4 million was primarily due to the timing of collections. The inventory
variance of $5.2 million was primarily due to the build-up of log inventories in
our Southern Region in the fourth quarter of 1997 and the subsequent processing
of these logs in the first quarter of 1998 during weather-related harvesting
curtailments. The Southern Region did not build similar log inventories in the
fourth quarter of 1998. The favorable wages payable variance of $5.3 million was
primarily due to lower incentive compensation accruals during the first six
months of 1998 as a result of lower earnings levels.
We have an unsecured line of credit with a group of banks. Subject to
customary covenants, the line of credit allows for borrowings from time to time
of up to $225 million for general corporate purposes, including up to $20
million of standby letters of credit. The line of credit matures on December 13,
2001 and bears a floating rate of interest. As of June 30, 1999, $218 million
was outstanding with $7 million remaining available. As of July 15, 1999, $111
million of the borrowings on the line of credit were repaid.
Our borrowing agreements contain certain restrictive covenants, including
limitations on harvest levels, sales of assets, cash distributions and the
incurrence of indebtedness. In addition, the line of credit requires the
maintenance of an interest coverage ratio. We were in compliance with these debt
covenants as of June 30, 1999.
Of the net proceeds of this offering, approximately $90 million will be
used to repay outstanding debt under our line of credit and the remainder will
be used for general business purposes. Following this offering and the
application of the proceeds to reduce the amount outstanding under our line of
credit, we will have $225 million available under our line of credit.
Our board of directors has declared a third quarter distribution of $0.57
per share to be paid on November 24, 1999 to stockholders of record as of
November 12, 1999. We distributed $0.57 per share with respect to the second
quarter of 1999, paid on August 26, 1999 to shareholders of record on August 13,
1999. This distribution of $0.57 per share was equivalent to $2.28 on an
annualized basis. Future distributions will be determined by our board of
directors, in its sole discretion, based on our results of operations, cash flow
and capital requirements, economic conditions, tax considerations, debt covenant
restrictions and other factors, including harvest levels and future
acquisitions.
Cash required to meet our quarterly cash distributions, capital
expenditures and principal and interest payments will be significant. Management
believes, however, that expected borrowings under our line of credit, cash
otherwise on hand and cash flows from continuing operations will be sufficient
to fund planned capital expenditures, distributions, and interest and principal
payments for the next twelve months.
Capital Expenditures. Capital expenditures in the first six months of 1999
totaled $12.2 million, compared to $36.0 million for the same period in 1998.
Total 1999 capital expenditures are expected to be approximately $26 million,
compared to $64.3 million expended in 1998. Planned capital expenditures include
approximately $5 million to complete the construction of the Joyce, Louisiana
sawmill, $6 million for replacement and upgrades of equipment and $15 million
for logging roads, reforestation and other expenditures related to our
timberlands.
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THE REIT CONVERSION
On July 1, 1999, in order to better align our legal structure with our
long-term growth objectives, we converted from a master limited partnership to a
REIT. In connection with this conversion, we issued 73% of our equity to our
former limited partners in the form of common stock, and 27% of our equity to
our former general partner in the form of common stock and special voting stock,
which is convertible into common stock. See "Description of Capital Stock."
We believe that our new structure has the following advantages:
- We have a greater capacity to compete for acquisitions due to our ability
to structure acquisitions on a tax efficient basis, including through the
issuance of our common stock and limited partnership interests in our
operating partnership;
- We expect to have a lower cost of capital than we did as a master limited
partnership;
- We can attract a broader base of investors as a REIT than we could as a
master limited partnership;
- We maintain substantially all of the advantages of single-layer taxation
enjoyed under our prior master limited partnership structure with respect
to the treatment of taxable income; and
- Unlike the treatment of distributions for most REITs, we anticipate that
a significant portion of the distributions to our stockholders will
continue to be taxable to the stockholders at long-term capital gains
rates for Federal income tax purposes. The maximum Federal long-term
capital gains rate for individuals is 20%.
In order to comply with the asset and income requirements for qualification
as a REIT under the Internal Revenue Code, we have transferred our manufacturing
and marketing operations, including our sawmills, plywood mills and a medium
density fiberboard facility and our operations relating to the sale of higher
and better use properties, to several unconsolidated subsidiaries. In addition,
two of our unconsolidated subsidiaries purchase standing timber from our
operating partnership and its subsidiaries. Our unconsolidated subsidiaries sell
some of this purchased timber to mills owned by third-parties, and convert the
remaining logs to lumber, plywood, and other wood products, including medium
density fiberboard. All reference to these operations contained in this
prospectus refer to the operations of our unconsolidated subsidiaries.
Provisions of the Internal Revenue Code limit the voting stock that a REIT
may own in other corporations. As a result, members of our senior management
have purchased all of the voting stock of our unconsolidated subsidiaries. These
purchases were financed through full-recourse, secured loans from our operating
partnership. The following table indicates the members of senior management and
their percentage ownership of the voting stock of the unconsolidated
subsidiaries:
<TABLE>
<CAPTION>
NAME PERCENTAGE OWNERSHIP
---- --------------------
<S> <C>
Rick R. Holley.............................................. 34%
William R. Brown............................................ 22%
Michael J. Covey............................................ 22%
Charles P. Grenier.......................................... 22%
</TABLE>
The corporation is entitled to approximately 99% of the dividends from the
unconsolidated subsidiaries. Our unconsolidated subsidiaries are not
consolidated for accounting purposes and are subject to income tax at the
corporate level of approximately 40%.
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Had this structure been in place in fiscal 1998, the pro forma effect on
our operating results would have been a reduction in revenues of approximately
$466.5 million with an increase in net income of approximately $14.1 million.
The reduction in revenues is due to the transfer of our manufacturing operations
to unconsolidated subsidiaries. The increase in net income is primarily due to
the recording of a tax benefit related to the combined book loss of the
unconsolidated subsidiaries and the elimination of nonrecurring REIT conversion
costs. See "Unaudited Pro Forma Condensed Consolidated Financial Statements."
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BUSINESS
OVERVIEW
We are the fifth largest owner of private timberlands in the United States
with a forest resource base of approximately 3.3 million acres. Our diverse
timber holdings are located in four distinct regions and are strategically
situated near end-markets for our products. As of December 31, 1998, we estimate
that our timber portfolio contained approximately 35.6 million cunits, as
summarized below. A cunit is a standard unit of measurement of volume equal to
one hundred cubic feet of timber.
<TABLE>
<CAPTION>
ACRES CUNITS PRIMARY
REGION (STATES) (OWNED) (IN MILLIONS) SPECIES
--------------- --------- ------------- --------------------
<S> <C> <C> <C>
Cascade Region............................ 307,000 5.0 Douglas-fir
Washington Hemlock
Rocky Mountain Region..................... 1,586,000 12.3 Douglas-fir
Montana Larch
Idaho Pine
Northeast Region.......................... 905,000 13.8 Spruce
Maine Firs
Birch
Maple
Southern Region........................... 525,000 4.5 Southern Yellow Pine
Louisiana
Arkansas
</TABLE>
Our disciplined growth strategy has allowed us to expand and diversify our
timber holdings, as well as increase our cash flow. Over the last decade, we
have increased our timber holdings from approximately 1.4 million acres to
approximately 3.3 million acres at the end of 1998. For the same period, our
inventory of standing timber increased from approximately 19.4 million cunits to
approximately 35.6 million cunits. In addition, our EBITDA, defined as operating
income before depreciation, depletion and amortization, grew from $97 million in
1990 to approximately $210 million in 1998. EBITDA does not take into account
capital expenditures, does not represent cash provided by operating activities
in accordance with generally accepted accounting principles and does not
indicate the cash available to fund cash needs, including distributions to
stockholders.
INDUSTRY OVERVIEW
UNIQUE ASSET CHARACTERISTICS
The timber industry provides raw material and conducts resource management
activities for the paper and forest products industry, including the planting,
fertilizing, thinning, and cutting of trees and the marketing of logs. Logs are
marketed and sold either as sawlogs to lumber and other wood products
manufacturers or as pulplogs to pulp and paper manufacturers. The timber
industry possesses several unique characteristics that distinguish it from the
broader paper and forest products industry which we believe make timber an
attractive asset class, including the following:
- Renewable Resource -- Timber is a growing and renewable resource that, if
properly managed, increases in value as it grows and regenerates over
time. Larger diameter trees are more valuable than smaller trees because
they may be converted to higher value end-use products such as lumber and
plywood.
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- Predictable and Improving Growth Rates -- Predictable biological growth
is an attractive feature of timberland assets because it contributes to
predictable, long-term harvest planning. The development and application
of intensive forest management practices continue to improve biological
growth rates.
- Harvest Flexibility -- Timberland owners have flexibility to increase
their harvests when prices are high and decrease their harvests when
prices are low, allowing timberland owners to maximize the long-term
value of their growing resource base.
- Historical Real Price Appreciation -- Due to growing demand combined with
limitations on supply caused by environmental restrictions, urban sprawl
and overcutting, prices for Douglas-fir, Ponderosa Pine and Southern
Yellow Pine timber have exceeded inflation by 2% to 4% per year, from
1967 to 1997.
SUPPLY AND DEMAND DYNAMICS
There are five primary end-markets for most of the timber harvested in the
United States:
- products used in new housing construction;
- products used in the repair and remodeling of existing housing;
- products for industrial uses;
- raw material for the manufacture of pulp and paper; and
- logs for export.
Supply. The supply of timber is limited, to some extent, by the
availability of timberland. The availability of timberland, in turn, is limited
by several factors, including government restrictions, alternate uses such as
agriculture, and loss to urban or suburban real estate development. The large
amounts of capital and time required to create new timberlands also limits
timber supply.
Tree growth rates vary from region to region because of differences in
weather, climate and soil conditions. Newly-planted seedlings take 20 to 30
years to reach harvest maturity in the Southern United States, 45 to 60 years in
the Northwestern United States, 45 to 70 years in the Northeastern United States
and 70 to 90 years in the Rocky Mountains, depending on the desired product.
Consequently, the development of new timberlands in the United States is not
commonplace. Instead, it is more cost effective to convert existing natural
growth stands to forestry plantations by applying modern forestry techniques to
efficiently increase tree growth and harvest levels.
The United States government is a significant timberland holder, and timber
harvested from government lands plays an important role in the supply-demand
balance. Heightened environmental awareness in recent years has resulted in the
enactment of governmental policies which have reduced the volume of timber under
contract to be sold from federal lands from over 10 billion board feet per year
in the 1980s to only 3.3 billion board feet in 1998. The resulting supply
decrease has contributed to increased prices for logs and lumber, benefitting
forest products companies with private timber holdings.
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[GRAPH]
Source: U.S. Department of Agriculture.
Demand. The demand for timber is directly related to the underlying demand
for pulp, paper, lumber, panel and other forest products. The demand for pulp
and paper is largely driven by population growth and per-capita income levels.
The demand for lumber and manufactured wood products is primarily affected by
the level of new residential construction activity and repair and remodeling
activity, which, in turn, is impacted by changes in general economic and
demographic factors, including interest rates for home mortgages and
construction loans.
PRICING
Timber is the only asset within the paper and forest products industry
whose price has risen in real terms over the last 30 years. United States Forest
Service data indicates that prices for Douglas-fir, Ponderosa Pine and Southern
Yellow Pine timber have exceeded inflation by 2% to 4% per year, from 1967 to
1997. Short-term timber prices have historically been cyclical as a result of
supply and demand imbalances. Supply and demand imbalances can be caused by
weather, capacity expansions and contractions, and sudden changes in government
policies affecting the timber industry. Timber price increases in the late 1980s
and early 1990s were significantly influenced by the reduction of supply from
federal lands due to environmental concerns. Reduced harvest levels led to
increased timber prices in the Western United States. Lumber and plywood prices
also rose, to a lesser extent, in response to this reduction in harvest levels.
As a result, wood products manufacturers' margins were reduced and a large
number of lumber and plywood mills in the Western United States closed. As
sawmills and plywood plants in the Southern United States increased their output
to fill the void created by the closure of western capacity, the demand for
southern timber increased, which gradually drove up timber prices in the
Southern United States.
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Log prices in the United States were also impacted in the mid 1990s by
exceptionally strong log export prices. The price of logs exported from the
United States to Asia soared to large premiums over domestic United States log
prices due to strong demand from Japan, a decline in supply from the United
States, and a very strong yen. In 1997, however, Japanese housing starts fell
nearly 30%, and the yen decreased in value 20% versus the United States dollar.
These factors, as well as increased competition from Russian logs and
Scandinavian lumber led to a sharp drop in shipments of United States export
logs to Japan in 1997 and 1998.
OUTLOOK
In the first half of 1999, there has been healthy log demand due to strong
new home construction and repair and remodeling markets in the United States, as
well as an increase in demand from Asia, which is showing signs of an economic
recovery. The macroeconomic factors that influence demand, such as mortgage
rates, unemployment, home construction and consumer confidence, remain strong.
OUR GROWTH STRATEGY
Our growth strategy is guided by specific operating objectives, including
maximizing the value of our current timberlands through intensive forest
management, expanding our resource base through acquisitions and maintaining our
leadership role in environmentally responsible resource management. To support
our growth strategy, we have made selective investments in manufacturing
facilities which help to create competitive local markets for our timber. These
facilities produce a variety of value-added lumber and panel products. To
further support our growth strategy, we recently converted from a master limited
partnership to a REIT. Our growth strategy includes the following key elements:
FOCUS ON MAXIMIZING THE VALUE OF OUR RESOURCE BASE THROUGH INTENSIVE
MANAGEMENT OF OUR TIMBERLANDS. We view our timber resource base as a renewable
asset with substantial inherent value. We seek to manage our timberlands in a
manner that optimizes the balance among current cash flows, the biological
growth of our timber, which, depending on species and region, averages between
2% and 12% annually, and prudent environmental management. Our harvest
management approach employs advanced forest management practices, including the
use of a computerized timber inventory system, thinning and fertilization, and
the development and use of genetically improved seedlings.
PURSUE ACQUISITIONS OF HIGH QUALITY TIMBER ASSETS. The United States timber
market is highly fragmented. We believe that, due to the desire among some
forest product companies to sell their timberland assets and the difficulties
faced by some small timberland owners in efficiently managing their timberlands,
there will continue to be numerous timberland acquisition opportunities. We
believe we are well positioned to compete for high quality timberland assets
because:
- We are an attractive strategic partner for integrated forest product
companies seeking to sell their timberlands because we do not compete
with their pulp or paper manufacturing operations and we are willing to
enter into long-term supply agreements;
- We can structure acquisitions on a tax-efficient basis through the
issuance of common stock, limited partnership interests in our operating
partnership, or installment notes, giving sellers the ability to defer
some or all of the taxes otherwise payable upon a sale;
- The geographic reach of our operations enhances our awareness of new
acquisition opportunities and our knowledge of environmental concerns,
market dynamics, timber productivity and other factors important in
valuing timberlands and operations in each region; and
- Our reputation for environmental leadership makes us attractive to
sellers concerned with continued responsible environmental resource
management.
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Since the beginning of 1990, we have established a successful acquisition
record having acquired 867,000 acres in the Rocky Mountain Region, 905,000 acres
in the Northeast Region and 529,000 acres, plus approximately 9,000 leased
acres, in the Southern Region. Each of these acquisitions has been accretive to
our cash flow, and together they have enhanced our operating flexibility and
reduced our exposure to regional economic fluctuations.
REALIZE THE VALUE OF SELECTED PROPERTIES THROUGH SALE OR EXCHANGE. In
addition to intensively managing our timberlands, we continually review our
timberland portfolio to identify properties that may have higher and better uses
than as commercial timberland. At this time, we have identified approximately
150,000 acres of properties located in recreational areas or near expanding
population centers that may be better suited for conservation, residential or
recreational purposes. We have transferred approximately 20,000 acres of what we
call "higher and better use properties" to an unconsolidated subsidiary. Our
unconsolidated subsidiary expects to sell or exchange these properties within
the next five years. Our strategy for the remaining 130,000 acres is to realize
the value of these properties, through sales or exchanges, over the next ten to
fifteen years. Our on-going review process evaluates properties based on a
number of factors such as proximity to population centers and major
transportation routes, and the presence of special ecological features.
In addition, we may occasionally exchange timberlands which have high
environmental or other public values for lands of equal value that are more
suitable for commercial timber management. We may also, from time to time, sell
less strategic timberlands to other forest products companies.
MAINTAIN ENVIRONMENTAL LEADERSHIP. We believe that environmentally sound
management practices contribute to our growth and value by providing greater
predictability in the management of our assets. Our forestry and mill practices
follow a set of environmental principles aimed at the sound management of all
natural resources, including soils, air, watersheds, fisheries and wildlife
habitats. These principles are reflected in our habitat planning efforts. In
1996 we implemented a comprehensive habitat conservation plan covering
approximately 170,000 acres of our timberlands in the Cascade Region. We are
currently developing a habitat conservation plan for the bull trout and other
native fish species covering approximately 1.7 million acres in Montana, Idaho
and Washington, as well as a plan for the red-cockaded woodpecker covering
approximately 260,000 acres in Arkansas and Louisiana.
OUR ACQUISITION STRATEGY
We intend to pursue the acquisition of high quality timberlands that
present opportunities to derive more value than the seller is achieving. Our
REIT structure provides a competitive advantage by giving us the flexibility to
issue attractive acquisition currencies, in the form of common stock or
operating partnership units, that allow us to offer a seller liquidity and tax
efficiency. We believe that this flexibility will allow us to negotiate
acquisitions on more favorable terms than other potential buyers that do not
offer these tax efficiencies. In addition, we believe that these same advantages
will increase the likelihood of future acquisitions being completed in privately
negotiated transactions rather than in auction settings.
We believe our geographic reach enables us to identify a broad range of
acquisition opportunities, and our evaluation criteria and experience provide us
with the discipline and insight necessary to successfully complete accretive
acquisitions.
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Although we will continue to consider attractive foreign timberland
acquisitions, our focus is primarily on softwood-growing timberlands in the
United States. We seek to improve returns through acquisitions by:
- improving the merchandising of logs in order to sell them for the highest
value possible;
- reducing costs through operating synergies;
- recognizing and capturing higher and better use values through sales or
land exchanges;
- reducing environmental and regulatory costs; and
- using our modern inventory and mapping systems, together with our
knowledge of intensive silviculture, to develop harvest plans that
optimize economics and timber growth.
We evaluate potential acquisitions based on the unique characteristics of
each property and specific acquisition criteria including:
- national and regional supply and demand factors;
- volumes, species and age characteristics of standing timber;
- environmental constraints, such as the actual or potential presence of
endangered species; and
- our ability to increase the property's cash flow.
OUR TIMBERLANDS
Our timberlands are well diversified, not only by species mix but also by
age distribution. Growth rates vary depending on species, location, age and
forestry practices. We manage our timberlands in two business segments, the
Northern Resources Segment, consisting of timberlands in western Washington,
western Montana, northern Idaho and central Maine, and the Southern Resources
Segment, consisting of timberlands in Louisiana and Arkansas.
THE NORTHERN RESOURCES SEGMENT
Cascade Region. The Cascade Region's 307,000 acres of timberland in western
Washington contain an estimated 5.0 million cunits of standing timber. Logs
harvested in the Cascade Region are sold for export to Pacific Rim countries,
principally Japan, and to domestic mills owned by third parties. Logs sold for
export are generally of higher quality than logs sold into the domestic market.
In the Cascade Region, approximately 59% of the logs sold in 1998 were sold
to unaffiliated domestic wood products manufacturers. We also sold 17% of the
logs from the Cascade Region to third parties as pulp logs. These logs generally
constitute smaller and lower quality logs not suitable for use by wood products
manufacturers. Competitors in the domestic log market include the United States
Forest Service, the state of Washington, and numerous private individuals and
industrial timber owners.
Customers for the Cascade Region's export sawlogs consist primarily of
large Japanese trading companies. Competitors in the export market include
numerous private land or timber owners in the United States and Canada, as well
as companies and state-controlled enterprises in Chile, New Zealand, Russia and
Scandinavia, all of which have abundant timber resources. We compete primarily
based on our long-term relationships and our reputation as a reliable year-round
supplier of premium grade logs.
In 1998, approximately 24% of the logs harvested in the Cascade Region were
sold to customers in Japan. Douglas-fir logs sold to Japan have historically
commanded a significant premium over Douglas-
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fir logs sold domestically. However, export log prices declined significantly in
1998 and 1997, eliminating a large portion of this premium. Cascade Region
export log revenues accounted for 3% of our combined revenues in 1998, 6% in
1997 and 8% in 1996. In addition, Cascade Region export log sales accounted for
6% of operating income in 1998, 11% in 1997 and 18% in 1996. For a discussion of
our financial reporting of these operations following the REIT conversion see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview -- Financial Reporting Impact."
The following table sets forth the Cascade Region's timber inventory by
species as of December 31, 1998.
<TABLE>
<CAPTION>
VOLUME PERCENTAGE
SPECIES (THOUSANDS OF CUNITS) OF VOLUME
------- --------------------- ----------
<S> <C> <C>
Douglas-fir........................................... 2,337 47
Hemlock............................................... 873 17
True Firs............................................. 955 19
Other Conifers........................................ 560 12
Hardwoods............................................. 271 5
----- ---
Total....................................... 4,996 100
</TABLE>
Rocky Mountain Region. The Rocky Mountain Region consists of 1,586,000
acres of timberland in western Montana and northern Idaho, containing an
estimated 12.3 million cunits of standing timber. See "Prospectus
Summary -- Plum Creek Timber Company, Inc. -- Recent Developments" for a
description of our proposed sale of 91,000 acres of less strategic timberlands
in Idaho that contain approximately 1.3 million cunits of standing timber. The
Rocky Mountain Region primarily sells logs to our lumber and plywood facilities,
with the remainder sold to third-party domestic mills. In conjunction with an
acquisition in 1993, we entered into a log sourcing agreement with Stimson
Lumber Company to supply Stimson's Montana mills with logs, based upon
prevailing market prices, over a ten-year period ending in 2003.
In the Rocky Mountain Region, we sell virtually all of our logs
domestically as saw timber. In 1998, approximately 68% of the logs sold in the
region were sold to our manufacturing facilities and the remainder were either
sold to unaffiliated domestic mills or traded to other timber companies for logs
better fitting our needs. In addition, a small percentage of lower quality logs
are sold to pulp and paper manufacturers.
Competitors in the Rocky Mountain Region log market include the United
States Forest Service, the states of Montana and Idaho, the Bureau of Land
Management, the Bureau of Indian Affairs, as well as numerous private
individuals and industrial timber owners.
The following table sets forth the Rocky Mountain Region's timber inventory
by species as of December 31, 1998.
<TABLE>
<CAPTION>
VOLUME PERCENTAGE
SPECIES (THOUSANDS OF CUNITS) OF VOLUME
------- --------------------- ----------
<S> <C> <C>
Douglas-fir......................................... 4,992 40
Pine................................................ 3,072 25
Larch............................................... 1,671 14
True Firs........................................... 1,175 10
Other Conifers...................................... 1,436 11
------ ---
Total..................................... 12,346 100
</TABLE>
Northeast Region. The Northeast Region consists of 905,000 acres of
timberland in central Maine, containing an estimated 13.8 million cunits of
standing timber. Logs sold in the Northeast Region are sold for export to Canada
and to domestic mills owned by third parties. In connection with our
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acquisition of these 905,000 acres in 1998, we entered into a long-term
agreement to supply wood fiber to S.D. Warren Company's paper facility in
Skowhegan, Maine at prevailing market prices. The fiber supply agreement covers
a 25-year period ending in 2023 and may be extended for up to an additional 15
years at the option of S.D. Warren Company.
In the Northeast Region, approximately 19% of the logs sold in 1998 were
exported to lumber mills in Canada. Competitors in this market include numerous
wood brokers, private individual and industrial timber owners in Maine, and the
Canadian provinces of Quebec and New Brunswick.
The following table sets forth the Northeast Region's timber inventory by
species as of December 31, 1998.
<TABLE>
<CAPTION>
VOLUME PERCENTAGE
SPECIES (THOUSANDS OF CUNITS) OF VOLUME
------- --------------------- ----------
<S> <C> <C>
Spruce.............................................. 3,005 22
True Firs........................................... 2,066 15
Other Conifers...................................... 1,189 9
Hardwoods........................................... 7,491 54
------ ---
Total..................................... 13,751 100
</TABLE>
THE SOUTHERN RESOURCES SEGMENT
The Southern Region consists of 525,000 acres (plus 9,000 acres of leased
land) of timberland in Louisiana and Arkansas, containing an estimated 4.5
million cunits of standing timber. In 1998, 73% of logs from this region were
sold to our lumber facilities and 27% were sold to other purchasers. The
Southern Region timberlands are nearing the end of a process of conversion from
unmanaged forests into actively managed plantation forests. We expect this
process to be completed by the year 2000. In connection with our acquisition of
the Southern Region timberlands and manufacturing facilities in 1996, we entered
into a long-term agreement to supply pulp logs and mill residuals to Riverwood
International Corporation at prices that are based upon prevailing market
prices. The fiber supply agreement covers a 20-year period ending in 2016 and
can be extended for up to an additional 10 years.
The fee harvest in the Southern Region during 1998 was approximately 58%
pulp logs and 42% sawlogs. We expect that our long-term supply agreement with
Riverwood International Corporation will provide us with a secure market for our
local mill residuals and a substantial portion of the pine and hardwood pulp
logs harvested from our Southern Region timberlands. Competitors in this market
include the United States Forest Service, the states of Arkansas and Louisiana,
as well as numerous private individuals and industrial timber owners in the
region.
The following table sets forth the Southern Region's timber inventory by
species as of December 31, 1998.
<TABLE>
<CAPTION>
VOLUME PERCENTAGE
SPECIES (THOUSANDS OF CUNITS) OF VOLUME
------- --------------------- ----------
<S> <C> <C>
Southern Yellow Pine................................ 3,779 84
Hardwoods........................................... 726 16
----- ---
Total..................................... 4,505 100
</TABLE>
RESOURCE MANAGEMENT
We view our timberlands as assets with substantial inherent value. We
strive to manage our timberlands in an economically prudent and environmentally
responsible manner in order to enhance
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their value. We seek to enhance value by improving the productivity of our
forests, controlling harvesting costs, and sorting and merchandising logs to
obtain their highest value.
Value can be enhanced on younger timber stands through thinning operations.
Value increases as trees grow and add wood volume more rapidly. After thinning a
timber stand, we continue to grow the healthiest trees, that have the greatest
potential for future value. As trees grow larger, they can be used in higher
valued applications such as plywood.
We consider the impact of forest management activities on properties with
higher and better uses other than long-term timber production, and modify
harvest plans accordingly.
We use different management techniques in each of our regions, employing a
variety of the most beneficial, proven silvicultural methods available. We
expect the timber growth rates on our timberland to continue to improve over
time as a result of genetic advances in seedlings, intensive forest management
practices such as thinning and fertilization, and the increasing proportion of
our timberlands that are converted from natural forests to actively managed
plantations. Technology and forest management advances have increased forest
growth rates and shortened harvest cycles. We believe our focus on intensive
forest management practices will enhance forest productivity and increase the
value of our timberlands.
It is our policy to ensure that every acre harvested is promptly
reforested. Based on the geographic and climatic conditions of the harvest site,
harvested areas may be regenerated naturally by leaving mature trees to reseed
the area. Natural regeneration methods are used on approximately 90% of the
timberlands in our Rocky Mountain and Northeast Regions. In both the Cascade and
Southern Regions, substantially all of the reforestation is done by planting.
During 1998, we planted approximately 4.1 million seedlings on the timberlands
located in our Cascade, Rocky Mountain and Northeast Regions and approximately
8.4 million seedlings on our Southern Region timberlands.
Forests are subject to a number of natural hazards, including damage by
fire, insects and disease. Severe weather conditions and other natural disasters
can also reduce the productivity of forest lands and can interfere with the
processing and delivery of forest products. However, damage from natural causes
is typically localized and would only affect a portion of the timberlands at any
given time. Nevertheless, these hazards are unpredictable and losses might not
be so limited. The size and diversity of our timberlands, together with our
intensive forest management, should help to minimize these risks. Consistent
with the practices of other large timber companies, we do not maintain insurance
against loss to standing timber on our timberlands, but we do maintain insurance
for loss of logs due to fire and other occurrences following harvesting.
HARVEST PLANS
Annual harvest plans are based on our projected inventory, regional supply
and demand expectations and environmental constraints.
We make inventory projections using computer software that can model both
forecasted harvests and forest growth over time, so that we can achieve optimum
economic returns while maintaining ecosystems and wildlife habitat. These
projections provide the foundation for the detailed annual operating plans used
by our foresters on our timberlands.
Our harvest planning is facilitated by our geographic information system,
which is a computer software program that provides detailed field maps. Our
planning is also facilitated by our computerized timber inventory system, which
is constantly updated with recent harvest activities and new biological growth
information on our timberlands.
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Our inventory estimates are based upon timber data including the heights
and diameters of trees, along with other data such as a timber stand's
accessability and expected logging conditions and costs. Our inventory is
updated regularly, accounting for both the growth and harvest of timber stands,
and the incorporation of new data.
Other information about our timberlands, such as roads, forest boundaries,
elevations and the location of endangered species, are recorded in our
computerized geographic information systems in each region. These systems are
important in the development of detailed annual harvest plans, contractor
administration, legal record keeping and the development of habitat conservation
plans.
ENVIRONMENTAL STEWARDSHIP
We are a leader in environmentally responsible resource management. In
1998, we were one of the first timber companies to commit to third-party
verification under the American Forest & Paper Association's Sustainable
Forestry Initiative.(SM) The Sustainable Forestry Initiative(SM) sets forth a
comprehensive nationwide approach to responsible forest stewardship. Sustainable
Forestry Initiative(SM) principles are designed to ensure that forest management
is integrated with the conservation of soil, air and water resources, wildlife
and fish habitat, and aesthetics. Under the Sustainable Forestry Initiative,(SM)
we have instituted a third-party verification program, in which independent
teams will audit all of our operating regions to verify adherence to the
Sustainable Forestry Initiative's(SM) objectives and performance standards.
Our protection of wildlife habitat is another example of our environmental
leadership. We currently manage more than a quarter-million acres under two
separate habitat conservation agreements. The habitats of hundreds of species
are protected by these agreements, including five species listed as threatened
under the Endangered Species Act.
In 1996, the United States Fish and Wildlife Service and the National
Marine Fisheries Service approved our habitat conservation plan that provides
habitat protection for 285 wildlife species on approximately 170,000 acres in
our Cascade Region. Just three years into the 50 year plan, we have demonstrable
progress to report:
- We have completed detailed scientific analyses in 13 of the 20 watersheds
to be studied in the habitat conservation plan area;
- Monitoring has confirmed a stable population of spotted owls on these
lands over the last three years, including 85 juveniles;
- We have closed or restricted access to 24 roads to address watershed
concerns and habitat requirements for wolves, grizzly bears and other
species; and
- Our scientists discovered the presence of Larch Mountain salamanders, a
species not previously known to exist in the western Cascades, but which
is protected under the habitat conservation plan.
As we realize the benefits of the Cascade Region's habitat conservation
plan, we are developing a similar long-term habitat conservation plan for the
bull trout and other native fish species, such as steelhead and salmon, covering
1.7 million acres in Montana, Idaho, and Washington, as well as a plan for the
red-cockaded woodpecker covering approximately 260,000 acres in Arkansas and
Louisiana. In addition, we have an agreement in place to conserve grizzly bear
habitat covering 83,000 acres of our timberlands in the Swan Valley in western
Montana.
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HIGHER AND BETTER USE LANDS
We have currently identified approximately 150,000 acres of our properties
located in recreational areas or near expanding population centers that may be
better suited for conservation, residential or recreational purposes, rather
than for long-term commercial timberland management. We have transferred
approximately 20,000 acres of these properties to an unconsolidated subsidiary.
Our unconsolidated subsidiary expects to sell or exchange these properties
within the next five years. Our strategy for the remaining 130,000 acres is to
realize the value of these properties, through sales or exchanges, over the next
ten to fifteen years. Our on-going review process evaluates properties based on
a number of factors such as proximity to population centers and major
transportation routes, and the presence of special ecological features. We sold
approximately 14,710 acres of higher and better use land in 1998, 3,350 acres in
1997 and 21,600 acres in 1996.
MANUFACTURING FACILITIES
General. Our manufacturing operations are conducted through our
unconsolidated subsidiaries and include six lumber mills, two plywood plants,
one medium density fiberboard facility, and two lumber remanufacturing
facilities. These facilities, strategically located near our timberlands in
Montana, Idaho, Louisiana and Arkansas, convert logs to lumber, plywood and
other wood products, and convert sawdust and shavings to medium density
fiberboard. These facilities accounted for 62% of our revenues in 1998,
excluding revenues from facilities closed or sold in 1998. For a discussion of
our financial reporting of these operations following the REIT conversion see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview -- Financial Reporting Impact."
We employ modern technology in our manufacturing facilities in order to
improve efficiency, maximize the utilization and value of our timber resources
and maintain the high quality standards that have been the basis of our
penetration of value-added markets. Since the beginning of 1993, we have
invested approximately $100 million in capital improvements to improve the
efficiency and expand the capacity of our conversion facilities. In 1998, we
completed the modernization of our Joyce, Louisiana sawmill. This high-volume,
multi-line sawmill is constructed on the site of a former plywood plant and
sawmill that we acquired with our Southern timberlands.
Lumber. We produce a diverse line of lumber products, including common and
select boards, dimension and stud lumber, industrial lumber, edge-glued boards
and finger-jointed studs. In 1998, we produced 635 million board feet of lumber,
compared to 582 million board feet in 1997, and 461 million board feet in 1996.
As a result of reconfigurations at the Joyce, Louisiana and Pablo, Montana
mills, and the May 1998 acquisition of an edge-glued board remanufacturing
facility in Meridian, Idaho, we expect our lumber capacity to be approximately
750 million board feet by the end of 1999. Lumber sales, including
remanufactured lumber, accounted for approximately 40% of our combined revenues
in 1998. For a discussion of our financial reporting of these operations
following the REIT conversion see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview -- Financial Reporting
Impact."
Lumber products manufactured in the northwest United States are targeted to
domestic lumber retailers, such as retail home centers, for use in repair and
remodeling projects. Lumber products manufactured in the southern United States
are targeted to the home construction, industrial and export markets.
Value-added products and services such as consumer appearance boards,
pull-to-length boards, premium furring strips, premium studs and pattern boards
targeted to specialty markets have made us less dependent on the more volatile
home construction market. In 1998, 44% of our lumber products were sold into
retail markets, 26% to stocking distributors, 20% to industrial and
remanufactured product markets, 2% to export markets and 8% to other markets.
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Competition in our lumber markets is primarily based on price and quality
and, to a lesser extent, the ability to meet delivery requirements on a
consistent long-term basis and provide specialized customer service. We compete
in domestic lumber markets primarily with other United States, Canadian and
European companies. Canadian and European lumber producers have increased their
penetration into the United States market due to their lower wood fiber costs
and favorable exchange rates. The lumber market is also subject to competition
from substitute products, primarily in shelving, window and door markets.
Substitute products include radiata pine, medium density fiberboard, oriented
strand board, particle board, laminates, steel and plastic. Substitution has
significantly increased in the past several years due to increases in stud and
board prices in the early 1990s.
Plywood. We produce high-grade plywood which we sell primarily into
specialized industrial markets. In 1998, we produced 323 million square feet of
plywood, compared to 312 million square feet in 1997 and 297 million square feet
in 1996. Plywood sales represented 16% of our total combined revenues in 1998.
For a discussion of our financial reporting of these operations following the
REIT conversion see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview -- Financial Reporting Impact."
During 1998, 64% of our plywood products were sold in specialty industrial
markets, including recreational boat, recreational vehicle, and
fiberglass-reinforced panels. Our plywood products are generally of higher
quality than commodity construction grade products and command higher prices in
these specialty markets.
Competition within the plywood market is based primarily on price and
quality and, to a lesser extent, the ability to offer a full line of products
and meet delivery requirements on a consistent, long-term basis. The domestic
plywood market is characterized by numerous large and small producers and is
also subject to competition from oriented strand board, a less expensive
substitute wood product. Due to oriented strand board's cost advantage, its
market share in the residential segment has been increasing, and we expect this
trend to continue. Oriented strand board's share of the North American
structural panel market was approximately 49% in 1998. The quality of oriented
strand board continues to improve and has become widely accepted in most
building applications. However, since oriented strand board does not have the
strength-to-weight ratio, moisture resistance and machinability of plywood, it
cannot be used in some specialty applications. Some commodity plywood
manufacturers, in order to avoid closing their facilities, have been refocusing
their products toward the specialty plywood market, resulting in increased
competition in markets we serve. We expect to remain competitive due to our
strong customer base, extensive experience in industrial markets, supply of
superior wood, and our reputation for high quality products, including various
trademarked products such as MarineTech(R), RV-X(R), DuraFloor(R), and
Ultra-Core(R).
Medium Density Fiberboard. We supply high quality medium density fiberboard
to markets in North America and the Pacific Rim. Medium density fiberboard
products are primarily sold to distributors and door, molding, fixture and
furniture manufacturers. Medium density fiberboard sales accounted for
approximately 6% of our revenues in 1998. For a discussion of our financial
reporting of these operations following the REIT conversion see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview -- Financial Reporting Impact."
We produce these products at our Montana facility using sawdust and wood
shavings from our lumber and plywood plants, and from third parties. During
1995, our medium density fiberboard process was redesigned to produce MDF(2)(R),
one of the highest quality medium density fiberboard products available.
MDF(2)(R) can be machined and finished more efficiently and has expanded our
markets to include higher value applications, such as moldings, doors, flooring
and kitchen cabinets.
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Medium density fiberboard producers compete on a global scale, primarily on
the basis of price, quality and service. Medium density fiberboard is also
subject to competition from solid wood products and hardboard and particle board
products. Competition in the industry has been increasing as a result of
significant capacity expansion both in the United States and Canada. MDF(2)(R)
commands a price premium over standard medium density fiberboard due to its
superior quality and its physical properties and densities. Moreover, because
our fiber supply consists of western softwoods, a slower growth species with a
low abrasive content, MDF(2)(R) has proven to have superior machining and
finishing qualities over competing products. In addition, because of the
elimination of wood chips from MDF(2)(R)'s manufacturing process, which
substantially reduces raw material costs, and our access to low-cost energy
sources, we believe we are one of the lowest cost medium density fiberboard
producers in the market.
We source 55% of our sawdust and wood shavings for medium density
fiberboard production internally from our plywood and lumber operations in the
Rocky Mountain Region. The remaining 45% of the fiber is purchased from third
parties.
Residual Wood Chips. Our lumber and plywood mills produce residual wood
chips as a by-product of the conversion of raw logs into finished products.
These wood chips are sold to regional paper and pulp mills. A substantial
portion of our wood chips derived from manufacturing lumber and plywood in the
Rocky Mountain Region are sold to Stone Container Corporation under a long term
supply agreement. This agreement generally provides for market-based pricing for
the wood chips, subject to specific minimum and maximum prices until December
31, 1999. If market sales prices for chips remain at current levels, which are
below the minimum level set by the supply agreement, our annual operating income
would be reduced by approximately $11 million starting in the year 2000. The
actual impact of the phase-out of the minimum pricing provision, however, cannot
be accurately predicted, and will depend on future market prices.
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FEDERAL AND STATE REGULATIONS
ENDANGERED SPECIES
The Endangered Species Act protects species threatened with possible
extinction. A number of species indigenous to our timberlands have been listed
as threatened or endangered or have been proposed for this status under the
Endangered Species Act. As a result, our activities in or adjacent to the
habitat of these species may be subject to restrictions on the harvesting of
timber and the construction of roads.
In June 1996, we received a permit under the Endangered Species Act from
the United States Fish and Wildlife Service and the National Marine Fisheries
Service that covers our forest management on 170,000 acres in the Cascade Region
(the "Planning Area"). As a part of the permit application, we prepared a
multi-species habitat conservation plan that will govern our management
activities in the Planning Area during the 50-year life of the permit. The
habitat conservation plan requires us to maintain set levels of wildlife habitat
and to take numerous other mitigation measures, including the protection of
riparian areas.
In consideration for this mitigation, the permit authorizes forestry
practices that are consistent with the habitat conservation plan, even though
they may have an adverse impact on spotted owls, grizzly bears, bull trout, gray
wolves or marbled murrelets, the listed species currently covered by the habitat
conservation plan and permit. The habitat conservation plan provides that the
United States Fish and Wildlife Service and the National Marine Fisheries
Service will amend the permit to add subsequently listed species without
requiring us to provide additional mitigation absent extraordinary
circumstances. The bull trout was added to the permit pursuant to this provision
upon its listing in 1998. Extraordinary circumstances would include situations
where continued activity under the habitat conservation plan would have a
significant material adverse impact on the species and mitigation on Federal
land would not alleviate the concern. As an incentive to us to create additional
wildlife habitat in the Planning Area, the permit provides additional
authorization during a second 50-year period if the wildlife habitat within the
Planning Area exceeds levels set in the habitat conservation plan. Therefore,
the permit is expected to provide long-term certainty and predictability for our
harvest activities in the Planning Area.
In October 1998, Congress passed legislation directing the United States
Forest Service to exchange specific Federal lands for some of our lands of equal
value located in the Planning Area (the "I-90 Land Exchange"). In connection
with this exchange, we are seeking an amendment to the habitat conservation plan
to add the lands we receive in the land exchange that are within the Planning
Area. Prior to consummating the exchange, we discovered marbled murrelets, a
threatened species, on a portion of the Federal lands to be exchanged, impacting
the value of this land. Although legislation is currently pending in Congress
that would address this valuation issue, there can be no assurance the
legislation will become law. In addition, an administrative appeal was filed
against the United States Forest Service alleging, among other things,
deficiencies in the United States Forest Service's environmental analysis of the
I-90 Land Exchange. On October 14, 1999, the date on which the administrative
appeal was dismissed, we filed a Complaint for Declaratory Judgement in the
Federal District Court for the Eastern District of Washington. Through this
lawsuit, we seek to establish the legality of the land exchange and the United
States Forest Service's actions in implementing the land exchange. Nonetheless,
there can be no assurance that the I-90 Land Exchange will be completed.
In December 1995, we entered into an agreement to conserve grizzly bears
with the United States Fish and Wildlife Service, the United States Forest
Service, and the state of Montana covering 83,000 acres of our timberlands in
the Swan Valley in western Montana. Under the grizzly bear agreement, we have
agreed to protect habitat and to minimize the impact of our forestry activities
on the grizzly bear. In consideration for this mitigation, the United States
Fish and Wildlife Service authorized forestry practices in the Swan Valley that
are consistent with the agreement, but may have an effect on grizzly bears.
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Although the habitat conservation plan and grizzly bear agreement have both
been implemented and are functioning as expected, there can be no assurance that
the terms of these agreements will remain in force or be sufficient to protect
us against subsequent amendments of the Endangered Species Act or additional
listings thereunder, or against changes to other applicable laws and
regulations. Any of these changes could materially and adversely affect our
operations. In addition, legal challenges could disrupt the continued operation
of the habitat conservation plan or the grizzly bear agreement, and thereby
reduce the level of certainty we anticipate gaining from these plans.
In 1998, the United States Fish and Wildlife Service listed some population
segments of the bull trout as threatened under the Endangered Species Act. Bull
trout are present in numerous streams and rivers which flow across our lands in
Montana, Idaho and Washington. In addition, the red-cockaded woodpecker, listed
as threatened, is found on our lands in Louisiana and Arkansas. We are currently
working with the United States Fish and Wildlife Service and the National Marine
Fisheries Service to develop a habitat conservation plan for bull trout and
other native fish species. We are also working with the United States Fish and
Wildlife Service to develop a habitat conservation plan for the red-cockaded
woodpecker. If these plans are approved, we will receive permits authorizing
forest practices consistent with those plans. Although discussions are underway,
we are unable to predict whether either of these plans will ultimately be
approved or what their terms would be. We are unable, at this time, to predict
the nature or scope of any land management restrictions that might be required
to protect native salmonids or red-cockaded woodpeckers.
The Endangered Species Act also prohibits the Federal government from
jeopardizing species listed under the Endangered Species Act or from destroying
or adversely modifying their designated critical habitat. Private landowners are
potentially affected by these restrictions if a private activity requires
Federal action, such as the granting of access or Federal funding. Where there
is a Federal connection, the Federal agency involved must consult with the
United States Fish and Wildlife Service or, in the case of anadromous fish, the
National Marine Fisheries Service, to determine that the proposed activity would
not jeopardize the listed species or cause direct or indirect adverse
modification of its designated critical habitat. If the landowner's proposed
activity would have these effects, the United States Fish and Wildlife Service
or the National Marine Fisheries Service must propose, where possible,
alternatives or modifications to the proposed activity.
Our land holdings in the Cascade and Rocky Mountain Regions are often
intermingled with Federal land and access across Federal lands may require
Federal approval. In the past, our access to these areas has been delayed by
administrative processes and legal challenges and restricted under the
Endangered Species Act. Although we believe that access to our lands in the
Planning Area and the Swan Valley should be facilitated by the Cascade Region's
habitat conservation plan and the grizzly bear agreement, and should be further
facilitated if the native fish habitat conservation plan is approved and the
I-90 Land Exchange consummated, there can be no assurance that access delays
will not continue to occur.
At this time, we believe that Federal and state laws and regulations
related to the protection of endangered species will not have a material adverse
effect on our financial position, results of operations or liquidity. We
anticipate, however, that increasingly strict laws and regulations relating to
the environment, natural resources and forestry operations, as well as increased
social concern over environmental issues, may result in additional restrictions
on us leading to increased costs, additional capital expenditures and reduced
operating flexibility.
GENERAL ENVIRONMENTAL REGULATION
Our operations are subject to Federal, state and local environmental laws
and regulations, including laws relating to water, air, solid waste and
hazardous substances. Although we believe that we are in material compliance
with these requirements, there can be no assurance that we will not incur
significant
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costs, civil and criminal penalties, and liabilities, including those relating
to claims for damages to property or natural resources, resulting from our
operations. We maintain environmental compliance programs and periodically
conduct regular internal and independent third-party regulatory audits of our
facilities and timberlands to monitor compliance with these laws and
regulations.
Environmental laws and regulations have changed substantially and rapidly
over the last 20 years, and we anticipate there will be continuing changes. The
trend in environmental regulation is to place more restrictions and limitations
on activities that may affect the environment, such as emissions of pollutants
and the generation and disposal of wastes. Increasingly strict environmental
restrictions and limitations have resulted in increased operating costs for us
and it is possible that the costs of compliance with environmental laws and
regulations will continue to increase.
Although we do not consider current laws and regulations relating to the
environment to be materially burdensome, there can be no assurance that these
laws or future legislative, administrative or judicial actions, which are
becoming increasingly stringent, will not adversely affect us or our ability to
continue our activities and operations as currently conducted with respect to
our timberlands and facilities.
AIR QUALITY
Our manufacturing facilities emit regulated substances that are subject to
the requirements of the federal Clean Air Act, as amended, and comparable state
statutes. Most of our manufacturing facilities are required to obtain federal
operating permits under Title V of the 1990 Clean Air Act Amendments. Title V of
the 1990 Clean Air Act Amendments requires that major industrial sources of air
pollution obtain federally enforceable permits, which contain all of the
applicable air quality restrictions for the facility. We do not believe that the
cost of renewing or obtaining the required Title V permits for our facilities
will be material.
WATER QUALITY AND WASTEWATER
The federal Clean Water Act and comparable state statutes regulate
discharges of process wastewater, and require national pollutant discharge
elimination system permits for discharge of industrial wastewater and stormwater
into regulated public waters. We believe that these laws will not have a
material adverse effect on our financial position, results of operations or
liquidity. However, there can be no assurance in this regard.
The Environmental Protection Agency has proposed regulations that might
require us to obtain point source discharge permits for some of our forest
activities, and might subject us to greater restrictions on our operations in
and around streams and waterbodies which do not meet state water quality
standards. It is unclear whether the proposed regulations will be enacted or, if
enacted, what the final form of these regulations will be. As a result, we are
unable to assess the impact of these proposed regulations on our financial
position, results of operations or liquidity.
HAZARDOUS MATERIALS
Our manufacturing facilities use and generate both hazardous and
nonhazardous substances, including wood waste and boiler ash, the handling and
disposal of which are subject to Federal and state laws, including the Resources
Conservation and Recovery Act, the Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("CERCLA") and comparable state statutes.
CERCLA imposes liability, without regard to fault or the legality of the
original act, on potentially responsible parties that contribute to a release or
threatened release of a hazardous substance into the environment. Potentially
responsible parties include the owner or operator of a site at which a release
or threatened release occurs, as well as any person who disposed of, or arranged
for disposal of, hazardous substances at a site.
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In the ordinary course of operations, several of our manufacturing
facilities have in the past utilized, and are expected to continue to utilize,
on-site and off-site facilities for the disposal of hazardous and nonhazardous
wastes. In addition, some site activities, including those of former operators
of our properties, may have resulted in conditions that may require remediation
under environmental laws. We believe that we will not incur responsibility for
any cleanup costs under CERCLA with respect to past activities affecting our
facilities or our timberlands that would be likely to have a material adverse
effect on our financial position, results of operations or liquidity. However,
there can be no assurance in this regard.
TIMBERLANDS
Our forest practices are and will in the future be subject to specialized
statutes and regulations in the states where we operate, which currently include
Montana, Washington, Idaho, Louisiana, Arkansas and Maine. Many of these states
have enacted laws which regulate forestry operations, such as growing,
harvesting and processing activities on forest lands. Among other requirements,
these laws impose some reforestation obligations on the owners of forest lands.
Several states require prior notification before beginning harvesting
activities. The states of Washington and Maine require a regulatory review
taking from 15 to 30 days or more prior to harvesting, depending upon the
environmental and other sensitivities of the proposed activity.
Other state laws and regulations control the following activities:
- slash burning and harvesting during fire hazard periods;
- activities that affect water courses or are in proximity to inland shore
lines;
- activities that affect water quality, and
- some grading and road construction activities.
LOG EXPORTS
Federal legislation currently prohibits the sale of unprocessed logs
harvested from Federal lands located in the western half of the United States,
if logs will be exported from the United States by the purchaser thereof, or if
logs will be used by the purchaser thereof as a substitute for timber from
private lands which is exported by a purchaser. In order to enforce this
substitution prohibition, the legislation requires persons who export private
logs and who wish to purchase Federal timber, to obtain an approved Federal
timber "sourcing area." In 1991, we applied for and obtained an approved
sourcing area for our Northwest manufacturing facilities. Under the legislation,
sourcing areas are subject to review and renewal at least every five years.
Revisions to the export law were enacted in November 1997, which we believe
ensure that our sourcing area will be renewed. However, there can be no
assurance in this regard.
In addition, Federal legislation prohibits the export of unprocessed logs
harvested from Washington and Oregon. Proposals have also been made from time to
time, but to date have been unsuccessful, to either ban or tax the export of
unprocessed logs harvested from private lands.
SAFETY AND HEALTH
The operations of our timberlands and our conversion facilities are subject
to the requirements of the Occupational Safety and Health Act and comparable
state statutes relating to the health and safety of employees. We believe that
we are in substantial compliance with the Occupational Safety and Health Act
regulations, including general industry standards, permissible exposure levels
for toxic chemicals (including wood dust and formaldehyde) and record-keeping
requirements. We conduct internal safety audits to identify potential violations
of law or unsafe conditions.
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PRODUCT LIABILITY AND REGULATION
All of the states in the United States and many foreign jurisdictions in
which we sell our products have, through some combination of legislation and
judicial decision, provided for the liability of the manufacturer and supplier
of defective materials for resulting personal injury and property damage. Our
operations entail exposure to product liability in connection with both the
export and domestic sales of our products. We have not been subject to any
material litigation relating to product liability.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table presents pertinent information concerning our executive
officers and directors as of the date of this prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rick R. Holley............. 47 President and Chief Executive Officer, Director
Charles P. Grenier......... 50 Executive Vice President, Director
William R. Brown........... 48 Executive Vice President and Chief Financial Officer
Michael J. Covey........... 41 Vice President, Resources
Barbara L. Crowe........... 48 Vice President, Human Resources
James A. Kraft............. 44 Vice President, General Counsel and Secretary
David D. Leland............ 64 Director and Chairman of the Board
Ian B. Davidson............ 67 Director
John G. McDonald........... 62 Director
Hamid R. Moghadam.......... 43 Director
William E. Oberndorf....... 46 Director
William J. Patterson....... 37 Director
John H. Scully............. 55 Director
</TABLE>
Rick R. Holley. Mr. Holley served as the President and Chief Executive
Officer of Plum Creek Management Company, L.P., our predecessor's general
partner (the "General Partner") from January 1994 through our conversion to a
REIT, and continues in the same position with the corporation. Mr. Holley served
as a Director of PC Advisory Corp I, our predecessor's ultimate general partner
("Corp I") from January 1994 through our conversion to a REIT, and was elected a
Director of the corporation on July 1, 1999.
Charles P. Grenier. Mr. Grenier served as the Executive Vice President of
the General Partner from January 1994 through our conversion to a REIT, and
continues in the same position with the corporation. Mr. Grenier served as a
Director of Corp I from April 1995 through our conversion to a REIT, and was
elected a Director of the corporation on July 1, 1999. Mr. Grenier also serves
as a Director of Winter Sports, Inc.
William R. Brown. Mr. Brown served as the Executive Vice President and
Chief Financial Officer of the General Partner from May 12, 1999 through our
conversion to a REIT and continues in the same positions with the corporation.
Mr. Brown served as the Vice President of Strategic Business Development for the
General Partner from January 1998 to May 1999, Vice President, Resource
Management from February 1995 to January 1998 and Director, Planning from
December 1992 to February 1995.
Michael J. Covey. Mr. Covey served as the Vice President, Resources of the
General Partner from January 1998 through our conversion to a REIT, and
continues in the same position with the corporation. Mr. Covey was the General
Manager, Rocky Mountain Timberlands for the General Partner from August 1996 to
January 1998, was Director of Operations, Rocky Mountain Region from June 1995
to August 1996, and was Plant Manager, Ksanka Sawmill from December 1992 to June
1995.
Barbara L. Crowe. Ms. Crowe served as the Vice President, Human Resources
of the General Partner from April 1997 through our conversion to a REIT, and
continues in the same position with the corporation. From October 1995 through
March 1997, Ms. Crowe was Vice President, Human Resources for Weight Watchers
Gourmet Food Co., a subsidiary of the H.J. Heinz Company. From
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November 1991 through September 1995, Ms. Crowe worked in Human Resources at
Ore-Ida Foods, Inc., a subsidiary of the H.J. Heinz Company, first as Manager,
then as General Manager.
James A. Kraft. Mr. Kraft served as the Vice President, General Counsel and
Secretary of the General Partner from April 1996 through our conversion to a
REIT, and continues in the same positions with the corporation. Mr. Kraft was
Vice President, Law of the General Partner from January 1994 to April 1996.
David D. Leland. Mr. Leland served as a Director and Chairman of the Board
of Corp I from December 1992 through our conversion to a REIT, and was elected a
Director and the Chairman of the Board of the corporation on July 1, 1999. Mr.
Leland served as the President and Chief Executive Officer of the General
Partner from December 1992 to December 1993.
Ian B. Davidson. Mr. Davidson served as a Director of Corp I from December
1992 through our conversion to a REIT, and was elected a Director of the
corporation on July 1, 1999. Since 1970, Mr. Davidson has been Chairman and
Chief Executive Officer of D.A. Davidson & Co. and DADCO, a regional brokerage
firm. Mr. Davidson also serves as a Director of Energy West and the DADCO
Companies.
John G. McDonald. Mr. McDonald was elected a Director of the corporation on
July 1, 1999. Mr. McDonald is the IBJ Professor of Finance in the Graduate
School of Business at Stanford University, where he has been a faculty member
since 1968. He serves as a director of Varian Associates, Inc.; Scholastic
Corp.; TriNet Corp. Realty Trust, Inc.; Garden State Vintners, Inc.; and eight
funds managed by Capital Research and Management Company and affiliates.
Hamid R. Moghadam. Mr. Moghadam was elected a Director of the corporation
on July 1, 1999. He is the President and Chief Executive Officer of AMB Property
Corporation, one of the largest public REITs in the country focusing on
industrial properties and community shopping centers. Mr. Moghadam is a director
and one of the founders of AMB.
William E. Oberndorf. Mr. Oberndorf served as a Director of Corp I from
November 1992 through our conversion to a REIT, and was elected a Director of
the corporation on July 1, 1999. Since 1991, Mr. Oberndorf's principal
occupation has been as a Managing Director of SPO Partners & Co., a private
investment firm that is an affiliate of our predecessor. Mr. Oberndorf serves as
a Director for Bell & Howell Company, Inc.
William J. Patterson. Mr. Patterson served as a Director of Corp I from
November 1992 through our conversion to a REIT, and was elected a Director of
the corporation on July 1, 1999. Since 1991, Mr. Patterson's principal
occupation has been as a Managing Director of SPO Partners & Co., a private
investment firm that is an affiliate of our predecessor.
John H. Scully. Mr. Scully served as a Director of Corp I from November
1992 through our conversion to a REIT, and was elected a Director of the
corporation on July 1, 1999. Since 1991, Mr. Scully's principal occupation has
been as a Managing Director of SPO Partners & Co., a private investment firm
that is an affiliate of our predecessor. Mr. Scully serves as a Director for
Bell & Howell Company, Inc.
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PRINCIPAL STOCKHOLDERS
BENEFICIAL OWNERSHIP
The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of October 1, 1999 by each person
who is known to be the beneficial owner of more than 5% of the outstanding
shares of our common stock, our directors and our most highly compensated
executive officers, and all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
BENEFICIALLY OWNED
-----------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME OF INDIVIDUAL OR IDENTITY OF GROUP BENEFICIALLY OWNED OFFERING OFFERING(*)
--------------------------------------- ------------------ -------- -----------
<S> <C> <C> <C>
Beneficial owners of more than 5%
PC Advisory Partners I, L.P.................... 17,133,275(a) 27.00% 25.03%
PC Intermediate Holdings, L.P.................. 17,133,275(a) 27.00% 25.03%
Directors
Ian B. Davidson................................ 26,142(b) .04% .04%
Charles P. Grenier............................. 208,005(c) .33% .30%
Rick R. Holley................................. 652,094(d)(e) 1.03% .95%
David D. Leland................................ 102,625(f) .16% .15%
John G. McDonald............................... 2,000 -- --
Hamid R. Moghadam.............................. -- -- --
William E. Oberndorf........................... 17,136,135(g) 27.00% 25.03%
William J. Patterson........................... 17,135,980(g) 27.00% 25.03%
John H. Scully................................. 17,140,792(g)(h) 27.00% 25.04%
Executive Officers
William R. Brown............................... 43,896(i) .07% .06%
James A. Kraft................................. 119,690(j) .19% .17%
Michael J. Covey............................... 14,918(k) .02% .02%
Barbara L. Crowe............................... 9,727(l) .02% .01%
All Executive Officers & Directors as a Group (13
persons)....................................... 18,325,454 28.88% 26.77%
</TABLE>
- -------------------------
* Assumes no exercise of the underwriters' over-allotment option.
(a) PC Advisory Partners I, L.P. and PC Intermediate Holdings, L.P. are deemed
to be under common control. Each is deemed, therefore, to beneficially own
shares of common stock held by the other. PC Advisory Partners I, L.P.
directly owns 164,987 shares of common stock and 6,346 shares of our special
voting stock, which is convertible into common stock. PC Intermediate
Holdings, L.P. directly owns 16,333,722 shares of common stock and 628,220
shares our special voting stock.
(b) Includes 300 shares of common stock owned by Mr. Davidson's wife.
(c) Includes 57,259 shares of common stock receipt of which has been deferred
pursuant to an election under an employee benefits plan. Also includes 5,750
shares of common stock owned by Mr. Grenier's children.
(d) Includes 98,552 shares of common stock receipt of which has been deferred
pursuant to an election under an employee benefits plan. Also includes 6,800
shares of common stock owned by Mr. Holley's children.
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(e) Includes 356,745 shares of common stock owned by an employee benefits trust
as to which Mr. Holley, as President and Chief Executive Officer, has voting
and dispositive power. Mr. Holley disclaims beneficial ownership of the
shares of common stock held by the trust.
(f) Includes 32,000 shares of common stock held by Mr. Leland's wife.
(g) Includes 164,987 shares of common stock and 6,346 shares of special voting
stock held by PC Advisory Partners I, L.P. Also includes 16,333,722 shares
of common stock and 628,220 shares of special voting stock held by PC
Intermediate Holdings, L.P. Messrs. Oberndorf, Patterson and Scully have
shared control of, and have an indirect pecuniary interest in, PC Advisory
Partners I, L.P. and PC Intermediate Holdings, L.P.
(h) Includes 5,000 shares of common stock held in a trust over which Mr. Scully
has voting and dispositive power.
(i) Includes 14,530 shares of common stock receipt of which has been deferred
pursuant to an election under an employee benefits plan.
(j) Includes 42,236 shares of common stock receipt of which has been deferred
pursuant to an election under an employee benefits plan. Also includes
3,220 shares of common stock held by Mr. Kraft's children.
(k) Includes 4,916 shares of common stock receipt of which has been deferred
pursuant to an election under an employee benefits plan.
(l) Includes 3,391 shares of common stock receipt of which has been deferred
pursuant to an election under an employee benefits plan.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary discusses the Federal income tax considerations
anticipated to be material to our prospective stockholders. The discussion does
not address the tax consequences that may be relevant to individual stockholders
in light of their particular circumstances or any special treatment to which
they may be subject under certain Federal income tax laws, such as dealers in
securities, traders in securities that elect to mark to market, banks, insurance
companies, tax-exempt organizations (except to the extent discussed under the
heading "-- Taxation of Tax-Exempt Stockholders") or non-United States persons
(except to the extent discussed under the heading "-- Taxation of Non-United
States Stockholders"). This discussion does not address any consequences arising
under the laws of any state, local or foreign jurisdiction.
The information in this discussion is based on current provisions of the
Internal Revenue Code, existing, temporary and currently proposed Treasury
Regulations thereunder, the legislative history of the Internal Revenue Code,
existing administrative interpretations and practices of the Internal Revenue
Service, and judicial decisions, all of which are subject to change either
prospectively or retroactively. No assurance can be given that future
legislation, Treasury Regulations, administrative interpretations or judicial
decisions will not significantly change the current law or adversely affect
existing interpretations of current law. Skadden, Arps, Slate, Meagher & Flom
LLP, our special counsel, has delivered an opinion with respect to certain tax
matters (the "Tax Opinion"), which is attached as Exhibit 8.1 to the
Registration Statement of which this prospectus forms a part, which contains an
opinion substantially to the effect that, subject to the foregoing
qualifications, the discussion set forth in this prospectus constitutes, in all
material respects, a fair and accurate summary of the United States federal
income tax consequences of the purchase, ownership, and disposition of common
stock.
We have received a substantially unqualified opinion from Skadden, Arps,
Slate, Meagher & Flom LLP to the effect that we have been organized in
conformity with the requirements for qualification as a REIT and that our
planned method of operation as represented by us in certificates delivered to
Skadden, Arps, Slate, Meagher & Flom LLP will enable us to meet the requirements
for qualification and taxation as a REIT for the taxable year ending on December
31, 1999 and thereafter. Receipt of the opinion of Skadden, Arps, Slate, Meagher
& Flom LLP is not equivalent to the receipt of a ruling from the Internal
Revenue Service to the effect that we have been organized in conformity with the
requirements for qualification as a REIT. Absent receipt from the Internal
Revenue Service of a favorable private letter ruling, there can be no assurance
that the Internal Revenue Service will not challenge our status as a REIT. We
have, however, as described more fully under "Income Tests" below, received a
private letter ruling from the Internal Revenue Service substantially to the
effect that our timberlands, including those timberlands that are subject to
timber cutting contracts, will be considered qualifying real estate assets or
interests in real property for purposes of the REIT asset tests discussed below,
and that the gains derived by us from timber cutting contracts will be from the
sale of real property for purposes of the REIT gross income tests. See "Risk
Factors -- If we fail to qualify as a REIT, we would be subject to tax at
corporate rates and would not be able to deduct distributions to stockholders
when computing our taxable income."
You are advised to consult with your tax advisor regarding the specific tax
consequences of the ownership and disposition of shares of our common stock in
light of your specific tax and investment situation and the specific Federal,
state, local and foreign laws that may be applicable to our common stock.
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TAXATION OF PLUM CREEK AS A REIT
General.
Under Federal income tax law, if certain detailed conditions imposed by the
Internal Revenue Code and the related Treasury Regulations are satisfied, an
entity that invests principally in real estate and that would otherwise be
subject to tax as a corporation may elect to be treated as a REIT for United
States federal income tax purposes. These conditions relate, in part, to the
nature of the entity's assets and income. If we qualify for taxation as a REIT,
we will generally not be subject to Federal corporate income tax on our taxable
income that we distribute currently to our stockholders. This treatment
substantially eliminates "double taxation." Double taxation means taxation once
at the corporate level when income is earned and once again at the stockholder
level when such income is distributed.
We intend to elect to be treated for tax purposes as, and to operate so as
to qualify as, a REIT under sections 856 through 860 of the Internal Revenue
Code, commencing with our taxable year ending on December 31, 1999. No assurance
can be given, however, that we will operate in a manner so as to qualify, or
remain qualified, as a REIT. Skadden, Arps, Slate, Meagher & Flom LLP, acting as
our special counsel, has delivered an opinion substantially to the effect that
commencing with our tax year ending on December 31, 1999, we will be organized
in conformity with the requirements for qualification as a REIT, and our
proposed method of operation will enable us to meet the requirements for
qualification and taxation as a REIT provided that (i) the elections and other
procedural steps described in this discussion of "Material Federal Income Tax
Consequences" are completed in a timely fashion and (ii) we (including our
subsidiaries) operate in accordance with various assumptions and factual
representations that we have made concerning our organization, business,
properties and operations. In providing its opinion, Skadden, Arps, Slate,
Meagher & Flom LLP has relied upon certain representations received from us and
the operating partnership. The opinion is based upon facts, representations and
assumptions as of its date, and Skadden, Arps, Slate, Meagher & Flom LLP will
have no obligation to advise us or holders of common stock of any subsequent
change in the matters stated, represented or assumed or any subsequent change in
applicable law. Qualification and taxation as a REIT will depend upon our
ability to meet on an ongoing basis (through actual annual operating results,
our asset base, distribution levels and diversity of share ownership) the
various qualification tests imposed under the Internal Revenue Code discussed
below, the results of which will not be reviewed by Skadden, Arps, Slate,
Meagher & Flom LLP on a continuing basis. No assurance can be given that the
actual results of our operations for any particular taxable year will satisfy
such requirements, and an opinion of counsel is not binding upon the Internal
Revenue Service. Further, the anticipated income tax treatment described in this
prospectus may be changed, perhaps retroactively, by legislative, administrative
or judicial action at any time. See "-- Taxation of Plum Creek as a
REIT -- Failure to Qualify as a REIT."
The sections of the Internal Revenue Code and the corresponding Treasury
Regulations relating to the taxation of REITs and their stockholders are highly
technical and complex. The following discussion sets forth the material aspects
of the rules that govern the Federal income tax treatment of a REIT and its
stockholders. This summary is based on current United States law, including the
applicable Internal Revenue Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change, which changes may apply retroactively.
If we qualify for taxation as a REIT, we will generally not be subject to
Federal corporate income taxes on that portion of our ordinary income or capital
gain that we currently distribute to stockholders. The REIT provisions of the
Internal Revenue Code generally allow a REIT to deduct dividends paid to our
stockholders. This deduction for dividends substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a regular corporation. We
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will, however, be subject to Federal income tax under certain circumstances,
among which are the following:
- We will be subject to tax at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains. See,
however, "-- Taxation of Plum Creek as a REIT -- Annual Distribution
Requirements" with respect to our ability to elect to treat as having
been distributed to our stockholders certain of our capital gains upon
which we have paid taxes, in which event so much of the taxes as we have
paid with respect to such income would also be treated as having been
distributed to stockholders.
- We may be subject to the "alternative minimum tax" on certain of our
items of tax preference.
- If we have (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in
the ordinary course of business or (ii) other nonqualifying income from
foreclosure property, we will be subject to tax at the highest corporate
rate on such income. In general, foreclosure property is property
acquired through foreclosure after a default on a loan secured by the
property or on a lease of the property.
- We will be required to pay a 100% tax on any net income from prohibited
transactions. In general, prohibited transactions are sales or other
taxable dispositions of property, other than foreclosure property, held
for sale to customers in the ordinary course of business.
- If we fail to satisfy the 75% gross income test or the 95% gross income
test (as discussed below), but we have maintained our qualification as a
REIT because certain other requirements have been met, we will be subject
to a 100% tax on an amount equal to (i) the gross income attributable to
the greater of the amount by which we fail the 75% or 95% gross income
test multiplied by (ii) a fraction intended to reflect our profitability.
- We will be required to pay a 4% excise tax on the amount by which our
annual distributions to our stockholders are less than the sum of (i) 85%
of our ordinary income for the year, (ii) 95% of our REIT capital gain
net income for the year (other than capital gain income we elect to
retain and pay tax on) and (iii) any undistributed taxable income from
prior periods (other than capital gains from such years which we elected
to retain and pay tax on).
- If we acquire an asset from a corporation which is not a REIT in a
transaction in which the basis of the asset in our hands is determined by
reference to the basis of the asset in the hands of the transferor
corporation, and we subsequently sell the asset within ten years, then
under Treasury regulations not yet issued, we would be required to pay
tax at the highest regular corporate tax rate on this gain to the extent
(a) the fair market value of the asset exceeds (b) our adjusted tax basis
in the asset, in each case, determined as of the date on which we
acquired the asset. The results described in this paragraph assume that
we will elect this treatment in lieu of an immediate tax when the asset
is acquired.
Requirements for Qualification.
To qualify as a REIT, we must elect to be so treated and we must meet the
requirements discussed below relating to our organization, sources of income,
nature of assets and distributions of income.
Organizational Requirements.
Our stock must be held by at least 100 persons and no more than 50% of the
value of our capital stock may be owned, directly or indirectly, by five or
fewer individuals (as specially defined for these purposes) at all times during
the last half of the taxable year. For these purposes, certain entities such as
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private foundations are treated as an individual. We must satisfy these stock
ownership requirements in our second taxable year and in each subsequent taxable
year. Our certificate of incorporation provides for certain restrictions
regarding the transfer of our capital stock in order to aid in meeting the stock
ownership requirements, but these restrictions cannot insure that we will in all
cases comply with these ownership requirements.
To monitor our compliance with the stock ownership requirements, we are
required to maintain records regarding the actual ownership of our stock. To do
so, we must demand written statements each year from the record holders of
certain percentages of our stock in which the record holders are to disclose the
actual owners of the stock (i.e., the persons required to include in gross
income the REIT dividends). A list of those persons failing or refusing to
comply with this demand must be maintained as part of our records. A stockholder
who fails or refuses to comply with the demand must submit a statement with its
Federal income tax return disclosing the actual ownership of the stock and
certain other information.
Income Tests.
In order to maintain qualification as a REIT, we must annually satisfy two
gross income requirements. First, for each taxable year we must derive, directly
or indirectly, at least 75% of our gross income (excluding gross income from
"prohibited transactions") from investments relating to real property or
mortgages on real property (including "rents from real property" and "gain from
the sale or other disposition of real property") other than property held
primarily for sale to customers in the ordinary course of business or from
certain types of temporary investments. Second, for each taxable year we must
derive, directly or indirectly, at least 95% of our gross income (excluding
gross income from "prohibited transactions") from such real property
investments, dividends, interest and gain from the sale or disposition of stock
or securities (or from any combination of the foregoing).
In addition, if we should realize any net income from the sale or other
disposition of property held primarily for sale to customers in the ordinary
course of business (including our share of any such gain realized by any
partnership in which we are a partner) then such income would be treated as
income from a "prohibited transaction" and would not count towards satisfying
the 95% and 75% gross income tests. Such income would also be subject to a 100%
penalty tax. Under existing law, whether property is held primarily for sale to
customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction.
Rents that we receive will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. It is anticipated that the only rental income we
will receive will be from certain farmlands and grazing lands and from certain
hunting leases. It is anticipated that any income we receive from such hunting
leases and properties will constitute "rents from real property" under the
applicable rules. While it is not expected that we will receive a substantial
amount of rental income, we will take steps to ensure that any such rental
income will qualify as "rents from real property" for purposes of the 75% and
95% gross income tests.
We have received a private letter ruling from the Internal Revenue Service
substantially to the effect that our timberlands, including those timberlands
that are subject to timber cutting contracts, will be considered qualifying real
estate assets or interests in real property for purposes of the REIT asset
tests, and that the gains derived by us from timber cutting contracts will be
from the sale of real property for purposes of the REIT gross income tests. In
reaching these conclusions, the Internal Revenue Service expressly relied upon a
representation from us that our disposals of timber pursuant to these timber
cutting contracts will qualify as disposals of timber under section 631(b) of
the Internal Revenue Code. In connection with this representation, we have
received an opinion of Skadden, Arps, Slate, Meagher &
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Flom, LLP, substantially to the effect that our disposal of timber pursuant to
these timber cutting contracts will qualify for treatment under section 631(b)
of the Internal Revenue Code.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a REIT for such year if we are
entitled to relief under certain provisions of the Internal Revenue Code. These
relief provisions will generally be available if our failure to meet such tests
was due to reasonable cause and not due to willful neglect, we attach a schedule
of the sources of our income to our Federal income tax return, and any incorrect
information on the schedule was not due to fraud with intent to evade tax. It is
not possible, however, to state whether in all circumstances we would be
entitled to the benefit of these relief provisions. As discussed above in
"-- Taxation of Plum Creek as a REIT -- General," even if these relief
provisions apply, a tax would be imposed with respect to the excess gross
income.
The Treasury Regulations provide that if we are a partner in a partnership,
we will be deemed to own our proportionate share of the assets of the
partnership, and we will be deemed to be entitled to our proportionate share of
the gross income of the partnership. In addition, the character of the assets
and gross income of the partnership generally retains the same character in our
hands for purposes of satisfying the gross income tests and the asset tests.
Asset Tests.
At the close of each quarter of our taxable year, we must satisfy three
tests relating to the nature of our assets. First, at least 75% of the value of
our total assets must be represented by real estate assets including (i) our
allocable share of real estate assets held by partnerships in which we own an
interest and (ii) stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering, cash, cash items and government securities. Second, not
more than 25% of our total assets may be represented by securities other than
those in the 75% asset class. Third, of the investments included in the 25%
asset class, the value of any one issuer's securities owned by us may not exceed
5% of the value of our total assets, and we may not own more than 10% of any one
issuer's outstanding voting securities.
As of the date of this prospectus, substantially more than 75% of the fair
market value of the assets indirectly owned by us through the operating
partnership consist of timberlands owned in fee, and we expect that, at all
times, substantially more than 75% of the assets indirectly owned by us through
the operating partnership will consist of fee ownership of timberland.
Accordingly, we believe that we will be able to meet the 75% test described
above on a going forward basis.
The operating partnership owns all of the nonvoting stock (representing 99%
of the outstanding equity) and none of the voting stock (representing 1% of the
outstanding equity) of five unconsolidated subsidiaries which are engaged in the
business of harvesting timber and manufacturing timber products. These
unconsolidated subsidiaries were formed, as part of the conversion, to own and
operate businesses that we, as a REIT, would not be permitted to own and operate
directly. Through our ownership interest in the operating partnership we are
considered to own our pro rata share of the stock of such unconsolidated
subsidiaries held by the operating partnership. Neither we nor the operating
partnership will own any outstanding voting securities of the unconsolidated
subsidiaries.
The 5% test described above must generally be met for any quarter in which
we acquire securities of the issuer. Thus, this requirement must be satisfied
not only on the date we acquire securities of each of the unconsolidated
subsidiaries but also each time we increase our ownership of securities of any
unconsolidated subsidiaries, including as a result of our interest in the
operating partnership, the exercise by the partners of any exchange rights or
otherwise. Although we will take steps to ensure that we satisfy the 5% value
test for any quarter with respect to which testing will occur, there can be no
assurance that
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such steps will always be successful or will not require us to reduce our
overall interest in one or more of the unconsolidated subsidiaries. The opinion
of Skadden, Arps, Slate, Meagher & Flom LLP is based on the assumption of
continued compliance with these tests.
If we fail to satisfy the asset tests at the end of a calendar quarter,
such a failure would not cause us to lose our REIT status if (i) we satisfied
all of the asset tests at the close of the preceding calendar quarter and (ii)
the discrepancy between the value of our assets and the asset requirements
either did not exist immediately after the acquisition of any particular asset
or was not wholly or partly caused by such an acquisition (i.e., the discrepancy
arose from changes in the market values of our assets). If the condition
described in clause (ii) of the preceding sentence were not satisfied, we could
still avoid disqualification by eliminating any discrepancy within 30 days after
the close of the quarter in which it arose.
Annual Distribution Requirements.
In order to qualify as a REIT, we will be required to make distributions
(other than capital gain dividends) to our stockholders in an amount at least
equal to (i) the sum of (a) 95% of our "REIT taxable income" (computed without
regard to the dividends paid deduction and our net capital gain) and (b) 95% of
the net income (after tax), if any, from foreclosure property, minus (ii) the
sum of certain items of noncash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before we timely file our tax return for such year and if paid on or before the
first regular dividend payment date after such declaration. To the extent that
we do not distribute (or we are not treated as having distributed) all of our
capital gain or we distribute (or we are treated as having distributed) at least
95%, but less than 100%, of our "REIT taxable income," as adjusted, we will be
subject to tax on the undistributed income at regular ordinary and capital gain
corporate tax rates. If we should fail to distribute during each calendar year
at least the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95%
of our REIT capital gain income for such year (other than capital gain income
which we elect to retain and pay tax on as provided for below) and (iii) any
undistributed taxable income from prior periods (other than capital gains from
such years which we elected to retain and pay tax on), we would be subject to a
4% excise tax on the excess of the required distribution over the amounts
actually distributed.
Pursuant to recently enacted legislation, we may elect to retain rather
than distribute our net long-term capital gains. The effect of this election is
that (i) we would be required to pay the tax on such gains at regular corporate
tax rates, (ii) our stockholders, while required to include their proportionate
share of the undistributed long-term capital gain in income, would receive a
credit or refund for their share of the tax paid by us, and (iii) the basis of a
stockholder's stock would be increased by the amount of the undistributed
long-term capital gains (minus the amount of capital gains tax paid by us and
deemed paid by the stockholder).
It is possible that we, from time to time, may not have sufficient cash or
other liquid assets to meet the annual distribution requirements described above
due to timing or other differences between (i) the actual receipt of income and
actual payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at our taxable income. If we encounter
this situation, we may elect to pay the tax and retain the capital gain.
Nevertheless, in order to pay such tax or otherwise meet the distribution
requirements, we may find it necessary to arrange for short or possibly
long-term borrowings, issue equity or sell assets.
Under certain circumstances, we may be able to rectify a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to our
stockholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being
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taxed on amounts distributed as deficiency dividends; however, we will be
required to pay interest based upon the amount of any deduction taken for
deficiency dividends.
Failure to Qualify as a REIT.
If we fail to qualify for taxation as a REIT in any taxable year and if the
relief provisions do not apply, we will be subject to tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. Distributions to our stockholders in any year in which we fail to qualify
as a REIT will not be deductible by us nor will they be required to be made. As
a result, our cash available for distribution to our stockholders would be
significantly reduced. In addition, if we fail to qualify as a REIT, all
distributions to our stockholders will be subject to tax as ordinary income, to
the extent of our current and accumulated earnings and profits, and, subject to
certain limitations of the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, we will also be disqualified from being eligible
to be subject to tax as a REIT for the four taxable years following the year
during which such qualification was lost. It is not possible to state whether in
all circumstances we would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. HOLDERS
As used herein, the term "U.S. Holder" means a holder of our common stock
who (for United States federal income tax purposes) is (i) an individual who is
a citizen or resident of the United States; (ii) an entity which is a
corporation or partnership for United States federal income tax purposes and
which is created or organized in the United States or under the laws of the
United States or any political subdivision thereof (although certain
partnerships so created or organized may be treated, under regulations not yet
published, as not a United States person); (iii) any estate whose income is
includable in gross income for United States federal income tax purposes
regardless of its source; or (iv) a "Domestic Trust." A Domestic Trust is
generally any trust with respect to which a court within the United States is
able to exercise primary supervision over the administration of such trust, and
as to which one or more United States fiduciaries have the authority to control
all substantial decisions of such trust.
Distributions to U.S. Holders.
Distributions made to U.S. Holders, other than tax-exempt entities, that
are not designated as capital gain dividends, will generally be subject to tax
as ordinary income to the extent of our current and accumulated earnings and
profits as determined for Federal income tax purposes. If the amounts
distributed exceed a stockholder's allocable share of our earnings and profits,
the excess will be treated as a return of capital to the extent of the
stockholder's adjusted basis in the common stock, which will not be subject to
tax, and thereafter as a gain from the sale or exchange of a capital asset. At
the present time, we anticipate that a portion of the distributions made by us
will constitute a return of capital to the holder and the remainder will
generally constitute capital gain dividends.
Distributions made by us to U.S. Holders that we properly designate as
capital gain dividends will be subject to tax as capital gains (to the extent
that they do not exceed our actual net capital gain for the taxable year)
without regard to the period for which a U.S. Holder has held his common stock.
The maximum capital gains rate for individuals with respect to capital gains
dividends is 20%. If we elect to retain capital gains rather than distribute
them, a U.S. Holder will be deemed to receive a capital gain dividend equal to
its share of such retained capital gains. In such a case, a stockholder will
receive a tax credit or refund for its share of the tax paid by us on such
undistributed capital gains and the basis of the
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stockholders' common stock would be increased by the amount of the undistributed
capital gains (minus the amount of capital gains tax paid by us deemed
distributed to such stockholders).
Dividends declared by us in October, November, or December of any year and
payable to a stockholder of record on a specified date in any such month shall
be treated as both paid by us and received by the stockholder on December 31 of
such year, provided that we actually pay the dividend on or before January 31 of
the following calendar year. Stockholders may not include in their income tax
returns any of our net operating losses or capital losses. We will notify each
stockholder after the close of our taxable year as to the portions of the
distributions attributable to that year which constitute ordinary income,
capital gain or a return of capital.
We will be treated as having sufficient earnings and profits to treat as a
dividend any distribution that we make up to the amount required to be
distributed in order to avoid imposition of the 4% excise tax discussed under
"-- Taxation of Plum Creek as a REIT -- General" and "-- Taxation of Plum Creek
as a REIT -- Annual Distribution Requirements." As a result, stockholders may be
required to treat as taxable dividends certain distributions that would
otherwise result in tax free returns of capital. In addition, any "deficiency
dividend" will be treated as a "dividend" (an ordinary dividend or a capital
gain dividend, as the case may be), regardless of our earnings and profits.
Passive Activity Losses and the Investment Interest Limitation.
Distributions made by us and gain arising from the sale or exchange by a
U.S. Holder of common stock will not be treated as passive activity income, and,
as a result, U.S. Holders will generally not be able to apply any "passive
losses" against such income or gain. Dividends from us (to the extent they do
not constitute a capital gain dividend or a return of capital) will generally be
treated as investment income for purposes of the investment interest limitation.
Net capital gain from the sale or other disposition of shares of common stock
and capital gain dividends will generally not be considered investment income
for purposes of the investment interest limitation.
Sale of Common Stock.
Upon any sale or other disposition of common stock, a U.S. Holder will
generally recognize gain or loss for Federal income tax purposes in an amount
equal to the difference between (i) the amount of cash and the fair market value
of any property received on such sale or other disposition and (ii) the holder's
adjusted basis in such common stock for tax purposes. Such gain or loss will be
capital gain or loss if the common stock has been held by the U.S. Holder as a
capital asset and will be eligible for preferential capital gains rates if such
common stock has been held for more than one year, as discussed above under
"-- Taxation of Taxable U.S. Holders -- Distributions to U.S. Holders." In
general, any loss recognized by a U.S. Holder upon the sale or other disposition
of our common stock that has been held for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions received by such U.S. Holder from us which were treated
as long-term capital gains.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Based upon a published ruling by the Internal Revenue Service,
distributions that we make to a stockholder that is a tax-exempt entity will not
constitute "unrelated business taxable income" ("UBTI"), provided that the
tax-exempt entity has not financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Internal Revenue Code and
the shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity.
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Notwithstanding the preceding paragraph, however, a portion of the
dividends we distribute may be treated as UBTI to certain U.S. private pension
trusts if we were treated as a "pension-held REIT." We are not currently nor do
we anticipate that we will be a "pension-held REIT." If we were to become a
pension-held REIT, these rules would generally only apply to certain U.S.
pension trusts that hold more than 10% of our stock.
TAXATION OF NON-UNITED STATES STOCKHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of common stock by persons that are, for purposes of such
taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts (collectively, "Non-U.S. Holders") are
complex, and no attempt is made herein to provide more than a brief summary of
such rules. Accordingly, the discussion does not address all aspects of United
States federal income tax and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Holder in light of its
particular circumstances. In addition, this discussion is based on current law,
which is subject to change, and assumes that we qualify for taxation as a REIT.
Prospective Non-U.S. Holders should consult their tax advisors to determine the
impact of Federal, state, local and foreign tax laws with regard to an
investment in common stock (including reporting requirements) in light of their
individual investment circumstances. As discussed below, because of the nature
of our income, investment in our stock by Non-U.S. Holders may be less favorable
than investments in REITs whose principal activity is not timber-related.
Distributions to Non-U.S. Holders.
Under the Foreign Investors In Real Property Tax Act ("FIRPTA"),
distributions to a Non-U.S. Holder that are attributable to gain from sales or
exchanges by us of United States real property interests will cause the Non-U.S.
Holder to be treated as recognizing such gain as income effectively connected
with a United States trade or business. Non-U.S. Holders would thus generally be
subject to tax at the same rates applicable to domestic stockholders (subject to
a special alternative minimum tax in the case of nonresident alien individuals).
Such gain may also be subject to a 30% branch profits tax in the hands of a
Non-U.S. Holder that is a corporation. We are generally required to withhold 35%
of any such distribution. That amount is creditable against the Non-U.S.
Holder's United States federal income tax liability. It should be noted that the
35% withholding tax rate on capital gain dividends is higher than the maximum
rate on long-term capital gains of U.S. Holders that are individuals. It should
also be emphasized that the income we will receive under our timber cutting
contracts will be characterized for Federal income tax purposes as gain from the
sale or other disposition of real property. Accordingly, the portion of any
distribution that we make that is not a return of capital will be subject to
such treatment. Although we currently expect that a substantial portion of each
distribution will be a return of capital that would not be subject to such
treatment, no assurances can be given that the relative amounts of capital gain
and return of capital would not change over time and, because at the time of a
distribution we will generally not know whether such distribution is in excess
of earnings and profits, we intend to withhold at a rate of 35% on the entire
amount of any distribution.
The portion of dividends received by Non-U.S. Holders payable out of our
earnings and profits which are not attributable to capital gains, if any, and
which are not effectively connected with a U.S. trade or business of the
Non-U.S. Holder will be subject to U.S. withholding tax at the rate of 30%
(unless reduced by treaty). In general, Non-U.S. Holders will not be considered
engaged in a U.S. trade or business solely as a result of their ownership of
common stock. In cases where the dividend income from a Non-U.S. Holder's
investment in common stock is (or is treated as) effectively connected with the
Non-U.S. Holder's conduct of a U.S. trade or business, the Non-U.S. Holder will
generally be subject to U.S. tax at graduated rates, in the same manner as U.S.
stockholders are subject to tax with
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respect to such dividends (and may also be subject to the 30% branch profits tax
in the case of a Non-U.S. Holder that is a foreign corporation).
In general, for purposes of determining whether tax is to be withheld at a
30% rate or at a reduced rate as specified in an applicable tax treaty, we will
presume that dividends paid on or before December 31, 1999 to a holder with an
address in a foreign country will be paid to a resident of such foreign country
absent knowledge that such treatment is not warranted. Under recently finalized
United States Treasury Regulations applicable to dividends paid after December
31, 2000 (the "Final Regulations"), to obtain a reduced rate of withholding
under a treaty, a Non-U.S. Holder will be required to either (i) provide an
Internal Revenue Service Form W-8BEN certifying such Non-U.S. Holder's
entitlement to benefits under a treaty together with, in certain circumstances,
additional information, or (ii) satisfy certain other applicable treaty
certification requirements. The Final Regulations also provide special rules to
determine whether, for purposes of determining the applicability of a tax treaty
and for purposes of the 30% withholding tax described above, dividends paid to a
Non-U.S. Holder that is an entity should be treated as paid to the entity or to
those persons or entities holding an interest in such entity. Non-U.S. Holders
who hold common stock through U.S. pass-through entities should consult their
tax advisors.
Distributions in excess of our current and accumulated earnings and profits
to Non-U.S. Holders will not be subject to tax to the extent that they do not
exceed the adjusted basis of the stockholder's common stock, but rather will
reduce the adjusted basis of such common stock. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Holder's common stock,
they will give rise to gain from the sale or exchange of its common stock, the
tax treatment of which is described below. Because at the time of a distribution
we will generally not know whether such distribution is in excess of earnings
and profits, we intend to withhold at rate of 35% on the entire amount of any
distribution. Nevertheless, a Non-U.S. Holder may seek a refund of such amounts
from the Internal Revenue Service if it subsequently determines that such
distribution was, in fact, in excess of our current or accumulated earnings and
profits and the amount withheld exceeded the Non-U.S. Holder's United States tax
liability, if any.
Sale of Common Stock.
Gain recognized by a Non-U.S. Holder upon the sale or exchange of common
stock will generally not be subject to United States taxation unless such shares
constitute a "United States real property interest" within the meaning of
FIRPTA. The common stock will not constitute a "United States real property
interest" so long as we are a "domestically controlled REIT." A "domestically
controlled REIT" is a REIT in which, at all times during a specified testing
period, less than 50% in value of its stock is held directly or indirectly by
Non-U.S. Holders. We believe that we are currently a "domestically controlled
REIT," because the common stock is publicly traded; however, no assurance can be
given that we will continue to be a "domestically controlled REIT." If we cease
to be a "domestically-controlled REIT," gain arising from the disposition of our
shares will not be subject to tax, provided that our shares are publicly traded
on an established securities market (as determined under applicable Treasury
Regulations) and the stockholder holds 5% or less of our outstanding stock
during the five-year period ending on the date of disposition.
Notwithstanding the foregoing, a Non-U.S. Holder will be subject to tax on
gain from the sale or exchange of common stock not otherwise subject to FIRPTA
if the Non-U.S. Holder is a nonresident alien individual who is present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States. In such case, the nonresident alien individual will be
subject to a 30% United States withholding tax on the amount of such
individual's gain.
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Backup Withholding Tax and Information Reporting.
We must report annually to the Internal Revenue Service and to each
Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, such stockholder, regardless of whether any tax was actually
withheld. That information may also be made available to the tax authorities of
the country in which a Non-U.S. Holder resides.
Backup withholding tax (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish certain information under the
United States information reporting requirements) will generally not apply to
dividends (including any capital gain dividends) that we pay on common stock to
a Non-U.S. Holder at an address outside the United States.
The payment of the proceeds from the disposition of common stock to or
through a U.S. office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of the proceeds from the disposition of common stock to
or though a non-U.S. office of a non-U.S. broker will generally not be subject
to backup withholding and information reporting.
The backup withholding tax is not an additional tax and may be credited
against a Non-U.S. Holder's United States federal income tax liability or
refunded to the extent excess amounts are withheld, provided that the required
information is supplied to the Service.
The Service has issued final Treasury Regulations regarding the backup
withholding rules as applied to Non-U.S. Holders. Those final Treasury
Regulations alter the current system of backup withholding compliance and will
be effective for payments made after December 31, 2000. You should consult your
tax advisors regarding the application of the final Treasury Regulations and
their potential effect on the ownership of common stock.
TAX ASPECTS OF OUR OWNERSHIP OF INTERESTS IN THE OPERATING PARTNERSHIP
Substantially all of our investments are held indirectly through the
operating partnership. In general, partnerships are "pass-through" entities that
are not subject to Federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. Skadden, Arps,
Slate, Meagher & Flom LLP, our special counsel, has delivered an opinion,
substantially to the effect that the operating partnership will not be
classified as an association subject to tax as a corporation, but will instead
be classified as either (A) a disregarded entity if we own 100% of its
membership interests directly or indirectly through one or more of our wholly-
owned subsidiaries, or (B) a partnership if, in addition to us at least one
other person that is unrelated to us or that is not, directly or indirectly, a
100% owned disregarded entity, owns an interest in the operating partnership.
Accordingly, we will include in our income our proportionate share of the
foregoing items of the operating partnership for purposes of the various REIT
income tests and in the computation of our REIT taxable income. Moreover, for
purposes of the REIT asset tests, we will include our proportionate share of
assets held through the operating partnership.
OTHER TAXES
We, the operating partnership, any of our subsidiaries, or our stockholders
may be subject to foreign, state and local tax in various countries, states and
localities, including those countries, states and localities in which we or they
transact business, own property, or reside. The state, local or foreign tax
treatment of us and the stockholders in those jurisdictions may differ from the
Federal income tax treatment described above. Consequently, you should consult
your tax advisor regarding the effect of
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foreign, state and local tax laws upon an investment in the common stock in
light of your individual investment circumstances.
PROPOSED CHANGES TO REIT QUALIFICATION REQUIREMENTS
On August 5, 1999, Congress passed a bill that was recently vetoed by
President Clinton, which if enacted into law, would have significantly modified
certain aspects of the REIT gross income and asset tests. Included in the vetoed
legislation were the following modifications:
- Under current law a REIT is prohibited from owning more than 10% of the
voting securities of any corporation. The legislation would modify the
current ownership limitations to prohibit a REIT from owning more than
10% of the voting securities or 10% of the value of any corporation,
unless the corporation elected to be treated as a "taxable REIT
subsidiary." A REIT would be permitted to own up to 100% of the voting
securities and 100% of the value of the other interests in a taxable REIT
subsidiary. In addition, the 5% REIT asset test would not apply to
taxable REIT subsidiaries, but taxable REIT subsidiaries would be subject
to the 25% asset test (see "-- Taxation of Plum Creek as a REIT -- Asset
Tests").
- The legislation would also apply certain limitations to the deductibility
of interest paid by a taxable REIT subsidiary to a related REIT.
Although Congress' bill has been vetoed by the President, it is possible
that similar legislation will be reintroduced in Congress and ultimately enacted
into law. If legislation were to be enacted with provisions that are identical
to those contained in the vetoed bill, such legislation would not apply to our
unconsolidated subsidiaries unless they were to acquire a substantial new line
of business or substantial assets. If we were required to convert our
unconsolidated subsidiaries into taxable REIT subsidiaries, we would be
permitted to own up to 100% of the voting stock and 100% of the value of such
subsidiaries. In such a case, it is possible that the limitations on interest
deductions would apply to interest payments made by the subsidiaries to us, in
which case, the subsidiaries would be subject to increased taxation thereby
diminishing our after-tax cash-flow from such subsidiaries. It is presently
uncertain whether the vetoed legislation will be reintroduced in Congress, and
if reintroduced, whether such legislation would be enacted into law, or, if
enacted, what the terms, including the effective dates, of the legislation would
be. Further, if legislation that is identical to the vetoed legislation is
enacted into law, it would eliminate the need for our senior management to own
any equity in the unconsolidated subsidiaries, and would allow us to report the
financial operations of these subsidiaries on a consolidated basis.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of our capital stock does not purport to
be complete and is qualified in its entirety by reference to our certificate of
incorporation, our bylaws and the Delaware General Corporation Law ("DGCL"). We
have filed copies of our certificate of incorporation and bylaws with the
Securities and Exchange Commission. These documents are incorporated by
reference into the registration statement of which this prospectus is a part.
GENERAL
We have authorized 525,634,567 shares of capital stock, consisting of:
- 300 million shares of common stock, par value $.01 per share;
- 634,566 shares of special voting stock, par value $.01 per share;
- 150,000,001 shares of excess stock, par value $.01 per share; and
- 75 million shares of preferred stock, par value $.01 per share.
Upon the completion of the this offering, 67,822,009 shares of common stock
will be issued and outstanding, 634,566 shares of special voting stock will be
issued and outstanding and no shares of preferred stock will be issued and
outstanding. We issued our special voting stock to the partners of our former
general partner in connection with our conversion to a REIT.
COMMON STOCK AND SPECIAL VOTING STOCK
Each holder of shares of our common stock and special voting stock is
entitled to one vote for each share held on all matters to be voted upon by our
stockholders. In addition, if individuals affiliated with our former general
partner and designated in our certificate of incorporation retain beneficial
ownership of at least five million shares of common stock and/or special voting
stock, in the aggregate, subject to customary adjustment to avoid dilution:
- those individuals will have the right to designate, for nomination
purposes only, a sufficient number of our nominees for our board of
directors that, taken together with any previously elected designees,
could constitute a majority of our board of directors; and
- holders of special voting stock will have the right to vote their special
voting stock, in a separate class vote, on some matters required to be
submitted for stockholder approval, including:
-- amendments to our certificate of incorporation;
-- issuances of more than 20% of our outstanding common stock for non-cash
consideration;
-- dissolution;
-- mergers;
-- the sale of all or substantially all of our assets; and
-- amendments to our bylaws as proposed by our stockholders.
Generally, matters submitted to our stockholders require the affirmative
vote of stockholders holding a majority of the number of votes cast either
present in person or by proxy at a duly convened meeting of stockholders, except
that the removal of directors, some mergers and the amendment of specific
sections of our certificate of incorporation requires the affirmative vote of
stockholders holding 66 2/3% of the
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<PAGE> 91
number of votes entitled to be cast on such proposals. Our board of directors is
divided into three classes, with the directors in each class serving for three
years and until their successors are duly qualified. Therefore, in general, the
replacement of a majority of our board of directors will take two years or the
vote of 66 2/3% of the shares of common stock outstanding.
Subject to the rights of the holders of preferred stock, and subject to any
other provisions of our certificate of incorporation, holders of common stock
are entitled to receive REIT distributions out of assets legally available
therefor as our board of directors may determine. Holders of special voting
stock are entitled to receive the same REIT distributions as holders of common
stock, except that REIT distributions paid in common stock will be paid in
special voting stock to these holders.
Our shares of special voting stock are convertible, at the holder's option,
into an equal number of shares of common stock. If the beneficial ownership of
the persons designated in our certificate of incorporation drops below five
million shares of common stock and/or special voting stock, in the aggregate,
subject to customary adjustment to avoid dilution, all of our outstanding shares
of special voting stock will automatically convert into common stock. Finally,
if shares of our special voting stock are transferred to persons unaffiliated
with the individuals designated in our certificate of incorporation, these
shares will automatically convert into an equal number of shares of common
stock.
Upon any liquidation or dissolution, the holders of our common stock and
special voting stock would be entitled to share ratably in our assets that are
legally available for distribution to stockholders after payment of liabilities.
If we have any preferred stock outstanding, holders of the preferred stock may
be entitled to distribution and/or liquidation preferences. In either case, we
must pay the applicable distribution to the holders of our preferred stock
before we may pay distributions to the holders of our common stock or special
voting stock. Except as discussed below, holders of our common stock and special
voting stock have no conversion, sinking fund, redemption, preemptive or
subscription rights. In addition, holders of our common stock and special voting
stock do not have cumulative voting rights. Holders of our special voting stock
have the right to convert shares of special voting stock into our shares of
common stock.
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A. acts as transfer agent and registrar for our common stock.
PREFERRED STOCK
Our board of directors has the authority to determine and alter the rights,
preferences, privileges and restrictions granted to or imposed on any unissued
series of our preferred stock and to fix the number of shares, distribution
rights, conversion or exchange rights, voting rights, redemption rights,
liquidation preferences, and sinking funds of any series of our preferred stock.
The authorized shares of our preferred stock will be available for issuance
without further action by our stockholders, unless stockholder action is
required by applicable law or by the rules of a stock exchange on which any
series of our stock may be listed. As of the date of this prospectus, no shares
of preferred stock are outstanding and we have no current plans to issue any
preferred stock.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF SHARES
In order for us to qualify as a REIT under the Internal Revenue Code, among
other things, not more than 50% in value of our outstanding capital stock may be
owned, directly or indirectly, by five or fewer individuals, as defined by the
Internal Revenue Code. Also, shares of our capital stock must be beneficially
owned by 100 or more persons during the last 335 days of a taxable year of 12
months, other than the first year or during a proportionate part of a shorter
year taxable year.
88
<PAGE> 92
To protect us from losing our status as a REIT, our certificate of
incorporation, subject to some exceptions, provides that no person, other than
the individuals designated in our certificate of incorporation and their
affiliates, may beneficially own more than the Ownership Limit of our shares of
capital stock. "Ownership Limit" means the provisions in our certificate of
incorporation which prohibit ownership either directly or under the applicable
attribution rules of the Internal Revenue Code of more than 5% of the lesser of
the total number of shares of common stock outstanding or the value of the
outstanding shares of common stock by any stockholder other than by some
designated persons agreed to by us. These ownership restrictions, however, allow
the individuals designated in our certificate of incorporation and some of their
affiliates to beneficially own up to 27% of our capital stock, which exception
will be permanently reduced in accordance with any reduction in their
proportional beneficial ownership from sales of shares of our capital stock by
these individuals and their affiliates or new issuances of capital stock by us,
and which exception will be increased to adjust for repurchases of capital stock
by us.
Any transfer of shares of our capital stock is null and void, and the
intended transferee will acquire no rights to the shares of capital stock, if
the transfer would do any of the following:
- cause any person to beneficially own shares of our capital stock in
excess of the Ownership Limit not otherwise permitted as provided above;
- result in the shares of our capital stock being owned by fewer than 100
persons within the meaning of 856(a)(5) of the Internal Revenue Code;
- result in us being "closely held" within the meaning of section 856(h) of
the Internal Revenue Code;
- result in us failing to qualify as a "domestically controlled REIT"
within the meaning of section 897(h)(4)(B) of the Internal Revenue Code;
or
- otherwise cause us to fail to qualify as a REIT.
The restriction on transferability and ownership described above which
prohibits any person from beneficially owning shares of our capital stock in
excess of the Ownership Limit will not apply if our board of directors, upon
receipt of a ruling from the Internal Revenue Service or an opinion of counsel
or other evidence or undertakings acceptable to it, waives the application of
the Ownership Limit to a person subject to the limit, provided that:
- our board of directors obtains representations and undertakings as are
reasonably necessary to ascertain that the acquiror's beneficial
ownership or constructive ownership of shares of capital stock will not
at that time or in the future result in any of the other situations
described above; and
- the acquiror agrees in writing that any violation or attempted violation
of any other limitations, restrictions and conditions that our board of
directors may impose at the time of waiver with respect to the acquiror
will result in the conversion of these shares in excess of the original
limit applicable to the acquiror into shares of excess stock.
If any purported transfer of our capital stock or other event resulting in
an increase in any holder's percentage interest in our common stock would cause
a purported transferee or holder to be in violation of the Ownership Limit or
would cause us to be disqualified as a REIT, then the purported transferee or
holder will not acquire or will cease to own, as the case may be, the number of
shares in excess of the Ownership Limit or in excess of the highest number of
shares which would allow us to remain qualified as a REIT. The excess stock will
be converted automatically into an equal number of shares of stock and
transferred automatically, by operation of law, to a trust, the beneficiary of
which will be a qualified charitable organization selected by us. Automatic
transfer shall be deemed to be effective as of the close
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<PAGE> 93
of business on the trading day prior to the date of the violative transfer or
event. Upon the occurrence of a conversion of shares of capital stock into an
equal number of shares of excess stock, these shares of capital stock shall be
automatically retired and canceled, without any action required by our board of
directors, and shall thereupon be restored to the status of authorized but
unissued shares of the particular class or series of capital stock from which
this excess stock was converted and may be reissued by us as that particular
class or series of capital stock.
As soon as practical after the transfer of shares of excess stock to the
trust, the trustee of the trust, who shall be designated by us, will be required
to designate one or more persons who could own excess shares without violating
the Ownership Limit or causing us to be disqualified as a REIT and to sell
excess shares to these permitted transferees. Upon the trustee's designation and
sale of the excess stock to the permitted transferee, shares of excess stock
will automatically convert into an equal number of shares of capital stock of
the same class and series from which the excess stock was converted. Upon the
occurrence of a conversion of shares of excess stock into an equal number of
shares of capital stock, shares of excess stock shall be automatically retired
and canceled, without any action by our board of directors, and shall be
restored to the status of authorized but unissued shares of excess stock and may
be reissued by us as excess stock. However, if the transfer of excess stock to a
purported permitted transferee would or does violate any of the transfer
restrictions set forth above, this transfer shall be void as to that number of
shares of excess stock that cause the violation of this restriction when shares
are converted into shares of capital stock and the purported permitted
transferee shall be deemed to be a prohibited owner and shall acquire no rights
in these shares of excess stock or our capital stock. Shares of our capital
stock shall be automatically converted into excess stock and transferred to the
trust from which they were originally transferred.
Any prohibited owner shall be entitled, following acquisition of the shares
of excess stock and the subsequent designation and sale of excess stock to a
permitted transferee, to receive from the trustee sales proceeds received by the
trust for the excess shares. The proceeds of a sale are calculated according to
a formula in our certificate of incorporation.
In addition, excess shares held in the trust shall be deemed to have been
offered for sale to us, or our designee, at a price per share equal to the
lesser of the price per share in the transaction that created the excess stock
or market value. We shall have the right to accept this offer for a period of 90
days.
All certificates representing shares of common stock bear a legend
referring to the restrictions described above.
We are required to keep records which disclose the actual ownership of our
outstanding shares of capital stock. Accordingly, in order to comply with these
record keeping requirements, any person who beneficially owns more than 3% of
the our outstanding shares of any class or series of our capital stock, or the
lower percentages as are then required pursuant to regulations under the
Internal Revenue Code, is required to provide to us, by January 31st of each
year, a written statement or affidavit stating the name and address of the
beneficial owner, the number of shares beneficially owned by the beneficial
owner and a description of how the shares are held. In addition, each record and
beneficial owner of our capital stock shall, upon demand, be required to
disclose to us in writing the information we may request in order to determine
our status as a REIT and to ensure compliance with the Ownership Limit. In
addition, the individuals designated in our certificate of incorporation and
their affiliates shall promptly notify us upon any transfer of our capital
stock.
The ownership limitations described above could have the effect of
delaying, deferring or preventing a change of control in which holders of common
stock might receive a premium for their shares over the then prevailing market
price. See also "Risk Factors -- Provisions in our certificate of incorporation
and Delaware law may prevent a change in control."
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<PAGE> 94
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
We are subject to the "business combination" statute of the Delaware
General Corporation Law. In general, the statute prohibits us from engaging in
various "business combination" transactions with any "interested stockholder"
for a period of three years after the date of the transaction in which the
person became an "interested stockholder" unless:
- the transaction is approved by our board of directors prior to the date
the "interested stockholder" obtains "interested stockholder" status;
- upon consummation of the transaction, the "interested stockholder"
beneficially owns at least 85% of our outstanding voting stock at the
time the transaction commenced, excluding shares owned by:
- our officers who are also directors;
- our employee stock plans, if any, in which our employee participants do
not have the right to determine confidentially whether the shares held
subject to the plan will be tendered in a tender or exchange offer; or
- the transaction is approved by our board of directors and authorized at
an annual or special meeting of our stockholders holding an affirmative
vote of at least 66 2/3% of our outstanding voting stock, which is not
owned by the "interested stockholder."
Under this statute, a "business combination" includes the following:
- mergers;
- asset sales; and
- other transactions resulting in financial benefit to the "interested
stockholder."
An "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years, did own 15% or more of our voting
stock.
This statute could prohibit or delay a merger or other takeover or change
of control. Accordingly, this statute may discourage any attempts to acquire us.
91
<PAGE> 95
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Goldman, Sachs & Co. are acting as representatives, have
severally agreed to purchase, and we have agreed to sell to them severally the
number of shares indicated below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Goldman, Sachs & Co.........................................
---------
Total............................................. 5,000,000
=========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered hereby are subject to
the approval of specific legal matters by their counsel and to specific other
conditions. The underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus if any of the shares are taken.
However, the underwriters are not required to take or pay for the shares covered
by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to specific dealers at a price that represents
a concession not in excess of $ a share under the public offering
price. Any underwriter may allow, and specific dealers may reallow, a concession
not in excess of $ a share to other underwriters or to other dealers.
After the initial offering of the shares of common stock, the offering price and
other selling terms may from time to time be varied by the representatives.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 750,000
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions and,
if necessary, the amount of our third quarter distribution with respect to these
shares. The underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of common stock offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to some conditions,
to purchase about the same percentage of the additional shares of common stock
as the number listed next to the underwriter's name in the preceding table bears
to the total number of shares of common stock listed next to the names of all
underwriters in the preceding table. If the underwriters' option is exercised in
full, the total price to the public would be $ , the total
underwriters' discounts and commission would be $ and our total
proceeds would be $ .
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<PAGE> 96
We and our directors, executive officers and some of our stockholders have
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of
the underwriters, they will not, during the period ending 90 days after the date
of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock,
whether any transaction described above is to be settled by delivery of common
stock or other securities, in cash or otherwise. The restrictions described in
this paragraph do not apply to:
- the sale of shares to the underwriters;
- our issuance of shares of common stock upon the exercise of an option or
a warrant or the conversion of a security outstanding on the date of this
prospectus of which the underwriters have been advised in writing; or
- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
We estimate that our expenses to be incurred in connection with the
offering of our common stock will be approximately $660,000. The underwriters
have agreed to reimburse us for a portion of our expenses incurred in connection
with this offering.
We and the underwriters have agreed to indemnify each other against
specific liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Specific legal matters, including the validity of the issuance of the
common stock being offered by this prospectus and the United States federal
income tax consequences in connection with this offering, will be passed upon
for Plum Creek Timber Company, Inc. by Skadden, Arps, Slate, Meagher & Flom LLP,
Los Angeles, California. Brown & Wood LLP, San Francisco, California will act as
counsel for the underwriters.
93
<PAGE> 97
EXPERTS
The combined balance sheet as of December 31, 1998 and 1997, and the
combined statements of income and cash flows for each of the three years in the
period ended December 31, 1998 of Plum Creek Timber Company, L.P. have been
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements, and other information with the SEC. You
can read and copy these reports, proxy statements and other information
concerning us at the SEC's Public Reference Room at 450 Fifth Street, N.W.
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Room. The SEC maintains an internet site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding issuers that file electronically, including
ourselves. Our common stock is quoted on the New York Stock Exchange and the
Pacific Exchange. These reports, proxy statements and other information are also
available for inspection at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005, or the offices of the Pacific Exchange, 301
Pine Street, San Francisco, California, 94104.
This prospectus is part of a registration statement that we filed with the
SEC. You can obtain the full registration statement from the SEC as indicated
above.
The SEC allows us to "incorporate by reference" the information we file
with the SEC. This permits us to disclose important information to you by
referring to these filed documents. Any information referred to in this way is
considered part of this prospectus, and any information that we file with the
SEC after the date of this prospectus will automatically be deemed to update and
supersede this information. We incorporate by reference the following documents
that have been filed with the SEC:
- Annual Report on Form 10-K for the fiscal year ended December 31, 1998
(filed March 18, 1999) and Amendment 1 to the Annual Report on Form
10-K/A dated March 29, 1999 (filed March 31, 1999);
- Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
1999 (filed May 14, 1999) and June 30, 1999 (filed August 11, 1999);
- Current Reports on Form 8-K dated February 8, 1999 (filed February 10,
1999), March 12, 1999 (filed March 12, 1999), March 18, 1999 (filed March
22, 1999), March 22, 1999 (filed March 23, 1999), March 24, 1999 (filed
March 25, 1999), March 26, 1999 (filed March 31, 1999), March 29, 1999
(filed March 30, 1999), April 9, 1999 (filed April 12, 1999), April 19,
1999 (filed April 20, 1999), June 21, 1999 (filed June 22, 1999), July 1,
1999 (filed July 1, 1999), July 1, 1999 (filed July 14, 1999) and October
5, 1999 (filed October 6, 1999); and
- Registration Statement on Form 8-A dated July 1, 1999 (filed July 1,
1999).
We also incorporate by reference any future filings made with the SEC
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act.
We will provide without charge upon written or oral request, a copy of any
or all of the documents that are incorporated by reference into this prospectus.
Requests should be directed to Director, Investor Relations, Plum Creek Timber
Company, Inc., 999 Third Avenue Suite 2300, Seattle, Washington 98104 (telephone
number 206-467-3600).
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<PAGE> 98
PLUM CREEK TIMBER COMPANY, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PLUM CREEK TIMBER COMPANY, L.P. COMBINED FINANCIAL
STATEMENTS:
Report of Independent Accountants......................... F-2
Combined Statement of Income -- Years Ended December 31,
1996, 1997, 1998 and Six Months Ended June 30, 1998 and
1999 (unaudited)....................................... F-3
Combined Balance Sheet -- December 31, 1997 and 1998, and
June 30, 1999
(unaudited)............................................ F-4
Combined Statement of Cash Flows -- Years Ended December
31, 1996, 1997, 1998 and Six Months Ended June 30, 1998
and 1999 (unaudited)................................... F-5
Notes to Combined Financial Statements.................... F-6
</TABLE>
F-1
<PAGE> 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Unitholders and Directors
of the General Partner of
Plum Creek Timber Company, L.P.
In our opinion, the accompanying combined balance sheet and the related
combined statements of income and of cash flows present fairly, in all material
respects, the financial position of Plum Creek Timber Company, L.P. at December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Seattle, Washington
January 26, 1999
F-2
<PAGE> 100
PLUM CREEK TIMBER COMPANY, L.P.
COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $633,741 $725,571 $699,370 $336,124 $362,570
-------- -------- -------- -------- --------
Costs and Expenses:
Cost of Goods Sold............ 429,897 503,259 505,366 239,768 257,907
Selling, General and
Administrative............. 38,856 49,031 52,917 27,430 21,547
-------- -------- -------- -------- --------
Total Costs and
Expenses........... 468,753 552,290 558,283 267,198 279,454
-------- -------- -------- -------- --------
Operating Income................ 164,988 173,281 141,087 68,926 83,116
Interest Expense................ (50,141) (60,364) (60,622) (29,576) (37,049)
Interest Income................. 1,291 1,113 1,042 467 610
Gain (Loss) on Disposition of
Assets........................ 108,852 (1,223) (805) (421) 120
Reorganization Costs............ (4,763) (1,748) (5,053)
Other Expense -- Net............ (1,031) 14 (90) (362)
-------- -------- -------- -------- --------
Income before Income Taxes...... 224,990 111,776 75,953 37,558 41,382
Provision for Income Taxes...... 1,391 80 517 147 985
-------- -------- -------- -------- --------
Net Income...................... 223,599 111,696 75,436 37,411 40,397
General Partner Interest........ 27,777 31,918 33,713 16,599 17,162
-------- -------- -------- -------- --------
Net Income Allocable to
Unitholders................... $195,822 $ 79,778 $ 41,723 $ 20,812 $ 23,235
======== ======== ======== ======== ========
Net Income per Unit............. $ 4.71 $ 1.72 $ 0.90 $ 0.45 $ 0.50
======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Combined Financial Statements
F-3
<PAGE> 101
PLUM CREEK TIMBER COMPANY, L.P.
COMBINED BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents....................... $ 135,381 $ 113,793 $ 96,188
Accounts Receivable............................. 28,698 32,007 43,267
Inventories..................................... 58,956 55,963 46,095
Timber Contract Deposits........................ 3,711 2,647 4,242
Other Current Assets............................ 5,508 6,053 5,873
---------- ---------- ----------
232,254 210,463 195,665
Timber and Timberlands -- Net..................... 887,694 1,030,484 1,015,007
Property, Plant and Equipment -- Net.............. 163,556 186,179 178,037
Other Assets...................................... 17,393 11,117 11,216
---------- ---------- ----------
Total Assets............................ $1,300,897 $1,438,243 $1,399,925
========== ========== ==========
LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt............... $ 18,400 $ 18,400 $ 26,950
Accounts Payable................................ 12,990 15,320 14,865
Interest Payable................................ 9,556 10,964 11,294
Wages Payable................................... 17,156 14,795 13,143
Taxes Payable................................... 4,757 4,081 4,304
Workers' Compensation Liabilities............... 1,450 1,550 1,300
Other Current Liabilities....................... 9,683 15,766 8,456
---------- ---------- ----------
73,992 80,876 80,312
Long-Term Debt.................................... 584,000 742,608 715,453
Line of Credit.................................... 161,000 200,000 218,400
Workers' Compensation Liabilities................. 8,466 7,495 7,280
Other Liabilities................................. 3,102 1,849 3,524
---------- ---------- ----------
Total Liabilities....................... 830,560 1,032,828 1,024,969
---------- ---------- ----------
Commitments and Contingencies
PARTNERS' CAPITAL
Limited Partners' Units........................... 469,824 406,857 377,284
General Partner................................... 513 (1,442) (2,328)
---------- ---------- ----------
Total Partners' Capital................. 470,337 405,415 374,956
---------- ---------- ----------
Total Liabilities and Partners'
Capital.............................. $1,300,897 $1,438,243 $1,399,925
========== ========== ==========
</TABLE>
See accompanying Notes to Combined Financial Statements
F-4
<PAGE> 102
PLUM CREEK TIMBER COMPANY, L.P.
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income..................................... $ 223,599 $ 111,696 $ 75,436 $ 37,411 $ 40,397
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization..... 56,945 70,243 69,287 31,876 34,988
Loss (Gain) on Property
Dispositions -- Net........................ (108,852) 1,223 805 421 (120)
Working Capital Changes:
Accounts Receivable........................ 8,053 (5,001) (3,309) (5,900) (11,260)
Inventories................................ (1,052) (5,072) 6,974 15,026 9,868
Timber Contract Deposits................... 1,663 2,276 1,064 (1,224) (1,595)
Other Current Assets....................... (10,579) 9,517 (513) (2,610) 180
Accounts Payable........................... (2,328) (453) 2,330 3,153 (455)
Interest Payable........................... 1,987 26 1,408 (281) 330
Wages Payable.............................. (77) 3,969 (2,361) (6,929) (1,652)
Taxes Payable.............................. (661) (518) (676) 985 223
Workers' Compensation Liabilities.......... (868) 100 (760) (250)
Other Current Liabilities.................. 2,148 471 6,083 8,141 (7,310)
Other........................................ 1,970 1,599 7,376 3,940 1,553
--------- --------- --------- --------- ---------
Net Cash Provided By Operating Activities...... 171,948 189,976 164,004 83,249 64,897
--------- --------- --------- --------- ---------
Cash Flows From Investing Activities:
Southern Region Acquisition.................... (555,966)
Proceeds from Newport Asset Sale............... 148,676
Business Acquisitions.......................... (12,353)
Additions to Other Properties.................. (19,280) (28,348) (54,927) (35,955) (12,193)
Proceeds from Other Property Dispositions...... 7,329 917 1,457 310 812
Other.......................................... (649) (11)
--------- --------- --------- --------- ---------
Net Cash Used In Investing Activities.......... (419,241) (28,080) (65,834) (35,645) (11,381)
--------- --------- --------- --------- ---------
Cash Flows From Financing Activities:
Cash Distributions............................. (110,116) (133,007) (140,358) (69,445) (70,916)
Borrowings on Lines of Credit and Bridge
Facility..................................... 948,250 814,950 695,000 388,000 310,900
Payments on Lines of Credit and Bridge
Facility..................................... (884,750) (814,950) (656,000) (349,000) (292,500)
Issuance of Long-Term Debt..................... 200,000
Retirement of Long-Term Debt................... (14,100) (17,400) (18,400) (18,400) (18,605)
Issuance of Limited Partner Units.............. 144,297
--------- --------- --------- --------- ---------
Net Cash Provided By (Used In) Financing
Activities................................... 283,581 (150,407) (119,758) (48,845) (71,121)
--------- --------- --------- --------- ---------
Increase (Decrease) in Cash and Cash
Equivalents.................................... 36,288 11,489 (21,588) (1,241) (17,605)
Cash and Cash Equivalents:
Beginning of Year.............................. 87,604 123,892 135,381 135,381 113,793
--------- --------- --------- --------- ---------
End of Year.................................... $ 123,892 $ 135,381 $ 113,793 $ 134,140 $ 96,188
========= ========= ========= ========= =========
Supplementary Cash Flow Information
Cash paid during the year for:
Interest Paid -- Net........................... $ 46,635 $ 59,650 $ 58,785
Income Taxes Paid -- Net....................... $ 972 $ 737 $ 362
Noncash investing and financing activities:
Business Acquisition........................... $ 177,060
Issuance of Unsecured Debt for Business
Acquisition.................................. $ 177,060
</TABLE>
See accompanying Notes to Combined Financial Statements
F-5
<PAGE> 103
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
BASIS OF PRESENTATION. Plum Creek Timber Company, L.P. (the "Partnership"),
a Delaware limited partnership, Plum Creek Manufacturing, L.P.
("Manufacturing"), and Plum Creek Marketing, Inc. ("Marketing"), own, manage and
operate approximately 3.3 million acres of timberland and eleven wood products
conversion facilities in the Northwest, Southern and Northeastern United States.
The Partnership owns 98 percent of Manufacturing and 96 percent of Marketing.
Plum Creek Management Company, L.P. (the "General Partner"), manages the
businesses of the Partnership, Manufacturing and Marketing and owns the
remaining two percent general partner interest of Manufacturing and four percent
of Marketing. As used herein, "Company" refers to the combined entities of the
Partnership, Manufacturing and Marketing.
The combined financial statements include all the accounts of the
Partnership, Manufacturing and Marketing. All significant intercompany
transactions have been eliminated in combination.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
On July 1, 1999, the Partnership converted to a real estate investment
trust and became Plum Creek Timber Company, Inc. See Note 2 to the Combined
Financial Statements for discussion of the conversion and reorganization of the
Partnership. Presentation of the June 30, 1999 financial statements and notes
reflects the business of the Partnership. Any reference to transactions or
activities subsequent to June 30, 1999 relates to Plum Creek Timber Company,
Inc., the surviving entity. The structure and future accounting presentation for
Plum Creek Timber Company, Inc. are discussed in the pro forma financial data
contained herein. See "Unaudited Pro Forma Condensed Consolidated Financial
Statements."
NET INCOME PER UNIT. Net income per Unit is calculated using the weighted
average number of Units outstanding, divided into the combined Partnership net
income, after adjusting for the General Partner interest. The weighted average
number of Units outstanding was 41,619,803 for the year ended December 31, 1996,
and 46,323,300 for the years ended December 31, 1997 and 1998. For the six
months ended June 30, 1998 and 1999, the weighted average number of Units
outstanding was 46,323,300.
REVENUE RECOGNITION. Revenues received from the sale of logs, wood products
and by-products, primarily wood chips, are generally recorded as revenue at the
time of shipment. Sales are denominated in U.S. dollars. Sales of timberlands
identified by the Partnership as higher and better use lands (for use other than
for forest management purposes) are included in revenues when the sale is
consummated.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. Substantially all of the cash and cash equivalents are
deposited with one financial institution.
F-6
<PAGE> 104
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
INVENTORIES. Logs, work-in-process, and finished goods inventories are
stated at the lower of average cost or market on the last-in, first-out ("LIFO")
method. Cost for manufactured inventories includes raw materials, labor,
supplies, energy, depreciation and production overhead. Cost of log inventories
includes timber depletion, stumpage, associated logging and harvesting costs,
road costs and production overhead. The average cost method is used to value the
Company's supplies inventories.
TIMBER AND TIMBERLANDS. Timber and timberlands, including logging roads,
are stated at cost less depletion for timber previously harvested and
accumulated amortization. Cost of the Partnership's timber harvested is
determined based on the volume of timber harvested in relation to the amount of
estimated recoverable timber. The Partnership estimates its timber inventory
using statistical information and data obtained from physical measurements, site
maps, photo-types and other information gathering techniques. For timberlands
located in the Southern and Northeastern United States, estimates of future
growth and costs related thereto are also made. The cost of logging roads is
amortized over the estimated useful life on a straight-line basis.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated at
cost. Improvements and replacements are capitalized. Depreciation is provided
for on a straight-line basis for buildings and improvements (over 20 to 31 1/2
years) and on a unit-of-production basis for machinery and equipment, which
approximates a straight-line basis. Maintenance and repairs necessary to
maintain properties in operating condition are expensed as incurred. The cost
and related accumulated depreciation of property sold or retired are removed
from the accounts and any gain or loss is recorded.
INCOME TAXES. The Partnership and Manufacturing are not subject to federal
income tax and their income or loss is included in the tax returns of individual
Unitholders. The Partnership files composite returns in the states in which it
does business, paying taxes on behalf of nonresident Unitholders. State taxes
paid on behalf of nonresident Unitholders are included in other expense.
Marketing, as a separate taxable corporation, provides for income taxes on a
separate company basis.
EMPLOYEE PENSION AND RETIREMENT PLANS. The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"), in 1998. The
provisions of SFAS 132 revise employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of these plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable. See Note 11 to Notes to
Combined Financial Statements.
UNIT-BASED COMPENSATION PLANS. The Company accounts for Unit-based
compensation plans under the provisions of Accounting Principles Board Opinion
No. 25 ("APB 25"). The Company has adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). See Note
12 to Notes to Combined Financial Statements for discussion of the above
referenced plans.
SEGMENT REPORTING. The Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131") in 1998. SFAS
131 supercedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. The adoption of SFAS 131 did
not affect results of operations or
F-7
<PAGE> 105
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
financial position but did affect the disclosure of segment information. Prior
year amounts have been restated in order to conform to the 1998 presentation.
See Note 15 to Notes to Combined Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities. The implementation of SFAS
133 is required for financial statements issued for periods beginning after June
15, 2000; early application is permitted. Adoption of this standard is not
expected to have a material impact on the Company's financial position, results
of operation or cash flows.
NOTE 2. REORGANIZATION
On June 8, 1998 the Partnership announced that the Board of Directors of PC
Advisory Corp. I ("Advisory Corp"), the ultimate general partner of the
Partnership, had authorized the Partnership to seek approval from its
Unitholders to convert (the "Conversion Transaction") its structure from a
publicly traded Master Limited Partnership into a publicly traded Real Estate
Investment Trust (the "REIT"). The Conversion Transaction is conditioned upon
the approval of the holders of two-thirds of the Partnership's outstanding
Units. In connection with the Conversion Transaction, the Unitholders will
exchange, on a one-for-one basis, their Units for shares of common stock in the
REIT. The General Partner will exchange its general partner interest in the
Partnership and Manufacturing and its interest in Marketing for a 27% equity
interest in the REIT and will also receive certain control rights. The
solicitation of Unitholder approval of the Conversion Transaction and the
exchange of shares in the REIT for the Partnership's outstanding Units was made
by means of a proxy statement/prospectus provided to the Unitholders of record
as of January 22, 1999. Reorganization costs are being expensed in the period
incurred and are reflected as a separate line item in the financial statements.
On September 11, 1998, a Unitholder, individually and as a purported
representative of all Unitholders as of June 8, 1998 (the "Plaintiff"), filed a
purported class action lawsuit (the "Action") in the Court of Chancery in the
State of Delaware against the Partnership, the General Partner and Advisory Corp
(collectively the "Plum Creek Defendants"), alleging that the General Partner's
receipt of a 27% equity interest in the REIT violates the General Partner's and
Advisory Corp's fiduciary duties to the Unitholders.
On November 17, 1998, the Plaintiff filed an amended complaint which also
challenged the General Partners' receipt of certain special voting and board
nomination rights. On December 17, 1998, the Delaware Court of Chancery granted
the Plum Creek Defendants' motion to dismiss. On January 11, 1999, the Plaintiff
filed a notice of appeal in the Supreme Court of the State of Delaware with
respect to the Action.
On February 8, 1999, the Plaintiff in the Action, individually and as a
purported representative of all Unitholders, filed a second purported class
action lawsuit in the Court of Chancery in the State of Delaware against the
Plum Creek Defendants. This new action alleges that the Partnership's proxy
statement/prospectus, included in a registration statement filed with the
Securities and Exchange Commission on January 28, 1999, is false and misleading.
The proxy statement/prospectus has been provided to all Unitholders of record as
of January 22, 1999 in connection with the Special Meeting of Unitholders
scheduled for March 22, 1999, at which approval of the Conversion Transaction
will be
F-8
<PAGE> 106
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
sought. The Plaintiff claims that, through alleged misstatements and omissions,
the General Partner and its affiliate have breached a fiduciary duty of candor
to the Unitholders.
On April 9, 1999, the Partnership announced that it and the General Partner
had entered into an agreement settling Unitholder litigation relating to the
Conversion Transaction. The settlement, which was approved by the Court of
Chancery in the State of Delaware on June 21, 1999, could obligate the
Partnership's former General Partner to pay up to an aggregate of $30 million
into a fund for distribution to eligible Unitholders if certain five-year
financial targets of the Company are not met. Payments by the General Partner,
if any, would generally be made following the end of the five-year period, on or
about April 15, 2004. Such payments, if any, may be accelerated upon the
occurrence of certain extraordinary transactions. Payments from the fund, less
court-approved attorney fees, would be made to Unitholders who were beneficial
owners as of July 1, 1999.
On April 19, 1999, at a special meeting of Unitholders, the Partnership's
Unitholders also approved the Conversion Transaction. The conversion became
effective on July 1, 1999. After the conversion, there are 62,822,009 shares of
common stock outstanding and 634,566 shares of special voting stock outstanding,
which are convertible into common stock. Plum Creek Timber Company, Inc., the
new corporation, will elect to be treated for Federal income tax purposes as a
REIT. Plum Creek Timber Company, L.P. ceased to exist.
NOTE 3. ACQUISITION
On November 12, 1998, the Partnership acquired 905,000 acres of forest
lands in central Maine (the "Maine Timberland Acquisition") from S.D. Warren
Company, a Pennsylvania corporation, for a purchase price of $180.0 million,
plus $300,000 for working capital. As part of the acquisition, the Partnership
entered into a long-term fiber agreement to supply fiber to S.D. Warren
Company's paper facility in Skowhegan, Maine at prevailing market prices. The
acquisition was accounted for as a purchase and the operations of the business
acquired have been included in the Company's combined financial statements from
the date of acquisition. The total purchase price of $181.1 million, including
$700,000 of acquisition costs and $105,000 of assumed liabilities, was allocated
as follows (in thousands):
<TABLE>
<S> <C>
Timber and Timberlands...................................... $177,618
Property, Plant and Equipment............................... 2,940
Other Assets................................................ 590
--------
Total Assets Acquired....................................... $181,148
Total Liabilities Assumed................................... $ 105
========
</TABLE>
The acquisition was financed with approximately $4 million cash and the
balance with unsecured promissory notes that were issued to the seller (Senior
Notes due 2011, see Note 7 to Notes to Combined Financial Statements). The
Senior Notes due 2011 have an average maturity of 10 years with effective
interest rates ranging from 7.16% to 7.32%.
The unaudited combined results of operations of the Company on a pro forma
basis as though the Maine Timberland Acquisition and the issuance of the Senior
Notes due 2011 had occurred as of the
F-9
<PAGE> 107
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
beginning of the years ended December 31, 1997 and 1998 were as follows (in
thousands, except per Unit):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Revenues.................................................. $774,032 $739,000
Net Income................................................ 110,987 73,540
Net Income Allocable to Unitholders....................... 79,083 39,865
Net Income per Unit....................................... $ 1.71 $ 0.86
</TABLE>
The pro forma financial information is not necessarily indicative of
results of operations that would have occurred had the Maine Timberland
Acquisition occurred as of those dates or of results which may occur in the
future.
NOTE 4. ACCOUNTS RECEIVABLE
Accounts receivable were presented net of allowances for doubtful accounts
of $1,285,000 at December 31, 1997, $1,323,000 at December 31, 1998, and
$1,376,000 at June 30, 1999.
NOTE 5. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials (logs).......................... $29,177 $25,129 $14,230
Work-in-process............................... 6,108 6,554 7,926
Finished goods................................ 15,295 15,831 14,928
Export logs................................... 715 53 96
------- ------- -------
51,295 47,567 37,180
Supplies...................................... 7,661 8,396 8,915
------- ------- -------
Total............................... $58,956 $55,963 $46,095
======= ======= =======
</TABLE>
Excluding supplies, which are valued at average cost, the cost of the LIFO
inventories valued at the lower of average cost or market (which approximates
current cost) was $50.0 million at December 31, 1997, $46.9 million at December
31, 1998 and $37.7 million at June 30, 1999.
F-10
<PAGE> 108
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
NOTE 6. TIMBER AND TIMBERLANDS AND PROPERTY, PLANT AND EQUIPMENT
Timber and timberlands consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Timber and logging roads -- net............. $789,513 $ 907,830 $ 891,529
Timberlands................................. 98,181 122,654 123,478
-------- ---------- ----------
Timber and timberlands -- net............... $887,694 $1,030,484 $1,015,007
======== ========== ==========
</TABLE>
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land, buildings and improvements............ $ 61,155 $ 66,714 $ 66,815
Machinery and equipment..................... 235,349 275,149 281,331
--------- --------- ---------
296,504 341,863 348,146
Accumulated depreciation.................... (132,948) (155,684) (170,109)
--------- --------- ---------
Property, plant and equipment -- net........ $ 163,556 $ 186,179 $ 178,037
========= ========= =========
</TABLE>
NOTE 7. BORROWINGS
Long-term debt and the Line of Credit consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Senior Notes due 2007.......................... $130,300 $122,000 $113,700
First Mortgage Notes due 2007.................. 122,100 112,000 101,900
Senior Notes due 2009.......................... 150,000 150,000 150,000
Senior Notes due 2011.......................... 177,008 176,803
Senior Notes due 2016.......................... 200,000 200,000 200,000
Line of Credit................................. 161,000 200,000 218,400
-------- -------- --------
Total Long-Term Debt........................... 763,400 961,008 960,803
Less: Current Portion.......................... (18,400) (18,400) (26,950)
-------- -------- --------
Long-Term Portion.............................. $745,000 $942,608 $933,853
======== ======== ========
</TABLE>
On November 12, 1998, the Partnership issued $171.4 million of senior notes
(the "Senior Notes due 2011") to S.D. Warren Company to finance the Maine
Timberland Acquisition. The Company recorded a premium on the Senior Notes due
2011 of $5.6 million to reflect the market value of the notes at the date of
issuance. The premium will be amortized using the effective interest rate method
over the terms of the notes. The Senior Notes due 2011 mature in 2007 through
2011 and bear interest at rates
F-11
<PAGE> 109
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
ranging from 7.62% to 7.83%, payable quarterly. The effective interest rates on
the Senior Notes due 2011 range from 7.16% to 7.32%.
The Partnership has an unsecured revolving line of credit ("Line of
Credit") which matures on December 13, 2001 and bears interest at a floating
rate (7.0% as of December 31, 1998 and 1997). The weighted average interest rate
for borrowings under the Line of Credit were 6.1% during 1997 and 5.9% during
1998. Borrowings on the Line of Credit fluctuate daily based on cash needs.
Subject to customary covenants, the Line of Credit allows the Partnership to
borrow from time to time up to $225 million, including up to $20 million of
standby letters of credit issued on behalf of the Partnership and Manufacturing.
As of December 31, 1998, $25 million remained available for borrowing under the
Line of Credit and the Company had no outstanding standby letters of credit. As
of January 4, 1999, the Partnership had repaid $100 million of the borrowings
under the Line of Credit. As of June 30, 1999, $6.6 million remained available
for borrowing under the Line of Credit and the Company had no outstanding
standby letters of credit. As of July 15, 1999, we repaid $111 million of
borrowings on the line of credit.
The Senior Notes due 2007 and the First Mortgage Notes due 2007 bear
interest at 11.125%, payable semiannually. The Senior Notes due 2009 bear
interest at 8.73%, payable semiannually. The Senior Notes due 2016 mature in
2006 through 2016 and bear interest at rates ranging from 7.74% to 8.05%,
payable semiannually. The Senior Notes, excluding the Senior Notes due 2011, and
the First Mortgage Notes are redeemable prior to maturity subject to a premium
on redemption, which is based upon interest rates of U.S. Treasury securities
having similar average maturities as these notes. The premium that would have
been due upon early retirement would have approximated $116 million at December
31, 1997 and $146 million at December 31, 1998. The four series of senior notes
are unsecured. The First Mortgage Notes are collateralized by a significant
portion of the property, plant and equipment of Manufacturing and are guaranteed
by the Partnership.
The aggregate maturities on the Senior Notes and the First Mortgage Notes
(collectively the "Note Agreements") and the Line of Credit are as follows (in
thousands):
<TABLE>
<CAPTION>
NOTE LINE OF
AGREEMENTS CREDIT
---------- --------
<S> <C> <C>
1999..................................................... $18,812
2000..................................................... 27,392
2001..................................................... 27,423 $200,000
2002..................................................... 27,458
2003..................................................... 27,494
Thereafter............................................... 632,429
</TABLE>
All principal and interest payments due under the Note Agreements are
nonrecourse to the General Partner. The Note Agreements and the Line of Credit
contain certain restrictive covenants, including limitations on harvest levels,
sales of assets, cash distributions and the incurrence of indebtedness. In
addition, the Line of Credit requires the maintenance of a required interest
coverage ratio. The Company was in compliance with such covenants at December
31, 1997, December 31, 1998 and June 30, 1999.
F-12
<PAGE> 110
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
NOTE 8. FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate fair value
due to the short-term maturities of these instruments. The estimated fair value
of the Company's debt, based on current interest rates for similar obligations
with like maturities, was approximately $843 million as of December 31, 1997 and
$1.02 billion as of December 31, 1998. The carrying amount of the Company's debt
was $763 million as of December 31, 1997 and $961 million as of December 31,
1998.
NOTE 9. PARTNERS' CAPITAL
The changes in Partners' Capital were as follows (in thousands):
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNER TOTAL
--------- -------- ---------
<S> <C> <C> <C>
January 1, 1996.............................. $ 234,117 $ (249) $ 233,868
Net Income................................... 195,822 27,777 223,599
Cash Distributions........................... (84,131) (25,985) (110,116)
Issuance of Limited Partner Units............ 144,297 144,297
--------- -------- ---------
December 31, 1996............................ 490,105 1,543 491,648
Net Income................................... 79,778 31,918 111,696
Cash Distributions........................... (100,059) (32,948) (133,007)
--------- -------- ---------
December 31, 1997............................ 469,824 513 470,337
Net Income................................... 41,723 33,713 75,436
Cash Distributions........................... (104,690) (35,668) (140,358)
--------- -------- ---------
December 31, 1998............................ $ 406,857 $ (1,442) $ 405,415
========= ======== =========
</TABLE>
The total number of Units outstanding at December 31, 1997 and 1998 was
46,323,300. On October 22, 1996, the Partnership issued 5,600,000 Units for net
proceeds of $141.4 million. On November 5, 1996, 115,000 additional Units were
issued by the Partnership for net proceeds of $2.9 million. The combined
proceeds are net of issuance costs of $8.6 million.
In accordance with the Partnership Agreement, the General Partner is
authorized to make quarterly cash distributions. The General Partner declared
$2.02 per unit for the year ended December 31, 1996, $2.20 per unit for the year
ended December 31, 1997, and $2.28 per unit for the year ended December 31,
1998, to be paid to the Partnership's Unitholders. For quarterly cash
distributions exceeding $0.21 2/3 per Unit, the General Partner is provided with
an incentive distribution. See Note 13 to Notes to Combined Financial
Statements.
F-13
<PAGE> 111
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
NOTE 10. INCOME TAXES
The provision for income taxes was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
------- ----- -----
<S> <C> <C> <C>
Current Federal.......................................... $1,201 $43 $426
Current State............................................ 190 37 91
------ --- ----
Total.......................................... $1,391 $80 $517
====== === ====
</TABLE>
Reconciliation of the federal statutory rate to the effective income tax
rate was as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate...................................... 35.0% 35.0% 35.0%
State tax net of federal tax benefit.................... 0.1 0.0 0.0
Nontaxable partnership income........................... (34.6) (34.9) (34.3)
Other................................................... 0.1 0.0 0.0
----- ----- -----
Effective tax rate...................................... 0.6% 0.1% 0.7%
===== ===== =====
</TABLE>
NOTE 11. EMPLOYEE PENSION AND RETIREMENT PLANS
PENSION PLAN. The Company provides defined benefit pension plans that cover
substantially all employees. The following tables provide a reconciliation of
benefit obligations, plan assets, and funded status of the plans for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $48,756 $56,286
Service cost................................................ 2,941 3,668
Interest cost............................................... 3,522 4,046
Actuarial loss.............................................. 4,130 5,640
Benefits paid............................................... (3,063) (2,917)
------- -------
Benefit obligation at end of year........................... $56,286 $66,723
======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $49,727 $57,635
Actual return on plan assets................................ 9,471 9,341
Benefits paid............................................... (3,063) (2,917)
Employer contributions...................................... 1,500
------- -------
Fair value of plan assets at end of year.................... $57,635 $64,059
======= =======
Funded Status............................................... $ 1,349 $(2,664)
Unrecognized net actuarial loss............................. 855 1,287
Unrecognized prior service cost............................. 776 668
------- -------
Prepaid (Accrued) benefit cost.............................. $ 2,980 $ (709)
======= =======
</TABLE>
F-14
<PAGE> 112
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
The components of the Company's pension cost were as follows for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost...................................... $ 2,419 $ 2,941 $ 3,668
Interest cost..................................... 3,388 3,522 4,046
Expected return on plan assets.................... (3,507) (3,817) (4,342)
Amortization of prior service cost................ 108 108 108
Recognized actuarial loss......................... 436 169 208
------- ------- -------
Net periodic benefit cost......................... $ 2,844 $ 2,923 $ 3,688
======= ======= =======
</TABLE>
The following assumptions were used in accounting for the Company's pension
plan as of December 31:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate............................. 7.5% 7.0% 6.75%
Rate of increase in compensation levels.................... 5.0% 5.0% 5.0%
Expected long-term rate of return on plan assets........... 8.5% 8.5% 8.5%
</TABLE>
THRIFT AND PROFIT SHARING PLAN. The Company sponsors an employee thrift and
profit sharing plan under section 401 of the Internal Revenue Code. This plan
covers substantially all full-time employees. The Company matches employee
contributions of up to six percent of compensation at rates ranging from 35 to
100 percent, depending upon the Company's financial performance. Amounts charged
to expense were $2.6 million during 1996, $3.9 million during 1997, and $2.9
million during 1998.
The Company matched 100% for the year ended 1996 and 1997 and 70% for the
year ended 1998. Approximately 725 employees were added to the plan during the
fourth quarter of 1996 as a result of the October 18, 1996 acquisition in the
Southern United States.
OTHER BENEFIT PLANS. Certain executives and key employees of the General
Partner participate in incentive benefit plans established by the General
Partner which provide for the granting of Units and/or cash bonuses upon meeting
performance objectives. See Note 12 to Notes to Combined Financial Statements.
NOTE 12. UNIT-BASED COMPENSATION PLANS
Effective October 1, 1993, the General Partner established a Long-Term
Incentive Plan, and on January 1, 1994, a Key Employee Long-Term Incentive Plan
(collectively "the 1994 Plans"). The 1994 Plans authorized the granting of up to
2,500,000 Unit Appreciation Rights ("UARs") to certain executives and key
employees (collectively "participants") of the General Partner. When any of five
Unit Value Targets ("UVTs") established by the 1994 Plans were met through a
combination of Unit market appreciation plus Partnership cash distributions
("Total Unitholder Return"), a percentage of the UARs was triggered and Units
were credited to the participants' accounts. In general, each successive UVT is
met when Total Unitholder Return over the life of the plan equals or exceeds
approximately 15% compounded annual growth. Units in participants' accounts earn
additional Units
F-15
<PAGE> 113
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
equal to the amount of any subsequent partnership distribution. The performance
period under the 1994 Plans during which UVTs may be met ended December 31,
1998, at which time all earned Units vested. Costs incurred by the General
Partner in administering and funding the 1994 Plans were borne by the
Partnership.
On April 17, 1998, the fifth and final target under the 1994 Plans was met.
As a result of meeting all five targets, participants' accounts were credited
with 902,866 Units, net of forfeitures. Total compensation expense for the 1994
Plans was $27.3 million, of which $3.9 million was recognized in 1996, $7.8
million was recognized in 1997, and $13.3 million was recognized in 1998.
Approximately 70% of the Units were distributed during the first quarter of
1999, with the remainder being distributed subsequent to the participants
separation from the Company.
Effective April 18, 1998, the General Partner established a new Long-Term
Incentive Plan and a new Key Employee Long-Term Incentive Plan, (collectively
"the 1998 Plans") with terms similar to the previously adopted 1994 Plans. The
1998 Plans authorize granting up to 1,175,000 UARs to certain executives and key
employees (collectively "participants"). The performance period under which UARs
may be earned ends December 31, 2003. Earned Units generally vest at the end of
the performance period. Costs incurred by the General Partner in administering
and funding the 1998 Plans are borne by the Partnership.
Under the 1998 Plans, the General Partner has granted 1,163,500 UARs, net
of forfeitures, to participants which could result in 1,163,500 Units being
earned over the life of the 1998 Plans if all targets were met. As of December
31, 1998 no UVTs had been achieved under the 1998 Plans. Accordingly, no
compensation cost has been recognized in the Combined Statement of Income.
The Company applies APB 25 in accounting for the 1994 and the 1998 Plans.
In general, under APB 25 no compensation expense is recognized until a UVT is
met. Effective January 1, 1996, SFAS 123 encouraged adoption of fair value-based
method for valuing the cost of stock-based compensation. Under SFAS 123,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the plan's performance period. However, SFAS 123
allowed companies to continue to apply the principles of APB 25 in recognizing
expense and disclose pro forma net earnings and earnings per share in accordance
with SFAS 123. Furthermore, since most of the grants under the 1994 Plans were
granted prior to the effective date of SFAS 123, pro forma disclosure is only
required with respect to grants made after December 31, 1994. Had compensation
expense for the Company's Unit-based compensation plans been determined
consistent with SFAS 123, the Company's net income and net income per Unit would
have been as follows (in thousands, except per unit):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Net Income:
As reported................................... $223,599 $111,696 $75,436
Pro forma..................................... 223,624 111,992 75,407
Net Income per Unit:
As reported................................... $ 4.71 $ 1.72 $ .90
Pro forma..................................... 4.71 1.73 .90
</TABLE>
F-16
<PAGE> 114
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
The effect of applying SFAS 123 for the pro forma disclosures are not
representative of the effects expected on reported net income and net income per
Unit in future years, since the disclosures do not reflect compensation expense
for UARs granted prior to 1995. In addition, UAR valuations are based on highly
subjective assumptions about the future, including Unit price volatility.
The Company used the Monte Carlo path dependent model to determine the fair
value of UAR grants. The following tables summarize UAR grants and assumptions
applied in determining pro forma compensation expense under the 1994 and 1998
Plans for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
1994 PLANS
UARs Granted............................. 90,601 22,533 16,333
Weighted-average fair value of UARs
granted................................ $6.02 $4.64 $13.98
Risk-free interest rate.................. 6.00% 6.28% 5.25%
Expected dividend yield.................. 7.50% 7.40% 6.20%
Expected life of UARs granted............ 2.17 years 1.67 years 0.83 years
Expected Unit price volatility........... 23.2% 18.2% 24.3%
</TABLE>
<TABLE>
<CAPTION>
1998
-----------
<S> <C> <C> <C>
1998 PLANS
UARs Granted............................. 1,163,500
Weighted-average fair value of UARs
granted................................ $12.25
Risk-free interest rate.................. 5.70%
Expected dividend yield.................. 7.13%
Expected life of UARs granted............ 5.67 years
Expected Unit price volatility........... 24.7%
</TABLE>
Under the 1994 Plans, if all five targets were met one UAR is converted
into approximately one-half Unit. Under the 1998 Plans, if all five targets were
met one UAR is converted into one Unit.
Effective January 1, 1994, the General Partner established a Management
Incentive Plan ("MIP") for certain executives of the General Partner. An annual
bonus of up to 100% of the respective executive's base salary may be awarded if
certain performance objectives established by the General Partner are met by the
Company and by the executive. One-half of the bonus will be paid annually in
cash and the remaining half will be converted into Units at fair market value
and will be distributed at the end of three years. Units in executives' accounts
will earn additional Units equal to the amount of any subsequent Partnership
cash distributions. Costs incurred in administering and funding the MIP have
been borne by the General Partner.
NOTE 13. RELATED-PARTY TRANSACTIONS
The General Partner has overall responsibility for the management of the
Company. The General Partner has a two percent general partner interest in the
income and cash distributions of the Partnership, subject to certain
adjustments, and owns a two percent interest in Manufacturing and a four percent
interest in Marketing. The Company reimburses the General Partner for the actual
costs of administering its businesses. Amounts reimbursed to the General Partner
for such costs were $5.7 million for the year
F-17
<PAGE> 115
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
ended December 31, 1996, $6.7 million for the year ended December 31, 1997, and
$7.7 million for the year ended December 31, 1998.
The Partnership is required under the Partnership Agreement to reimburse
the General Partner for compensation costs related to the management of the
Partnership, including the purchase of Units associated with the Unit-Based
Compensation Plans discussed in Note 12 to Notes to Combined Financial
Statements.
The Partnership paid the General Partner $9.2 million for the purchase of
280,482 Units during 1997 and $2.4 million for the purchase of 89,780 Units
during 1998. In January 1999, a final payment of $6.2 million was paid by the
Partnership in connection with the funding of the 1994 Plans.
Net income is allocated to the General Partner based on two percent of the
Company's combined net income (adjusted for the incentive distribution), plus
the incentive distribution, as provided by the Partnership Agreement. Incentive
distributions paid were approximately $23.8 million in 1996, $30.3 million in
1997, and $32.9 million in 1998.
Certain conflicts of interest could arise as a result of the relationships
described above. The Board of Directors and management of the General Partner
have a duty to manage the Company in the best interests of the Unitholders and,
consequently, must exercise good faith and integrity in handling the assets and
affairs of the Company. Related non-interest bearing receivables and payables
between the General Partner and the Company are settled in the ordinary course
of business. The Company had receivables from the General Partner of $138,502 as
of December 31, 1997 and $507,978 as of December 31, 1998.
NOTE 14. COMMITMENTS AND CONTINGENCIES
A portion of the Company's log requirements is acquired through contracts
with public and private sources. Except for required deposits, no amounts are
recorded until such time as the Company harvests the timber. The unrecorded
amounts of those contract commitments were approximately $15.8 million at
December 31, 1997 and $10.8 million at December 31, 1998. During 1993, the
Partnership entered into a log sourcing contract to sell logs to a customer over
a ten-year period ending in 2003, based upon prevailing market rates. The
Partnership has an annual commitment to supply pulpwood and residual chips to a
customer for a 20-year period ending in 2016, based upon prevailing market
rates. As part of the Maine Timberland Acquisition, the Partnership entered into
a long-term fiber agreement to supply fiber to S.D. Warren Company's paper
facility in Skowhegan, Maine at prevailing market prices. The fiber supply
agreement with S.D. Warren Company expires in 2023 and may be extended for up to
15 additional years at the option of S.D. Warren Company.
There are no contingent liabilities which would have a materially adverse
effect on the financial position, the results of operations or liquidity of the
Company.
The Company is subject to regulations regarding harvest practices and is
involved in various legal proceedings, including environmental matters,
incidental to its business. While administration of current regulations and any
new regulations or proceedings have elements of uncertainty, the General Partner
believes that none of the pending legal proceedings or regulatory matters will
have a materially adverse effect on the financial position, the results of
operations or liquidity of the Company.
F-18
<PAGE> 116
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
The Company leases buildings and equipment under non-cancelable operating
lease agreements. The Company's operating lease expense was $2.3 million for
1996, $2.9 million for 1997, and $3.2 million for 1998. The following summarizes
the future minimum lease payments (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 3,335
2000........................................................ 2,687
2001........................................................ 2,197
2002........................................................ 1,744
2003........................................................ 1,546
Thereafter.................................................. 657
-------
Total............................................. $12,166
=======
</TABLE>
NOTE 15. SEGMENT INFORMATION
The Company is organized into eight business units on the basis of both
product line and geographic region. Each business unit has a separate management
team due to different production processes and/or marketing strategies. In
applying SFAS 131, these business units have been aggregated into five
reportable segments based on similar long-term economic characteristics. The
Company's reportable segments are: Northern Resources, Southern Resources,
Lumber, Panel and Land Sales.
The Cascades Resource unit, the Rockies Resource unit, and the Northeastern
Resource unit are aggregated into the Northern Resources segment. The Northern
Resources segment consists of timberlands in the Northwest and Northeastern
United States. Northern Resources grows and harvests timber for sale in export
markets, primarily Pacific Rim countries and Canada, and domestic markets,
primarily Idaho, Maine, Montana, and Washington. The domestic market includes
sawlog sales directly to the Lumber and Panel segments and to unaffiliated wood
product manufacturers, as well as pulp logs and chips to third-party domestic
pulp and paper manufacturers.
The Southern Resources segment consists of timberlands located in the
Southern United States. Southern Resources grows and harvests timber for sale in
domestic markets, primarily Arkansas and Louisiana. Southern Resources' revenues
are derived from sawlog sales to the Lumber segment and to unaffiliated domestic
mills, as well as pulp logs and chips to third-party domestic pulp and paper
manufacturers.
The Northwest Lumber unit and the Southern Lumber unit are aggregated into
the Lumber segment. The Lumber segment consists of eight manufacturing
facilities in the Northwest and Southern United States. These facilities produce
boards, studs, and dimension lumber targeted towards domestic lumber retailers,
home construction, and industrial customers, and to a lesser extent, Pacific Rim
countries and Europe. Residual chip products are sold to regional pulp and paper
manufacturers.
The Panel segment consists of two plywood and one MDF manufacturing
facilities located in the Northwest United States. These facilities produce
high-quality panels that are primarily targeted towards domestic industrial
customers, such as boat, recreational vehicle, furniture and door manufacturers,
and to a lesser extent, Pacific Rim countries, Canada and Europe. Residual chip
products are sold to regional pulp and paper manufacturers.
F-19
<PAGE> 117
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
The Land Sales segment consists of timberlands in the various resource
units that have been identified from time-to-time as having a higher and better
use than forest management, such as for recreational or conservation purposes.
A plywood manufacturing facility in the Southern United States and a chip
facility in the Northwest United States are included in "Other." The plywood
facility was permanently closed and the chip facility was sold in 1998.
The accounting policies of the segments are substantially the same as those
described in Note 1 to Notes to Combined Financial Statements. For segment
purposes, however, inventories are stated at the lower of average cost or market
on the first-in, first-out ("FIFO") method. Segment data includes external
revenues, intersegment revenues and operating income, as well as export revenues
and depreciation, depletion, and amortization. The Company evaluates performance
and allocates capital to the segments based on operating income before: other
gains and losses, interest, unallocated corporate expenses, and taxes. Asset
information by reportable segment is not reported, as the Company does not
produce such information internally. The table below presents information about
reported segments (in thousands):
<TABLE>
<CAPTION>
NORTHERN SOUTHERN LAND
RESOURCES RESOURCES LUMBER PANEL SALES OTHER TOTAL
--------- --------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
External revenues............................... $196,427 $ 7,115 $239,252 $138,947 $42,324 $ 9,676 $633,741
Intersegment revenues........................... 112,330 11,139 123,469
Export revenues................................. 53,111 16,613 2,966 72,690
Depreciation, depletion and amortization........ 32,017 2,897 11,576 9,024 156 55,670
Operating income................................ 119,767 8,149 18,596 5,305 35,434 (1,682) 185,569
DECEMBER 31, 1997
External revenues............................... $158,535 $54,780 $294,839 $149,618 $17,884 $49,915 $725,571
Intersegment revenues........................... 115,387 64,287 179,674
Export revenues................................. 41,003 16,125 5,950 63,078
Depreciation, depletion and amortization........ 30,204 17,734 11,514 10,004 678 70,134
Operating income................................ 98,792 54,313 34,667 8,462 13,963 (1,152) 209,045
DECEMBER 31, 1998
External revenues............................... $131,625 $68,800 $281,614 $154,640 $32,813 $29,878 $699,370
Intersegment revenues........................... 118,675 49,562 168,237
Export revenues................................. 23,197 7,127 1,638 31,962
Depreciation, depletion and amortization........ 29,716 15,530 13,105 10,598 274 69,223
Operating income................................ 73,715 53,568 2,599 14,360 26,598 (2,247) 168,593
JUNE 30, 1999 (UNAUDITED)
External revenues............................... $ 76,922 $25,880 $168,046 $ 84,643 $ 7,079 $362,570
Intersegment revenues........................... 51,291 20,608 71,899
Operating income................................ 40,213 15,017 10,280 13,018 6,159 84,687
</TABLE>
Intersegment sales prices are determined quarterly, based upon estimated
market prices and terms in effect at that time. Export revenues consist of log
sales to Japan and Canada, as well as lumber and panel sales primarily to Canada
and Mexico. No single customer provides more than 10% of the Company's revenue.
The Company holds no long-lived foreign assets.
F-20
<PAGE> 118
PLUM CREEK TIMBER COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
A reconciliation of total operating income to combined income before income
taxes is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ JUNE 30,
1996 1997 1998 1999
-------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total segment operating income.......... $185,569 $209,045 $168,593 $ 84,687
Gain (Loss) on disposition of assets --
net................................... 108,852 (1,223) (805) 120
Interest expense -- net................. (48,850) (59,251) (59,580) (36,439)
Corporate and other unallocated
expenses.............................. (20,581) (36,795) (32,255) (6,986)
-------- -------- -------- --------
Combined income before income taxes..... $224,990 $111,776 $ 75,953 $ 41,382
======== ======== ======== ========
</TABLE>
NOTE 16. SUBSEQUENT EVENTS
On July 1, 1999, we converted to a real estate investment trust. See Note 2
of Notes to Combined Financial Statements.
On August 4, 1999, we filed a registration statement on Form S-3 to
register 7,000,000 shares of common stock. The registration statement relating
to the securities has been filed with the Securities and Exchange Commission,
but has not yet become effective. The securities may not be sold nor may offers
to buy be accepted prior to the time that the registration statement becomes
effective. We intend to use the proceeds from the offering to reduce
indebtedness under the Line of Credit and for general business purposes.
Distributions declared and paid during 1999 are as follows:
<TABLE>
<CAPTION>
RECORD DATE DISTRIBUTION DATE AMOUNT PER UNIT/SHARE
- ----------------- ----------------- ---------------------
<S> <C> <C>
February 12, 1999 February 25, 1999 $0.57
May 14, 1999 May 27, 1999 $0.57
August 13, 1999 August 26, 1999 $0.57
</TABLE>
F-21
<PAGE> 119
PlumCreek Logo
<PAGE> 120
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses (other than the SEC registration fee and NASD filing
fee) are estimated.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 57,894
NASD filing fee............................................. 21,325
Printing and engraving expenses............................. 150,000
Accountants' fees and expenses.............................. 75,000
Attorneys' fees and expenses................................ 250,000
Miscellaneous............................................... 105,781
--------
Total............................................. $660,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Our certificate of incorporation limits the liability of our directors to
us and our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to us or our stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the Delaware General Corporate Law ("DGCL"), or (iv) for
any transaction from which the director derived an improper impersonal benefit.
If the DGCL is amended to further eliminate or limit the liability of directors,
then the liability of a director, in addition to the aforementioned limitations
on personal liability, will be limited to the fullest extent permitted by the
amended DGCL.
Our bylaws require us to indemnify our directors, officers and certain
other parties in (i) suits or proceedings other than those by or in the right of
us if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of us, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe such
person's conduct was illegal and (ii) suits or proceedings by or in the right of
us if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of us except that with
respect to this clause (ii), no such indemnification will be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable to us, unless the Court of Chancery or the court in which such action
or suit was brought determines such person is fairly and reasonably entitled to
indemnity.
Our bylaws permit us to purchase and maintain insurance on behalf of
directors, officers and certain other parties against any liability asserted
against such person and incurred by such person in such capacity, whether or not
we would have the power or the obligation to indemnify such person.
It is the position of the Securities and Exchange Commission that
indemnification of directors and officers for liabilities arising under the
Securities Act of 1933 is against public policy and is unenforceable pursuant to
Section 14 of the Securities Act of 1933.
II-1
<PAGE> 121
ITEM 16. EXHIBITS.
The following is a list of all exhibits filed as part of this registration
statement on Form S-3, including those incorporated by reference.
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Amended and Restated Agreement and Plan of Conversion, dated
as of July 17, 1998, by and among Plum Creek Timber Company,
Inc., Plum Creek Timber Company, L.P. and Plum Creek
Management Company, L.P. (Registration Statement on Form
S-4, filed on January 28, 1999).
2.2 Agreement and Plan of Merger, dated as of July 17, 1998, by
and among Plum Creek Timber Company, L.P., Plum Creek
Acquisition Partners, L.P. and Plum Creek Timber Company,
Inc. (Registration Statement on Form S-4, filed on January
28, 1999).
2.3 Agreement and Plan of Merger, dated as of July l7, 1998, by
and between Plum Creek Timber Company, Inc. and Plum Creek
Management Company, L.P. (Registration Statement on Form
S-4, filed on January 28, 1999).
4.1 Senior Note Agreement, dated May 31, 1989, 11 1/8% Senior
Notes due June 8, 2007, Plum Creek Timber Company, L.P.
(Form 10-Q, No. 1-10239, for the quarter ended June 30,
1989). Amendment No. l, consent and waiver dated January l,
1991 to Senior Note Agreement, dated May 31, 1989, 11 1/8%
Senior Notes due June 8, 2007, Plum Creek Timber Company,
L.P. (Form 8 Amendment No. 1, for the year ended December
31, 1990). Amendment No. 2, consent and waiver dated
September l, 1993 to the Senior Note Agreement (Form l0-K/A,
Amendment No. l, for the year ended December 31, 1993).
Amendment No. 3, Senior Note Agreement Amendment dated May
20, 1994 (Form 10-K/A, Amendment No. l, for the year ended
December 31, 1994). Senior Note Agreement dated May 31, 1996
(Form 10-Q, No. 1-10239, for the quarter ended June 30,
1996). Senior Note Agreement Amendment dated April 15, 1997
(Form 10-Q, No. 1-10239, for the quarter ended September 30,
1997). Senior Note Agreement Amendment effective July 1,
1999 (Form 10-Q, No. 1-10239, for the quarter ended June 30,
1999).
4.2 Mortgage Note Agreement, dated May 31, 1989, 11 1/8% First
Mortgage Notes due June 8, 2007, Plum Creek Manufacturing,
Inc. (Form 10-Q, No. 1-10239, for the quarter ended June 30,
1989). Amendment No. l, consent and waiver dated January 1,
1991 to Mortgage Note Agreement, dated May 31, 1989, 11 1/8%
First Mortgage Notes due June 8, 2007, Plum Creek
manufacturing, Inc., now Plum Creek Manufacturing, L.P.
(Form 8 Amendment No. 1, for the year ended December 31,
1990). Amendment No. 2, consent and waiver dated September
1, 1993 to the Mortgage Note Agreement (Form 10-K/A,
Amendment No. 1, for the year ended December 31, 1993).
Amendment No. 3, Mortgage Note Agreement Amendment dated May
20, 1994 (Form 10-K/A, Amendment No. l, for the year ended
December 31, 1994). Amendment to Mortgage Note Agreement
dated June 15, 1995 (Form l0-Q, No. 1-10239, for the quarter
ended September 30, 1995). Mortgage Note Agreement dated May
31, 1996 (Form 10-Q, No. 1-10239, for the quarter ended June
30, 1996). Mortgage Note Agreement Amendment dated April 15,
1997 (Form 10-Q, No. 1-10239, for the quarter ended
September 30, 1997). Mortgage Note Agreement effective July
1, 1999 (Form 10-Q, No. 1-10239, for the quarter ended June
30, 1999).
</TABLE>
II-2
<PAGE> 122
<TABLE>
<C> <S>
4.3 Senior Note Agreement, dated August 1, 1994, 8.73% Senior Notes due August 1, 2009, Plum Creek Timber
Company, L.P. (Form 10-K/A, Amendment No. l, for the year ended December 31, 1994). Senior Note
Agreement Amendment dated as of October 15, 1995 (Form 10-K, No. 1-10239, for the year ended December
31, 1995). Senior Note Agreement Amendment dated May 31, 1996 (Form 10-Q, No. 1-10239, for the quarter
ended June 30, 1996). Senior Note Agreement Amendment dated April 15, 1997 (Form 10-Q, No. 1-10239,
for the quarter ended September 30, 1997). Senior Note Agreement Amendment effective July 1, 1999
(Form 10-Q, No. 1-10239, for the quarter ended June 30, 1999).
4.4 Senior Note Agreement dated as of November 13, 1996, $75 million Series A due November 13, 2006, $25
million Series B due November 13, 2008, $75 million Series C due November 13, 2011, $25 million Series
D due November 13, 2016 (Form 10-K, No. 1-10239, for the year ended December 31, 1996). Senior Note
Agreement Amendment effective July 1, 1999 (Form 10-Q, No. 1-10239, for the quarter ended June 30,
1999).
4.5 Senior Note Agreement dated as of November 12, 1998, Series E due February 12, 2007, Series F due
February 12, 2009, Series G due February 12, 2011 (Form 8-K and Form 8-K/A, No. 1-10239, dated
November 12, 1998). Senior Note Agreement Amendment effective July 1, 1999 (Form 10-Q, No. 1-10239,
for the quarter ended June 30, 1999).
4.6 Form of Common Stock Certificate (Registration Statement on Form S-4, filed on January 28, 1999).
5.l** Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to certain matters regarding the shares of
Common Stock offered hereby.
8.1** Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to certain tax matters.
23.1** Consent of PricewaterhouseCoopers LLP.
23.2** Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in their opinions filed as Exhibits 5.1
and 8.1).
24.1*** Power of Attorney.
</TABLE>
- -------------------------
* To be filed by amendment or as an exhibit to a document to be incorporated
or deemed to be incorporated by reference in this registration statement.
** Filed herewith.
*** Previously filed.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than
II-3
<PAGE> 123
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 124
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on this Form S-3, and has duly caused this Amendment No.
1 to this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Seattle, State of Washington, on this
19th day of October, 1999.
PLUM CREEK TIMBER COMPANY, INC.
By: /s/ RICK R. HOLLEY
------------------------------------
Rick R. Holley,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to this registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ RICK R. HOLLEY President and October 19, 1999
--------------------------------------------------- Chief Executive Officer
Rick R. Holley and Director
/s/ DAVID D. LELAND* Chairman of the Board October 19, 1999
--------------------------------------------------- and Director
David D. Leland
/s/ CHARLES P. GRENIER* Executive Vice President October 19, 1999
--------------------------------------------------- and Director
Charles P. Grenier
/s/ WILLIAM R. BROWN* Executive Vice President October 19, 1999
--------------------------------------------------- and Chief Financial
William R. Brown Officer (Principal
Accounting and Financial
Officer)
/s/ IAN B. DAVIDSON* Director October 19, 1999
---------------------------------------------------
Ian B. Davidson
/s/ JOHN G. MCDONALD Director October 19, 1999
---------------------------------------------------
John G. McDonald
/s/ HAMID R. MOGHADAM* Director October 19, 1999
---------------------------------------------------
Hamid R. Moghadam
/s/ WILLIAM E. OBERNDORF* Director October 19, 1999
---------------------------------------------------
William E. Oberndorf
</TABLE>
II-5
<PAGE> 125
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ WILLIAM J. PATTERSON* Director October 19, 1999
---------------------------------------------------
William J. Patterson
/s/ JOHN H. SCULLY* Director October 19, 1999
---------------------------------------------------
John H. Scully
* By Rick R. Holley, attorney-in-fact
pursuant to a Power of Attorney previously filed.
</TABLE>
II-6
<PAGE> 1
EXHIBIT 5.1
October 19, 1999
Plum Creek Timber Company, Inc.
999 Third Avenue
Suite 2300
Seattle, Washington 98104
Re: Plum Creek Timber Company, Inc.
Registration on Form S-3
Ladies and Gentlemen:
We have acted as special counsel to Plum Creek Timber Company,
Inc., a Delaware corporation (the "Company"), in connection with the issuance by
the Company of 5,750,000 shares (including 750,000 shares subject to an
over-allotment option) (the "Shares") of its Common Stock, par value $.01 per
share (the "Common Stock"). This opinion is being furnished in accordance with
the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act
of 1933, as amended (the "Act").
In connection with this opinion, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of (i) the
Registration Statement on Form S-3 as filed with the Securities and Exchange
Commission (the "Commission") on August 4, 1999 under the Act, and Amendment
No.1 thereto, as filed with the Commission on October 19, 1999 (such
Registration Statement, as amended, being hereinafter referred to as the
"Registration Statement"); (ii) the form of the Underwriting Agreement (the
"Underwriting Agreement") proposed to be entered into among the Company, as
issuer, and Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, and Goldman, Sachs & Co. as representatives of the several
underwriters named therein (the "Underwriters"); (iii) the Certificate of
Incorporation of the Company, as presently in effect; (iv) the Amended and
<PAGE> 2
Plum Creek Timber Company, Inc.
October 19, 1999
Page 2
Restated By-Laws of the Company, as presently in effect; (v) a specimen
certificate representing the Common Stock; and (vi) resolutions of the Board of
Directors of the Company and drafts of resolutions (the "Draft Resolutions") of
the Pricing Committee of the Board of Directors of the Company (the "Pricing
Committee") in each case relating to the issuance and sale of the Shares and
related matters. We have also examined originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company and
such agreements, certificates of public officials, certificates of officers or
other representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such latter documents. In making our
examination of executed documents or documents to be executed, we have assumed
that the parties thereto, other than the Company, had or will have the power,
corporate or other, to enter into and perform all obligations thereunder and
have also assumed the due authorization by all requisite action, corporate or
other, and execution and delivery by such parties of such documents and the
validity and binding effect thereof. As to any facts material to the opinions
expressed herein which we have not independently established or verified, we
have relied upon statements and representations of officers and other
representatives of the Company and others.
Our opinions set forth herein are limited to the General
Corporation Law of the State of Delaware. We do not express any opinion as to
any other laws.
Based upon and subject to the foregoing and the limitations,
qualifications, exceptions and assumptions set forth herein, we are of the
opinion that when (i) the Draft Resolutions have been adopted by the Pricing
Committee; (ii) the price at which the Shares are to be sold to the Underwriters
pursuant to the Underwriting Agreement and other matters relating to the
issuance and sale of the Shares have been approved by the Pricing Committee in
accordance with the Draft Resolutions; (iii) the Underwriting Agreement has been
duly executed and delivered; and (iv)
<PAGE> 3
Plum Creek Timber Company, Inc.
October 19, 1999
Page 3
certificates representing the Shares in the form of the specimen certificates
examined by us have been manually signed by an authorized officer of the
transfer agent and registrar for the Common Stock and registered by such
transfer agent and registrar, and delivered to and paid for by the Underwriters
at a price per share not less than the per share par value of the Common Stock
as contemplated by the Underwriting Agreement, the issuance and sale of the
Shares will have been duly authorized, and the Shares will be validly issued,
fully paid and non-assessable.
We hereby consent to the filing of this opinion with the
Commission as an exhibit to the Registration Statement. We also consent to the
reference to our firm under the caption "Legal Matters" in the Registration
Statement. In giving this consent, we do not thereby admit that we are included
in the category of persons whose consent is required under Section 7 of the Act
or the rules and regulations of the Commission. This opinion is expressed as of
the date hereof, and we disclaim any undertaking to advise you of any subsequent
changes in the facts stated or assumed herein, or of any subsequent changes in
applicable law.
Very truly yours,
Skadden, Arps, Slate, Meagher & Flom LLP
<PAGE> 1
EXHIBIT 8.1
October 19, 1999
Plum Creek Timber Company, Inc.
999 Third Avenue
Suite 2300
Seattle, Washington 91804
Re: Certain Federal Income Tax Considerations
-----------------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel for Plum Creek Timber Com-
pany, Inc., a Delaware corporation ("Plum Creek," and together with the
subsidiary corporations, partnerships, and limited liability companies in which
Plum Creek owns a direct or indirect interest, the "Company"), in connection
with the offering for sale by Plum Creek of shares of its common stock, par
value $0.01 per share (the "Shares"), pursuant to the Registration Statement on
Form S-3 (No. 333-84519), filed by the Company with the Securities Exchange
Commission (the "SEC") on August 4, 1999, as amended (the "Registration
Statement").(1)
In rendering our opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of the private letter
rulings, dated January 12, 1999 and April 8, 1999, issued by the Internal
Revenue Service to the
- --------
(1) Unless otherwise specifically defined herein, all capitalized terms have
the meanings assigned to them in the Registration Statement, as amended
to date.
<PAGE> 2
Plum Creek Timber Company
October 19, 1999
Page 2
Plum Creek Timber Company, L.P. (the "Partnership") relating to the tax conse-
quences of certain transactions that effected the combination of the Partnership
and the Company, and the operation of the Company as a REIT (the "Rulings"), and
such other materials as we have deemed necessary or appropriate as a basis for
our opinion, including certificates (the "Certificates") executed by appointed
officers of the Company relating to, among other things, the proposed operations
of the Company (the Certificates, together with the Registration Statement, the
"Documents"). Our opinion is conditioned on, among other things, the initial and
continuing accuracy of the facts, information, covenants, and representations
set forth in the Documents and the statements and representations made by the
Company.
In our examination, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies, and
the authenticity of the originals of such latter documents. In making our
examination of documents executed, or to be executed by parties other than the
Company, we have assumed that such parties had, or will have the power,
corporate or other, to enter into and perform all obligations thereunder and
have also assumed the due authorization by all requisite action, corporate or
other, and execution and delivery by such parties of such documents and that
such documents constitute, or will constitute valid and binding obligations of
such parties. As to any facts material to the opinions expressed herein which
were not independently established or verified, we have relied upon oral or
written statements and representations of officers, trustees and other
representatives of the Company, and others.
In rendering our opinion, we have considered the current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
Treasury Regulations promulgated thereunder, pertinent judicial authorities,
interpretive rulings of the Internal Revenue Service and the Rulings, and such
other authorities as we have considered relevant. It should be noted that
statutes, regulations, judicial decisions, and administrative interpretations
are subject to change at any time and, in some circumstances, with retroactive
effect. A change in the authorities upon which our opinion is based could affect
the conclusions. There can be no assurances, moreover, that any of the opinions
expressed herein will be accepted by the Internal Revenue Service or, if
challenged, by a court.
<PAGE> 3
Plum Creek Timber Company
October 19, 1999
Page 3
Based solely upon the foregoing, we are of the opinion that under
current United States federal income tax law, although the discussion set forth
in the Prospectus under the heading "MATERIAL FEDERAL INCOME TAX CONSEQUENCES"
does not purport to discuss all possible United States federal income tax
consequences of the purchase, ownership, and disposition of the Shares, such
discussion constitutes, in all material respects, a fair and accurate summary of
the United States federal income tax consequences of the purchase, ownership,
and disposition of Shares under current law.
Except as set forth above, we express no opinion to any party as
to the tax consequences, whether Federal, state, local or foreign, of the
issuance of Shares, or any transaction related thereto.
This opinion is expressed as of the date hereof unless otherwise
expressly stated and we disclaim any undertaking to advise you of changes of the
facts stated or assumed herein or any subsequent change in applicable law.
Very truly yours,
Skadden, Arps, Slate, Meagher & Flom LLP
<PAGE> 1
[PRICEWATERHOUSECOOPERS LOGO]
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report dated January 26, 1999 relating to the
financial statements, which appears in the Plum Creek Timber Company, L.P.'s
Annual Report on Form 10-K for the year ended December 31, 1998. We also consent
to the reference to us under the headings "Experts" in such Registration
Statement.
PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Seattle, Washington
October 15, 1999
