UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10239
PLUM CREEK TIMBER COMPANY, L.P.
(Exact name of registrant as specified in its charter)
999 Third Avenue, Seattle, Washington 98104-4096
Telephone: (206) 467-3600
Organized in the State of Delaware
I.R.S. Employer Identification No. 91-1443693
Securities registered pursuant to Section 12(b) of the Act:
Depositary Units, Representing Limited Partner Interests ("Units")
The above securities are registered on the New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ( 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of Units held by non-affiliates based on the
closing sales price on February 28, 1999 was approximately $1,203,592,508.
For this calculation, all executive officers, directors and Unitholders
owning more than 5% of the outstanding Units have been deemed affiliates.
Such determination should not be deemed an admission that such executive
officers, directors and Unitholders are, in fact, affiliates of the
registrant.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: None.
PART I
ITEM 1. BUSINESS
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GENERAL
Plum Creek Timber Company, L.P. (the "Partnership"), a Delaware limited
partnership organized in 1989, Plum Creek Manufacturing, L.P.
("Manufacturing"), and Plum Creek Marketing, Inc. ("Marketing"), own,
manage, and operate approximately 3.3 million acres of timberland and 11
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 and
four percent of Manufacturing and Marketing, respectively. As used herein,
"Company" refers to the combined entities of the Partnership, Manufacturing
and Marketing.
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"). A 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 sought. See Item 3
Legal Proceedings - Unitholder Litigation and Note 2 of Notes to Combined
Financial Statements.
ACQUISITIONS
On November 12, 1998, the Partnership acquired 905,000 acres of forest
lands in central Maine from S.D. Warren Company for a purchase price of
$180.0 million, plus $0.3 million for working capital (the "Maine
Timberland Acquisition"). See Financial Condition and Liquidity and Note 3
of Notes to Combined Financial Statements.
On October 18, 1996, the Partnership acquired approximately 529,000
acres (plus approximately 9,000 leased acres) of timberland in Louisiana and
Arkansas, along with two sawmills, a plywood plant and a nursery from
Riverwood International Corporation for a total purchase price of $540
million, plus $11.9 million for working capital (the "Southern Region
Acquisition").
On October 11, 1996, the Company consummated the sale to Stimson Lumber
Company ("Stimson") of 107,000 acres of timberland in northeast Washington
and northern Idaho and the Company's sawmill near Colville, Washington (the
"Newport Asset Sale") for approximately $141.9 million, plus $8.7 million
for working capital. The Company used the net proceeds from the Newport
Asset Sale to pay a portion of the purchase price for the Southern Region
Acquisition.
SEGMENT INFORMATION
As used herein, "Lumber Segment" refers to the Partnership's combined
lumber facilities. "Northern Resources Segment" refers to the
Partnership's combined timber operations in the Northwest and Northeastern
United States. "Panel Segment" refers to the Partnership's combined
plywood and MDF facilities. "Southern Resources Segment" refers to the
Partnership's timber operations in the Southern United States. "Land Sales
Segment" refers to the Partnership's higher and better use lands. "Other"
refers to the Partnership's Southern plywood facility and the Northwest chip
facility, both of which were closed in 1998. Certain financial information
for each business segment is included in Note 15 of Notes to Combined
Financial Statements.
LUMBER SEGMENT
The Lumber Segment consists of two studmills, two random-length lumber
mills and a lumber remanufacturing facility in western Montana, a lumber
remanufacturing facility in Meridian, Idaho, a dimension lumber mill in
Joyce, Louisiana and a dimension lumber mill in Huttig, Arkansas
(collectively the "Lumber Facilities"). The Lumber Facilities produce a
diverse line of lumber products, including boards, studs, dimension lumber,
edge-glued boards and finger jointed studs. The Lumber Segment sells a
portion of these products to Marketing, which has established a network of
40 independent warehouses located strategically throughout the United
States, in order to enhance customer service and prompt deliveries. For the
years ended December 31, 1998, 1997 and 1996 the Lumber Facilities produced
635 million board feet ("MMBF"), 582 MMBF, and 461 MMBF of lumber,
respectively. 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 (the "Meridian Acquisition"),
lumber capacity is expected to be approximately 750 MMBF by the end of 1999.
Production increased in 1998 primarily due to the Meridian Acquisition.
Production increased in 1997 primarily due to the addition of the two
dimension lumber mills in the Southern Region, offset in part by the
disposition of the Company's Arden random-length lumber mill, in October
1996. Lumber Segment product revenues represented approximately 40%, 41% and
38% of total combined revenues in 1998, 1997 and 1996, respectively. In
late 1997, the Company began a project to reconfigure its lumber and plywood
facilities in Joyce, Louisiana to a state-of-the-art, high-volume sawmill in
order to capture greater value from its timber resource through improved
productivity and efficiency. The $31 million project is expected to be
fully operational in the first quarter of 1999.
Lumber products manufactured in the Northwest United States are
targeted to domestic lumber retailers, such as retail home center chains,
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, aimed at retail and other specialty markets, have
made the Lumber Segment less dependent on the more cyclical housing related
market. In 1998, 44% of the Lumber Segment's products was sold into retail
markets, 26% to stocking distributors, 20% to industrial and remanufactured
product markets, 2% to export markets and 8% to other markets.
Competition in the Company's 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 to provide specialized
customer service. The Partnership competes in domestic lumber markets
primarily with other companies in the United States, Canada, and Europe.
Canadian lumber producers have increased their penetration into the United
States market due to their lower wood fiber costs, favorable exchange rates,
and stronger demand in the U.S. During the five year period ended December
31, 1995, Canadian producers increased their percentage of the U.S. lumber
market from approximately 27% to 36%. In 1995, the United States and
Canadian governments announced a five-year lumber trade agreement that took
effect on April 1, 1996. This agreement is intended to reduce the volume of
Canadian lumber imported to the United States through the assessment of a
tariff on annual lumber exports to the United States in excess of certain
levels from the four major producing provinces. In 1998, 1997 and 1996,
Canadian imports represented approximately 34%, 34% and 35%, respectively,
of the total U.S. lumber market. The lumber market is also subject to
competition from substitute products in the shelving, window and door
markets. Substitute products include European imports, radiata pine, MDF,
particle board, laminates and wire shelving. Substitution has significantly
increased in the past several years. Board markets have recently
experienced increased competition from European producers who are targeting
a greater percentage of their production toward the U.S. market due to
weakness in the Asian market.
CHIPS. The Lumber Facilities 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. The Company's Lumber
Facilities produced 351 thousand bone dry units ("MBDU"), 323 MBDU and 241
MBDU of chips in 1998, 1997 and 1996, respectively. The increase in volume
in 1997 was due to the addition of a lumber mill in October 1996 as a part
of the Southern Region Acquisition. A substantial portion of the Company's
chips produced in the Northwest United States is sold to a customer under a
long-term supply agreement.
NORTHERN RESOURCES SEGMENT
The Partnership owns and manages approximately 2.8 million acres of
timberland in the Northwest and Northeastern United States (the "Northern
Timberlands"). The Northern Resources Segment grows and harvests timber
for sale in export and domestic markets. The Northern Timberlands are
geographically segregated into three regions: the Cascades Region in western
Washington, the Rocky Mountain Region in western Montana and northern Idaho,
and the Northeast Region in central Maine. At December 31, 1998, the
Northern Timberlands contained an estimated timber inventory of 31.1 million
Cunits of standing timber. The Northern Resources Segment revenues
represented approximately 19%, 22% and 31% of the Company's combined
revenues in 1998, 1997 and 1996, respectively.
The Cascades Region consists of 307,000 acres of timberland containing
an estimated 5.0 million Cunits or 1.9 billion board feet ("BBF") of
standing timber. Logs harvested in the Cascades Region are sold for export
to Pacific Rim countries, principally Japan, and to domestic mills owned by
third parties, as the Company does not own mills in the Cascades Region.
Logs sold for export are generally of higher quality than logs sold into the
domestic market.
The Rocky Mountain Region consists of 1,586,000 acres of timberland
containing an estimated 12.3 million Cunits or 6.2 BBF of standing timber.
The Rocky Mountain Region primarily sells logs to the Lumber and Panel Segments,
with the remainder sold to third-party domestic mills. In conjunction with an
acquisition in 1993, the Partnership 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.
The Northeast Region consists of 905,000 acres of timberland
containing an estimated 13.8 million Cunits of standing timber. Logs
harvested in the Northeast Region are sold for export to Canada and to
domestic mills owned by third parties, as the Company does not own mills in
the Northeast Region. Simultaneously with 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 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.
DOMESTIC LOGS. The Northern Resources Segment sells its sawlogs
directly to the Lumber and Panel Segments and unaffiliated wood products
manufacturers and sells its pulpwood and in-woods chips to unaffiliated pulp
and paper manufacturers. The percentage of logs which are sold as sawlogs
or pulp logs varies by region and is dependent on, among other things, the
species mix and quality of the inventory harvested and the market dynamics
affecting the given region. The Partnership's customers include numerous
operators of conversion facilities. Domestic sawlog sales from the Northern
Resources Segment accounted for approximately 13%, 14% and 20% of the
Company's combined revenues in 1998, 1997 and 1996, respectively.
In the Cascades Region, approximately 59% of the total volume harvested
in 1998 was sold to unaffiliated domestic wood products manufacturers. The
Cascades Region also sold 17% of the volume harvested in 1998 to third
parties as pulp logs. Pulp logs generally constitute smaller and lower
quality logs, which are not suitable for use by wood products manufacturers.
In the Rocky Mountain Region, the Partnership sells its logs
domestically, substantially all as saw timber. In 1998, approximately 68%
of the timber harvested was sold to the Lumber and Panel Segments and the
remainder was sold to third-party domestic mills. In addition, a small
amount of lower quality logs is sold to pulp and paper manufacturers when
market conditions permit.
In the Northeast Region, approximately 26% of the total volume
harvested in 1998 was sold to unaffiliated domestic wood products
manufacturers and 55% of the was sold to third parties as pulp logs.
The Partnership operates in-woods chipping operations, primarily in the
Rocky Mountain Region, in conjunction with conventional logging operations
when feasible, producing wood-chips from once valueless treetops and other
debris that were previously unutilized. Chip markets are highly susceptible
to fluctuations in pulp and paper markets. During the first half of 1996, a
decline in chip prices made it uneconomical to continue most of the
Partnership's in-woods chipping operations. However, operations resumed at
reduced levels in the second half of 1996 and continued at reduced levels in
1997 and 1998.
Due to transportation costs, domestic wood and fiber consuming
facilities tend to purchase raw materials within a 200-mile radius.
Competitive factors within a market area generally will include price,
species and grade, quality, proximity to wood consuming facilities and the
ability to consistently meet customer requirements. The Partnership has a
reputation as a stable and consistent supplier of well-merchandised, high-
quality logs. In domestic log markets, the Partnership competes with
numerous private land and timber owners in the Northwest and Northeastern
United States and the state agencies of Idaho, Montana, Oregon and
Washington. In addition, the Partnership competes with the United States
government, principally the United States Forest Service ("USFS"), the
Bureau of Land Management ("BLM") and the Bureau of Indian Affairs
("BIA"). All federal timber and timber supplied from state lands in
Washington and Oregon is restricted from export, and is sold solely into
domestic markets.
EXPORT LOGS. The Northern Resources Segment exports logs to Japan and
Canada. In the Cascades Region, approximately 24% of the total 1998 timber
harvested was sold into the Japanese market. Douglas-fir logs sold to Japan
have historically commanded a significant premium over Douglas-fir sold
domestically. However, export log prices declined significantly in 1998 and
1997, eliminating a portion of this premium. Export log revenues to Japan
accounted for 3%, 6% and 8% of combined revenues for 1998, 1997 and 1996,
respectively, and accounted for 6%, 11% and 18%, respectively, of operating
income in such periods.
Customers for the Cascades Region's export sawlogs consist primarily of
large Japanese trading companies. Competitors in this 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. The
Partnership competes primarily based on its long-term relationships and its
reputation as a reliable year-round supplier of premium grade logs.
In the Northeast Region, approximately 19% of the volume harvested in
1998 was exported to regional lumber mills in Canada. Competitors in this
market include numerous private individual and industrial timber owners in
Maine and the provinces of Quebec and New Brunswick, as well as regional
wood brokers.
PANEL SEGMENT
The Panel Segment consists of two plywood plants and a medium density
fiberboard ("MDF") facility in western Montana (collectively the "Panel
Facilities"). The Panel Facilities produce a diverse line of plywood and
MDF products. The Panel Segment sells a portion of these products to
Marketing, which has established a network of 40 independent warehouses
located strategically throughout the United States, in order to enhance
customer service and prompt deliveries. The Panel Segment revenues
represented approximately 22%, 21% and 22% of the Company's combined
revenues in 1998, 1997 and 1996, respectively.
PLYWOOD. The Panel Segment produces high-grade plywood sold primarily
into specialized industrial markets. For the years ended December 31, 1998,
1997 and 1996 the plywood plants produced 323 million square feet ("MMSF")
(3/8" basis), 312 MMSF, and 297 MMSF of plywood, respectively. Plywood
product revenues represented 16%, 15% and 16% of total combined revenues in
1998, 1997 and 1996, respectively.
During 1998, 64% of the Panel Segment's plywood products were sold in
specialty industrial markets, including recreational boat, recreational
vehicle, carpet strip and fiberglass-reinforced panel. The Panel Segment's
plywood products are generally of higher quality than commodity construction
grade products, which makes them more valuable in these specialty niche
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 to 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
("OSB"), a wood product, which is a less expensive and generally lower
quality substitute. Due to OSB's cost advantage, its demand and market
share in the residential segment has been increasing, and this trend is
expected to continue. OSB's share of the North American Structural Panel
market was approximately 49% in 1998, compared to 46% in 1997 and 41% in
1996. The quality of OSB continues to improve and it has become widely
accepted in many building applications. However, since OSB does not have
the strength, weight and machinability of plywood, it cannot be used in
certain specialty applications. In order to avoid closing facilities, some
commodity plywood manufacturers have refocused their products toward
industrial markets, resulting in increased competition for the Company's
products. The Company expects to remain competitive due to its strong
customer base, years of experience in industrial markets, reputation for
high quality products (including various trademarked products such as
MarineTech, RV-X, DuraFloor, and Ultra-Core), and a full line of products.
MEDIUM DENSITY FIBERBOARD. The Panel Segment's MDF products are
primarily sold to specialized industrial markets in North America and
Pacific Rim countries. For the years ended December 31, 1998, 1997 and 1996
the MDF plant produced 132, 127, and 113 MMSF (3/4" basis) of MDF,
respectively.
The introduction in 1996 of super-refined MDF(2), one of the highest
quality MDF products available, has expanded the Partnership's markets to
include higher value applications, such as molding and kitchen cabinets.
During 1998, 66% of the Panel Segment's MDF products were sold in specialty
industrial markets, including furniture, fixtures, and kitchen and bath
cabinets.
MDF producers compete on a global scale, primarily on the basis of
price, quality and service. MDF is also subject to competition from solid
wood, hardboard and particle board products. Competition in the industry
has been increasing over the past few years as a result of significant
capacity expansion both in the United States and Canada. Three new mills
began operations in 1998 in North America and much of this new capacity will
be in direct competition with super-refined MDF(2). Over the same time period
demand has also been increasing but at a slower rate. Super-refined MDF(2)
commands a price premium over standard MDF due to its superior fiber quality
and consistent properties and densities. Moreover, because the Company's
fiber supply consists of western softwoods, a slow growth species with a low
abrasive content, super-refined MDF(2) has proven to have superior machining
qualities over competing MDF products. In addition, because the super-
refined MDF(2) manufacturing process does not use wood chips (substantially
reducing raw material costs) and because the facility has access to low cost
energy sources, the Partnership believes it is one of the lowest cost MDF
producers.
CHIPS. The plywood facilities produce residual wood chips as a
by-product from the conversion of raw logs into finished products. These
wood chips are sold to regional paper and pulp mills. The Company's plywood
facilities produced 87, 78 and 77 MBDU of chips in 1998, 1997 and 1996,
respectively. A substantial portion of these chips are sold to a customer
under a long-term supply agreement.
SOUTHERN RESOURCES SEGMENT
At December 31, 1998, the Partnership owns and manages approximately
524,000 acres (plus 9,000 acres of leased land) of timberland in Arkansas
and Louisiana (the "Southern Timberlands") which were acquired as a part
of the Southern Region Acquisition. The Southern Resources Segment grows
and harvests timber for sale in domestic markets. The Southern Timberlands
contained an estimated timber inventory of 5.1 million Cunits of standing
timber. The Southern Resources Segment revenues represented approximately
10%, 8% and 1% of total combined revenues in 1998, 1997 and 1996,
respectively.
The Southern Timberlands are nearing the end of a process commenced in
1972 of conversion from unmanaged second growth timber into plantation
forests. The Partnership expects this process to be completed by
approximately the year 2000. The pine fiber growth from these plantations
is expected to increase substantially over the next 10 to 15 years as a
result of this conversion. As part of the Southern Region Acquisition, the
Partnership entered into a long-term agreement to supply pulp wood fiber to
Riverwood International's West Monroe paperboard plant based upon prevailing
market prices. The fiber supply agreement covers a 20 year period ending in
2016 and may be extended for up to an additional 10 years.
DOMESTIC LOGS. The Southern Resources Segment sells its sawlogs
directly to the Lumber Segment and unaffiliated wood products manufacturers
and sells its pulpwood to unaffiliated pulp and paper manufacturers. The
Partnership's customers include numerous operators of conversion facilities.
The harvest in the Southern Region during 1998 consisted of 58% pulp logs
and 42% sawlogs. Approximately 31% of the total timber harvest in the
Southern Region was sold internally, with the remainder sold to third-party
domestic conversion facilities.
Due to transportation costs, domestic wood and fiber consuming
facilities tend to purchase raw materials within a 200-mile radius.
Competitive factors within a market area generally include price, species
and grade, quality, proximity to wood consuming facilities and the ability
to consistently meet customer requirements. The Southern Resources Segment
competes with numerous private land and timber owners in the Southern United
States and state agencies in Arkansas and Louisiana.
LAND SALES SEGMENT
The Partnership owns property that may have a higher value as
recreational, residential or conservation uses than for long-term timberland
management. These properties are identified in an on-going process that
evaluates the many factors that influence property values, such as proximity
to population centers and major transportation routes, or the presence of
special ecological features. At December 31, 1998, the Partnership
determined that approximately 150,000 acres of land may have these higher
and better use values, and seeks to realize that value through market-timed
sales and exchanges over the next ten to fifteen years. Approximately 14,710
acres, 3,350 acres and 21,600 acres of higher and better use land were sold
or exchanged during 1998, 1997 and 1996, respectively. Land Sales proceeds
represented approximately 5%, 2%, and 7% of total combined revenues in 1998,
1997 and 1996, respectively.
OTHER
Other consists of a plywood plant in Joyce, Louisiana and a wood chip
plant in Washington. The plywood plant was closed in July 1998 as a part of
the reconfiguration of the Joyce, Louisiana complex to a state-of-the-art,
high-volume sawmill. The chip plant was sold in December 1998.
TIMBER RESOURCE MANAGEMENT
The Partnership's resource operations involve timber management and
harvesting operations, which include road construction and reforestation, as
well as wildlife and watershed management for the Northern and Southern
Timberlands (collectively the "Timberlands"). The Partnership practices
"Environmental Forestry" on the Timberlands which attempts to better
protect and maintain ecosystems while providing for a reasonable harvest.
Particular forestry practices vary by geographic region and depend upon
factors such as soil productivity, tree size, age and stocking. Forest
stands are thinned periodically to improve growth and stand quality until
they are harvested. The Partnership actively utilizes pre-commercial and
commercial thinning practices. Pre-commercial thinning occurs when the
timber harvested is not merchantable. The Partnership believes that such
thinning improves the overall productivity of the Timberlands by enhancing
the growth of the remaining trees. A substantial portion of the harvest
volume on the Southern Timberlands consists of commercial thinnings. In
addition, in 1998 the Partnership developed a plan to maximize timber growth
on its Southern Timberlands. The plan involves three management
practices: bedding sites as needed to raise the planting rows out of
standing water; controlling grasses and weeds that compete with the pine's
development; and periodically applying a phosphorus-rich fertilizer where
site-specific soil and needle samples indicate the need.
It is the Partnership's 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 widely used on
approximately 90% of the harvested land in the Rocky Mountain and Northeast
Regions. In the Cascades Region substantially all of the reforestation is
done by planting. During 1998, the Partnership planted 4.1 million
seedlings on the Northern Timberlands. Substantially all of the areas
harvested in the Southern Timberlands are regenerated with seedlings. The
Partnership planted 8.4 million seedlings on the Southern Timberlands during
1998.
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, such hazards are to a large
extent unpredictable and there can be no assurance that losses will be so
limited. The size, species, diversity and checker-board ownership of the
Rocky Mountain Regions' timberlands, as well as the Partnership's forest
management practices, should help to minimize these risks. Consistent with
the practices of other large timber companies, the Partnership does not
maintain insurance against loss to standing timber on the Timberlands, but
maintains insurance for loss of logs due to fire and other occurrences
following harvesting.
RAW MATERIALS
The Lumber and Panel Segments obtain the majority of their raw logs
from the Timberlands. The Timberlands provided 63%, 60%, and 60% of the
Lumber Facilities' raw log needs in 1998, 1997 and 1996, respectively. The
Timberlands provided 95%, 89%, and 89% of the plywood facilities' raw log
needs in 1998, 1997 and 1996, respectively. The price of logs obtained from
the Partnership is determined quarterly based upon estimated market prices.
The Rocky Mountain Region and Southern Timberlands provide a consistent
supply of quality logs and preferred species to the lumber and plywood
facilities, although over time the average log size is expected to decline,
and the species mix is expected to change due to harvest and growth
patterns.
The Lumber and Panel Segments have and will continue to purchase
stumpage and logs from external sources, which include the USFS, BIA, BLM
and state and private timberland owners. At December 31, 1998, the Lumber
and Panel Facilities had 74 MMBF of timber under contract from external
sources which may be harvested over the next three years. The USFS harvest
plan is expected to provide for a 1999 harvest of 250 MMBF in the Rocky
Mountain Region, geographically close to the lumber and plywood facilities
in western Montana. However, due in part to legal challenges and changes in
public policy, the USFS will likely sell less volume. The lumber and
plywood facilities are permitted to bid on up to approximately fifty percent
annually of this USFS volume, with the remainder set aside for small
businesses. In addition, approximately 557 MMBF of timber is expected to be
made available to the lumber and plywood facilities annually from private
timberland owners. The geographic area in which the lumber and plywood
facilities obtain logs may expand or contract from year to year as the cost
of logs and value of manufactured products fluctuate. (For further
discussion of other timber supply issues see "Federal and State
Regulations.")
The MDF facility has a consistent supply of sawdust and wood shavings
from internal and external sources. The remanufacturing facilities use
pieces of lumber, a by-product of the Lumber Segment's operations and
purchased lumber from third-party mills.
COMPETITION
Markets for forest products are highly competitive in terms of price
and quality. Many of the Company's competitors have substantially greater
financial and operating resources than the Company. In addition, wood
products are subject to increasing competition from a variety of
substitutes, including non-wood and engineered wood products. Plywood
markets are subject to competition from OSB; and lumber and log markets are
subject to competition from other worldwide suppliers. The Partnership
believes it is able to compete effectively due to its extensive private
timber inventory, its proven leadership in Environmental Forestry which has
positioned the Partnership to meet regulatory challenges on a cost-effective
basis, its reputation as a dependable, long-term supplier of quality
products, its innovative approach to providing high quality, value-added
products to various specialty and industrial niche markets and the
integration of its timberlands with its efficient manufacturing processes.
SEASONALITY
Domestic log sales volumes from the Northern Timberlands are typically
at their lowest point in the second quarter of each year during spring
break-up, when warming weather thaws and softens roadbeds, restricting
access to logging sites. Log sales volumes from the Southern Timberlands are
generally at their lowest point during the first quarter of each year, as
winter rains limit operations. Export log sales are affected by variations
in inventory, both domestically and in the countries where such logs are
sold, as well as by weather conditions. Winter logging activity in the
Cascades Region takes place at lower elevations, where predominantly second
growth logs are found, affecting the volume of higher quality export logs
sold during this time of the year.
Demand for manufactured products is generally lower in the fall and
winter quarters when activity in the construction markets is slower, and
higher in the spring and summer quarters when these markets are more active.
In addition to seasonal fluctuations in demand, prices of manufactured
products can be impacted by weather-related fluctuations in supply, as
production can be hampered during severely cold winter months and then
rebound with warmer spring weather. Working capital varies with seasonal
fluctuations. Log inventories increase going into the winter season to
prepare for reduced harvest during spring break-up in the Northwest and
during the rainy season in the South.
FEDERAL AND STATE REGULATIONS
GENERAL. The activities of the Company are subject to various federal
and state environmental laws and regulations which impose limitations on the
discharge of pollutants into the air and water, establish standards for the
treatment, storage and disposal of solid and hazardous waste, and govern the
discharge of runoff stormwater and wastewater. The General Partner believes
that the Company is in substantial compliance with such laws and
regulations.
The activities of the Company are also subject to federal and state
regulations regarding natural resources and forestry operations and the
requirements of the federal Occupational Safety and Health Act and
comparable state statutes relating to the health and safety of the Company's
employees. The General Partner believes that the Company is in substantial
compliance with such laws and regulations.
THREATENED AND ENDANGERED SPECIES. The Endangered Species Act
("ESA") protects species threatened with possible extinction. A number of
species indigenous to the Company's timberlands have been listed as
threatened or endangered or have been proposed or are candidates for such
status under the ESA, including the northern spotted owl, marbled murrelet,
gray wolf, red cockaded woodpecker, mountain caribou, grizzly bear, bald
eagle, Canadian lynx, bull trout and various salmon species. As a result,
the Company's activities in or adjacent to the habitat of such species may
be subject to restrictions relating to the harvesting of timber and the
construction of roads.
In 1996, the Partnership received a permit under the ESA from the
United States Fish and Wildlife Service (the "USFWS") and the National
Marine Fisheries Service ("NMFS" and together with the USFWS, the
"Services") that covers the Partnership's forest management on 170,000 acres
in the Cascades Region (the "Planning Area"). As a part of the permit
application, the Partnership prepared a multi-species habitat conservation
plan (the "HCP") that will govern the Partnership's management activities in
the Planning Area during the 50-year life of the permit. The HCP requires
the Partnership to maintain certain levels of wildlife habitat and to take
numerous other mitigation measures, including the protection of riparian
areas.
In consideration for such mitigation, the permit authorizes forestry
practices that are consistent with the HCP 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 plan and
permit. The HCP provides that the Services will amend the permit to add
subsequently listed species without requiring the Partnership to provide
additional mitigation, absent extraordinary circumstances. The bull trout
was added to the permit pursuant to this provision upon its listing in 1998.
Such circumstances would include situations where continued activity under
the HCP would have a significant material adverse impact on the species, and
mitigation on federal land would not alleviate the concern. As an incentive
to the Partnership to create additional wildlife habitat in the Planning
Area, the permit provides certain additional authorization during a second
50-year period if the wildlife habitat within the Planning Area exceeds
levels set in the HCP. The permit thus is expected to provide long-term
certainty and predictability for the Partnership's harvest activities in the
Planning Area.
In October 1998, Congress passed legislation directing the USFS to
exchange certain federal lands to the Partnership for certain Partnership
lands of equal value located in the Planning Area (the "Cascade Land
Exchange"). In connection with the Cascade Land Exchange, expected to
close in the summer of 1999, the Partnership is seeking an amendment to the
HCP that would add lands received by the Partnership within the Planning
Area as a result of the Cascade Land Exchange.
In December 1995, the Partnership entered into an agreement to conserve
grizzly bears (the "Grizzly Bear Agreement") with the USFWS, the USFS and
the state of Montana covering 83,000 acres of the Partnership's timberlands
in the Swan Valley in western Montana. Under the Grizzly Bear Agreement,
the Partnership has agreed to protect certain habitat and to minimize the
impact of the Partnership's forestry activities on the grizzly bear. In
consideration for this mitigation, the USFWS authorized forestry practices
in the Swan Valley that are consistent with the agreement.
In November 1996, several organizations filed a lawsuit against the
Secretary of the Interior and certain USFWS and USFS officials in Federal
District Court for the District of Montana challenging the Grizzly Bear
Agreement under the ESA and the National Environmental Policy Act
("NEPA"). The Partnership subsequently became a party to the lawsuit in
order to defend the Grizzly Bear Agreement. In October 1997, the Court
ruled in favor of the Partnership and the government, upholding the Grizzly
Bear Agreement under both the ESA and NEPA. The plaintiffs appealed the
decision to the Ninth Circuit Court of Appeals, which affirmed the District
Court's decision in January 1999.
Although the HCP and Grizzly Bear Agreement have been implemented and
are functioning as expected, there can be no assurance that the terms of
such agreements will remain in force or be sufficient to protect against
subsequent amendment of the ESA or additional listings thereunder, or
against changes to other applicable laws and regulations. Any such changes
could materially and adversely affect the Partnership's operations. In
addition, legal challenges such as those described above could disrupt the
continued operation of the HCP and the Grizzly Bear Agreement and thereby
reduce the level of certainty the Partnership anticipates gaining from such
plans.
In 1998, the USFWS listed certain population segments of the bull trout
as threatened under the ESA. Bull trout are present in numerous streams and
rivers which flow across the Partnership's lands in Montana, Idaho and
Washington. In addition, the red-cockaded woodpecker, listed as threatened,
is found on the Partnership's lands in Louisiana and Arkansas. The
Partnership is currently working with the Services to develop a conservation
plan for bull trout and other native fish species and a conservation plan
for the red-cockaded woodpecker which, if approved, would result in the
issuance of permits authorizing forest practices consistent with those
plans. Although discussions are underway, the Partnership is unable to
predict whether any such agreements will ultimately be entered into or what
the terms of any such agreements would be. The Partnership is 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 ESA also prohibits the federal government from jeopardizing species
listed under the ESA 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 such a federal
connection, the federal agency involved must consult with the USFWS or, in
the case of anadromous fish, NMFS, 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 such effects, the USFWS or NMFS must propose,
where possible, alternatives or modifications to the proposed activity.
The Cascades and Rocky Mountain Regions ("Northwest Timberlands") are
often intermingled with federal lands and access across federal lands may
require federal approval. In the past, the Partnership's access to such
areas has been delayed by administrative processes and legal challenges and
has been restricted under the ESA. The Partnership believes that access to
its lands in the Planning Area and the Swan Valley should be facilitated by
the HCP and the Grizzly Bear Agreement, although no assurance can be given
that further such delays will not occur. Upon the consummation of the
Cascades Land Exchange, the Partnership will have access to substantially
all of its land in the Cascades Region.
At this time, the Partnership believes that federal and state laws and
regulations related to the environment and the protection of endangered
species will not have a material adverse effect on the Partnership's
financial position, results of operations or liquidity. The Partnership
anticipates, 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 the Partnership, leading to increased costs, additional
capital expenditures and reduced operating flexibility.
LEGISLATION RESTRICTING LOG EXPORTS. Federal legislation prohibits the
sale of unprocessed logs harvested from federal lands located in the western
half of the U.S. if such logs will be exported from the U.S. by the
purchaser thereof, or if such logs will be used by the purchaser thereof as
a substitute for timber from private lands which is exported by such
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, the Partnership applied for and obtained an approved
sourcing area for the Partnership's Northwest conversion 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
(the "1997 Amendment") which the Partnership believes ensure that the
Partnership's sourcing area will be renewed.
In addition, federal legislation prohibits the export of unprocessed
logs harvested from certain state lands. Initially, Washington and Oregon
prohibited the export of all logs harvested from state lands. The
legislation provided, however, that the ban in Washington state on the
export of state logs would become a partial ban beginning January 1, 1996.
The 1997 Amendment made the full ban permanent. 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.
INCOME TAX CONSIDERATIONS
PARTNERSHIP STATUS. The Partnership is not a taxable entity and incurs
no federal income tax liability. Each partner is required to take into
account in computing his or her federal income tax liability, his or her
allocable share of income, gains, losses, deductions and credits of the
Partnership, regardless of whether cash distributions are made.
Distributions by the Partnership to a partner are generally not taxable.
Publicly traded partnerships will be taxed as corporations unless
certain requirements are met. Publicly traded partnerships, such as the
Partnership, whose income consists of at least 90% qualifying income,
however, are treated as partnerships for federal income tax purposes.
Qualifying income includes income from the processing, refining, marketing
or transportation of timber and land sales. The Partnership's principal
sources of income include income from the sale of timber, the operation of
sawmills and the production of plywood and MDF. The Internal Revenue
Service ("IRS") has issued two rulings to the Partnership that income from
the operation of sawmills and the production of plywood and MDF is qualified
for this purpose.
TIMBER INCOME. The Taxpayer Relief Act of 1997 lowered the maximum
capital gains tax rate for most taxpayers from 28 percent to 20 percent,
effective for sales of capital assets after May 6, 1997. This rate
reduction is a significant benefit to Unitholders because most of the
Partnership's income is derived from the harvesting of timber which
qualifies under Section 631 of the Internal Revenue Code (the "Code") as
capital gains income. This capital gains benefit is particularly
advantageous when combined with the ordinary deductions (primarily related
to interest and corporate expense) which can be used to offset other
ordinary income, which is generally taxed at higher rates.
SECTION 754 ELECTION. The Partnership has made the election permitted
by Section 754 of the Code. This election requires a purchaser of depositary
units representing limited partner interests ("Units") to adjust his or her
share of the basis in the Partnership's properties ("Inside Basis") pursuant
to Section 743(b) of the Code to fair market value (as reflected by his or
her Unit cost). A Unitholder's allocable share of Partnership income,
gains, losses and deductions is determined in accordance with the
Unitholder's unique basis under this election. Such election is irrevocable
and may not be changed without the consent of the IRS. The Section 743(b)
adjustment is attributed solely to a purchaser of Units and is not added to
the basis of the Partnership's assets associated with all of the
Unitholders.
FEDERAL INCOME TAXATION - GENERAL. Marketing, organized as a separate
corporation, reports all of its income, gains, losses, deductions and
credits arising from its operations on its own tax return and pays a
corporate tax on any resulting net income. Under current law, Marketing's
net income is subject to federal income tax at rates up to 35%. Losses
realized by Marketing do not flow through to the Partnership, but are
carried back and forward, within certain limitations, to offset taxable
income of Marketing in past or future years. Distributions, if any,
received by the Partnership from Marketing generally would be characterized
as either taxable dividends of current or accumulated earnings and profits,
or in the absence of earnings and profits, as a nontaxable return of capital
(to the extent of the Partnership's tax basis in Marketing's stock) or as
taxable capital gain (after the Partnership's basis in such stock is reduced
to zero).
STATE TAX INFORMATION. The Partnership conducts operations in seven
states, five of which (Arkansas, Idaho, Louisiana, Maine and Montana) have a
state income tax. To simplify the Unitholders' state filing requirements,
the Partnership files composite returns in each of those states and pays the
state income tax due on behalf of non-resident Unitholders. Marketing
conducts operations in approximately 25 states for which it pays state
corporate income taxes.
TAX-EXEMPT ENTITIES. Certain entities otherwise generally exempt from
federal income taxes (such as individual retirement accounts ("IRAs"),
employee benefit plans and other charitable or exempt organizations) may be
subject to federal income tax if their share of Unrelated Business Taxable
Income ("UBTI") exceeds $1,000. For years prior to 1994, all income derived
from publicly traded partnerships was classified as UBTI. For years after
1993, income is classified as UBTI dependent upon source. Most of the
Partnership's income continues to be classified as UBTI. Regulated
investment companies are required to derive 90% or more of their gross
income from qualified sources, such as interest or security trading income;
gross income from the Partnership is not qualifying income for purposes of
this test.
ENCUMBRANCES
Under the terms of the Partnership's debt agreements, the Partnership
has agreed not to pledge, assign or transfer the Timberlands, except under
limited circumstances. The holders of the First Mortgage Notes of
Manufacturing have a first mortgage lien on a significant portion of the
Lumber and Panel Facilities. The Partnership guarantees the First Mortgage
Notes of Manufacturing.
The Partnership's title to the timberlands acquired upon formation of
the Company in 1989 and in the Southern Region and Maine Timberlands
Acquisitions includes substantially all the related hard rock mineral
interests. However, the Partnership did not obtain the hard rock mineral
interests to a significant portion of the 865,000 acres of Montana
timberland purchased in 1993. In addition, the Partnership does not own oil
and gas rights to the majority of its Timberlands. Title to the Timberlands
is subject to presently existing easements, rights of way, flowage and
flooding rights, servitudes, cemeteries, camping sites, hunting and other
leases, licenses and permits, none of which materially adversely affect the
value of the Timberlands or materially restrict the harvesting of timber or
other operations of the Partnership.
EMPLOYEES
The Company currently has approximately 515 salaried and 1,880 hourly
employees, including employees of the General Partner that manage the
businesses of the Company. The Company believes that its employee relations
are good. The Company's wage scale and benefits are generally competitive
with other forest products companies. Hourly employees (154 employees) at
the Huttig, Arkansas lumber mill participate in the UBC Southern Council of
Industrial Workers, Local Union No. 2346. The Company has been in contract
negotiations with union representatives. To date, these negotiations have
not resulted in a contract agreement and the bargaining is at an impasse.
The majority of the harvesting and delivery of logs are conducted by
independent contractors who are not employees of the Company.
ITEM 2. PROPERTIES
- ------------------
The Company believes that its Northern and Southern Timberlands and
Lumber and Panel Facilities are suitable and adequate for current
operations. The Lumber and Panel Facilities are maintained through on-going
capital investments, regular maintenance and equipment upgrades. The
majority of the Lumber and Panel Facilities are modern, state-of-the-art
facilities. The Company owns all of the Lumber and Panel Facilities.
Substantially all of the Lumber and Panel Facilities are operated at, or
near, maximum capacity year round. See Item 1. Business for discussion of
the location and description of properties and encumbrances related to
properties.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
Unitholder Litigation
- ---------------------
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. The Action also challenges the General Partner's and
Advisory Corp's receipt of certain special voting and board nomination
rights in the Conversion Transaction. 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. The Plum Creek
Defendants intend to continue to defend themselves vigorously in connection
with this appeal.
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 Delaware Court of Chancery 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 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. The
Plaintiff seeks: (i) to enjoin the Conversion Transaction, (ii) in the event
the Conversion Transaction is consummated, to rescind and set aside the
transaction or award rescissory damages to the purported class, (iii) an
accounting to the purported class for their alleged damages and the Plum Creek
Defendants'alleged profits, (iv) costs, including experts' and attorneys' fees,
and (v) such further relief as the Court deems just and proper. The Plum Creek
Defendants dispute the Plaintiff's allegations and intend to defend
themselves vigorously.
The General Partners' decision to proceed with the Conversion
Transaction is in the sole discretion of the General Partner, subject to
receipt of the requisite Unitholder's approval and satisfaction of the other
conditions precedent in the Conversion Agreement. The General Partner
currently expects to delay the consummation of the Conversion Transaction
until the Action, including the appeal and any additional claims that may be
brought, is fully resolved to the General Partners' satisfaction.
Stone Container Corporation - Mill Shutdown
- -------------------------------------------
As reported in the Partnership's third quarter 1998 Form 10-Q, Stone
Container Corporation ("Stone") shut down its Frenchtown, Montana linerboard
plant for approximately 30 days during the fourth quarter of 1998 and
notified the Partnership that it would not be purchasing wood chips during
the shutdown. The Partnership filed for arbitration to enforce Stone's
obligation to continue purchasing wood chips from the Partnership during the
shutdown under the terms of a long-term supply agreement. The parties
settled the dispute in December 1998. Under the settlement agreement, Stone
will purchase during 1999 all of the chips stockpiled during the shutdown.
There is no other pending or threatened litigation involving the
Partnership which the General Partner believes would have a material adverse
effect on the financial position, the results of operations or liquidity of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
- -------------------------------------------------
AND RELATED UNITHOLDER MATTERS
- ------------------------------
The Partnership's Units are traded on the New York Stock Exchange. As
of February 28, 1999, there were approximately 65,000 beneficial owners of
46,323,300 outstanding Units.
Trading price data, as reported by the New York Stock Exchange, and
declared cash distribution information for 1998 and 1997 are as follows:
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
---- -------- -------- -------- --------
High $ 34-7/8 $ 34-1/4 $ 31 $ 28-3/4
Low 30 28-3/16 24-1/2 25
Cash Distribution per Unit $ 0.57 $ 0.57 $ 0.57 $ 0.57
1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
---- -------- -------- -------- --------
High $ 29-1/4 $ 32-1/2 $ 36 $ 34-3/8
Low 25-7/8 26-3/4 31-11/16 28
Cash Distribution per Unit $ 0.55 $ 0.55 $ 0.55 $ 0.55
Cash distributions are paid from available cash as defined by the
Partnership's partnership agreement. It is the Company's intention to
maintain the distribution into the foreseeable future; however, there can
be no guarantee. In addition, the Company's debt agreements have certain
restrictive covenants limiting the amount of cash distributions.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
<TABLE>
1998(1) 1997 1996(2) 1995 1994
------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
For the year:
(In millions, except per Unit):
Revenues $ 699.4 $ 725.6 $ 633.7 $ 585.1 $ 578.7
Depreciation, Depletion and
Amortization 69.3 70.2 56.9 54.1 54.1
Operating Income 141.1 173.3 165.0 159.0 164.1
Net Income 75.4 111.7 223.6 110.7 112.2
Capital Expenditures (3) 64.3 28.3 19.3 30.7 25.8
Net Cash Provided by Operations 164.0 190.0 171.9 165.2 155.1
Net Income per Unit 0.90 1.72 4.71 2.17 2.36
Cash Distributions Declared
per Unit 2.28 2.20 2.02 1.96 1.67
At year end (in millions):
Working Capital 129.6 158.3 153.0 111.5 90.5
Total Assets 1,438.2 1,330.9 1,336.4 826.1 826.2
Total Debt 961.0 763.4 780.8 531.4 544.4
Partners' Capital (4) $ 405.4 $ 470.3 $ 491.6 $ 233.9 $ 223.0
Operating Data:
Northwest Timberlands Fee Timber
Harvested (MMBF) 495 512 577 562 559
Southern Timberlands Fee Timber
Harvested (M Cunits) 764 799 127
Northeastern Timberlands Fee
Timber Harvested (M Tons) 131
Lumber Production (MMBF) 635 582 461 433 388
Plywood Production (MMSF)
(3/8" basis)(5) 323 312 297 294 290
MDF Production (MMSF)
(3/4" basis) 132 127 113 102 123
</TABLE>
(1) Results include the impact of the Maine Timberland Acquisition from
November 12, 1998.
(2) Included in 1996 results of operations was a gain of $105.7 million
related to the Newport Asset Sale. Results include the impact of the
Southern Region Acquisition from October 19, 1996 and the Newport Asset Sale
from October 12, 1996.
(3) Does not include $181.1 million related to the Maine Timberland
Acquisition in 1998 or $560.7 million related to the Southern Region
Acquisition in 1996.
(4) The Partnership issued 5.7 million Units during 1996 for net proceeds of
$144.3 million.
(5) Does not include 111 MMSF, 200 MMSF and 37 MMSF for the years ended
December 31, 1998, 1997 and 1996, respectively, related to production at the
Joyce, Louisiana, plywood facility which was closed in July 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
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
U.S. dollar in foreign exchange markets, competition, the availability of
substitute products and other factors. In particular, the demand for logs,
lumber, plywood and MDF is affected by 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.
CURRENT MARKET CONDITIONS. Throughout 1998 there was an excess supply
of logs and lumber in the U.S. market due to the economic weakness in Asia.
As a result, prices for domestic logs in the Cascades Region for 1998
decreased by approximately 13% from levels experienced in 1997. The supply
of logs in the Cascades Region increased significantly due to both the re-
direction of export quality logs to the domestic market and an inflow of
logs from British Columbia. Prices for domestic logs in the Rocky Mountain
Region for 1998 declined modestly from those experienced during 1997,
primarily as a result of weak lumber markets and an excess supply of logs
caused by the Asian economic crisis. Pulp logs and chip prices in the
Northwest generally remained weak during 1998 due to a world-wide excess
supply of pulp and paper. Domestic log prices in the Southern Region for
1998 were generally comparable to those experienced during 1997. However,
prices were under downward pressure during the second half of the year
primarily due to an excess supply of lumber and favorable harvesting
conditions. Pulp log prices in the Southern Region improved slightly
compared to 1997, primarily due to log supply shortages in the first half of
the year as a result of weather-related harvesting curtailments.
Export log prices for 1998 decreased by approximately 16% from levels
experienced in 1997 primarily due to the continued economic weakness in
Asia. Demand for logs during 1998 remained weak due to a decline in
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.
Industry composite indices for lumber commodity prices were 16% lower
in 1998 than in 1997 primarily due to the worldwide excess supply of lumber.
Despite declining lumber prices, the demand for lumber remains extremely
strong primarily due to a robust U.S. economy, low interest rates, healthy
job growth and strong consumer confidence. Both housing starts and new home
sales in 1998 were approximately 10% above the prior year's 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 that was previously targeted toward Japanese markets and
increased substitution of engineered wood products. Furthermore, lumber
prices in the South have experienced greater downward pressure primarily due
to increased substitution of Western species and engineered wood products
for Southern Yellow Pine. Board prices for 1998 in the repair and remodel
markets declined by over 10% from the prior year levels. The price decline
was primarily due to increased imports from European producers as a result
of the weak Asian markets and increased domestic production as a result of
weak dimension lumber prices. European lumber producers exported
approximately three times the volume (155 MMBF or 20% of the U.S. board
market) to the U.S. in 1998 compared to 1997.
Industry composite indices for plywood commodity prices in 1998 were
comparable with 1997. Commodity plywood prices were generally under downward
pressure during the first half of 1998 due to continued OSB capacity
expansion. OSB continues to capture a significant share of the North
American Structural Panel market with approximately 49% in 1998. However,
commodity plywood prices improved during the second half of 1998 primarily
due to strong building activity, rising OSB prices and recent plywood plant
closures. Industrial and specialty grade plywood prices remained strong
during 1998.
MDF prices in 1998 were comparable to 1997 prices. North American
demand for MDF continues to grow at approximately 15% 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 as a result of three new mills beginning operations
in 1998, better operating performance by start-up mills and the re-direction
to North American markets of MDF previously targeted toward Asian markets.
COMPARABILITY OF FINANCIAL STATEMENT PERIODS. The Company has pursued
and will continue to pursue the acquisition of additional timberlands to
increase inventories of fee timber. On November 12, 1998, the Company
completed the Maine Timberland Acquisition. On October 18, 1996, the
Company completed the Southern Region Acquisition. The Company may also,
from time to time, sell timberlands and facilities if attractive
opportunities arise. The Newport Asset Sale was completed on October 11,
1996. Revenues and operating income generated by the assets sold in the
Newport Asset Sale were $61.0 million and $15.7 million, respectively, in
1996 and were $67.8 million and $14.6 million, respectively, in 1995. See
Item 1 Business - Acquisitions. Accordingly, the comparability of periods
covered by the Company's financial statements is, and in the future may be,
affected by the impact of acquisitions and divestitures.
HARVEST PLANS. The Partnership determines its harvesting plans based
on a number of factors, including age and size of, and species distribution
within, its timber acreage, economic maturity of each harvest area,
environmental considerations and mill requirements both in the lumber and
plywood facilities and at unaffiliated mills.
Harvest levels in the Rocky Mountain Region averaged approximately 365
MMBF in 1998 and 1997. Harvest levels in 1999 and 2000 are expected to
decline slightly compared to 1998 harvest levels. By the year 2001, the
Partnership anticipates that it will have nearly completed the conversion of
slower growing forests to younger, more productive stands in the Rocky
Mountain Region, at which time a moderate reduction in the region's harvest
levels is anticipated. Harvest levels in the Cascades Region averaged 150
MMBF during 1995 to 1997 before declining approximately 10% in 1998.
Harvest levels in 1999 (including sawlogs and pulpwood) are expected to
decline moderately before stabilizing in future years as the
conversion of slower growing forests to younger, more productive stands
nears completion. Harvest levels in the Northeast Region (including sawlogs
and pulpwood) are anticipated to approximate 1 million tons in 1999 and
remain stable for the foreseeable future.
Harvest levels in the Southern Region (including sawlogs and pulpwood)
were approximately 800 and 760 thousand Cunits ("M Cunits") during 1997 and
1998, respectively. The 1999 harvest volume is expected to approximate the
level in 1998. During 1999, the Partnership will complete both the
conversion of mature second growth pine timberlands into intensively managed
pine plantations and its accelerated thinning operations to improve growth
rates. As a result, the Partnership anticipates moderate declines in
harvest levels for the next several years. Thereafter harvest levels are
expected to gradually increase as the Partnership benefits from faster
growing, intensively managed plantations.
Harvest plans are influenced by inventories on fee lands, as well
as projections of demand, price, availability of timber from other sources,
availability of legal access and other factors that may be outside of the
Partnership's control. Accordingly, actual harvest levels may vary. The
Partnership believes that its 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 the Company's
wood chips derived from manufacturing lumber and plywood ("Residual
Chips") 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 Residual Chips subject to certain
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 related to sales of Residual Chips
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.
Impact of the Year 2000 Issue
- -----------------------------
OVERVIEW OF THE PLAN
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. This could
result in a system failure or miscalculation in the year 2000 when using
date sensitive software. During the first quarter of 1997, the Company
adopted a Year 2000 Plan to identify and address both internal and external
Year 2000 issues. The Year 2000 Plan addresses information technology
systems, process control systems and embedded chips used in its
manufacturing operations, and key business relationships.
Pursuant to the Plan, the Company completed a company-wide assessment
of its information technology systems in 1997 to determine the impact of the
Year 2000 issue. Most of the necessary revisions to the systems and
processes were completed by year-end 1998, with complete testing and
verification of the systems and processes for Year 2000 compliance to occur
during 1999.
ASSESSMENT OF THE COMPANY'S STATE OF READINESS
Over the last five years the Company has replaced many of its 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, and the
related costs have been capitalized. In 1999, the replacement of the
payroll and human resources system will be completed at an approximate cost
of $300,000 for 1998 and an approximate cost of $110,000 for 1999. These
costs will also be capitalized. Currently, the payroll and human resources
system replacement is 80% complete.
The Company's log accounting systems have required program
modifications to achieve Year 2000 readiness. The program modifications and
testing will be completed in early 1999 at an approximate cost of $28,000
for 1998 and an approximate cost of $7,000 for 1999. Company information
systems personnel are performing all remediation efforts, and the related
costs will be expensed as incurred. The log accounting systems modifications
and testing are 90% complete.
During 1998, the Company completed an inventory of the process control
systems and embedded chips used in its manufacturing operations and
identified the systems that could be subject to Year 2000 problems. The
systems used in the lumber and plywood operations will require minimal
changes, while the MDF systems will require the replacement of certain
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 is 75% complete.
As part of the Company's Year 2000 Plan, service providers, vendors,
suppliers and customers that are critical to the Company's operations ("Key
Business Partners") have been notified and steps are being undertaken to
determine their Year 2000 readiness through questionnaires, interviews, and
other available means. The Company's efforts to determine the readiness of
Key Business Partners and the potential impacts on the Company's operations
if such Key Business Partners are not Year 2000 compliant will be ongoing
through year-end 1999.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The Company relies on Key Business Partners for materials and services.
Failure by Key Business Partners to achieve Year 2000 compliance could
temporarily impact the ability of the Company to operate. However, the
impact of the failure of a Key Business Partner would be limited to the
extent that sufficient alternate supplies of materials or services were
available.
The Company is also dependent upon its customers for sales and cash
flow. Year 2000 interruptions in its customers' operations could result in
reduced sales, increased inventory or receivable levels, and cash flow
reductions. While these events are possible, the Company's customer base is
broad enough to minimize the effects of individual occurrences.
CONTINGENCY PLAN
The Company is working to evaluate 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, should the Company
determine that certain Key Business Partners may fail to achieve Year 2000
readiness, appropriate contingency plans would be developed.
SUMMARY
Based on the Company's assessments, Year 2000 issues relating to its
information technology systems and process control systems and embedded
chips used in its manufacturing operations are not expected to have a
material impact on the Company's financial position, results of operations
or liquidity. Furthermore, the Company will continue to monitor the
progress of its Key Business Partners in achieving Year 2000 compliance,
and, to the extent practicable, will develop contingency plans. However, no
assurance can be given that 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 Key Business Partners fail to achieve Year 2000
Compliance.
Results of Operations
- ---------------------
The following table compares operating income by segment for the years
ended December 31:
Operating Income by Segment
(In Thousands)
1998 1997 1996
---- ---- ----
Lumber.................................$ 2,599 $ 34,667 $ 18,596
Northern Resources..................... 73,715 98,792 119,767
Panel.................................. 14,360 8,462 5,305
Southern Resources..................... 53,568 54,313 8,149
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
======= ======= =======
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. Therefore, the
difference in computing cost of goods sold under the LIFO and FIFO methods
is included in "Other Costs & Eliminations."
1998 Compared to 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
and Southern lumber prices decreased by 12% and 13%, respectively, 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% and 12% as a percentage of its
revenues for the years ended December 31, 1998 and 1997, respectively. 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 Acquisition and increased Southern
lumber sales volume.
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 Cascades Region, lower
Rocky Mountain and Cascades Regions domestic log prices, 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 Cascades Region decreased revenue by
approximately $13 million. (See Item 7. Management's Discussion and Analysis
- - Events and Trends Affecting Operating Results - Harvest Plans.) Rocky
Mountain and Cascades Regions domestic prices decreased by 4% and 13%,
respectively, compared to 1997, primarily as a result of weak lumber markets
and an excess supply of logs. Export prices decreased by 16%, and
approximately 35% of export quality logs were re-directed to the domestic
market, primarily due to a decline in Japanese demand for logs.
Northern Resources Segment operating income was 29% and 36% as a
percentage of its revenues for the years ended December 31, 1998 and 1997,
respectively. 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 a
decrease in harvesting costs in the Cascades Region as a result of reduced
harvest levels.
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 MDF and plywood sales volume and higher plywood
prices. MDF 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% and 6% as a percentage of its
revenues for the years ended December 31, 1998 and 1997, respectively,
primarily due to lower MDF 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 MDF raw material costs, offset in part by increased
MDF and plywood sales volume.
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% and 46% as a
percentage of its revenues for the years ended December 31, 1998 and 1997,
respectively. 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.
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% and 78% as a percentage of
its revenues for the years ended December 31, 1998 and 1997, respectively.
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 (eliminated) 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). 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 of
1997 and the subsequent processing of these logs in the first quarter of
1998 during weather-related harvest restrictions. Similar log inventories
were not built-up during the fourth quarter of 1998. The decrease in
operating income due to corporate overhead is primarily due to achieving the
fifth and final target under the Company's 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 are costs associated with the
proposed conversion of the Partnership to a REIT. See Note 2 of Notes to
Combined Financial Statements. Reorganization Costs consist of fees for
legal, investment banking and tax consultants, as well as printing and other
related costs. Reorganization costs are being expensed as incurred.
The income allocated to the General Partner 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 is allocated to
the General Partner based on two percent of the Company's net income
(adjusted for the incentive distribution), plus the incentive distribution.
The General Partner's incentive distribution is 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 for the year ended 1998,
compared to $2.16 per Unit for the year ended 1997.
1997 Compared to 1996
- ---------------------
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 U.S. housing
market and the reduction in supply of certain 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% and 8% as a percentage of its
revenues for the years ended December 31, 1997 and 1996, respectively. 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.
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% and 39% as a
percentage of its revenues for the years ended December 31, 1997 and 1996,
respectively. 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.
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 MDF sales volumes, offset in part by
lower MDF 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. MDF sales volume
increased by 13% primarily due to greater efficiencies from high-energy
refiners that were installed in the third quarter of 1995. MDF 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% and 4% as a percentage of its
revenues for the years ended December 31, 1997 and 1996, respectively.
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 MDF sales volumes, offset in part by
lower MDF raw materials and production costs.
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 the Partnership had no operations in the South.
Southern Resources Segment operating income was 46% and 45% as a
percentage of its revenues for the years ended December 31, 1997 and 1996,
respectively. 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.
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. (See Item 1. Business - Land
Sales Segment.)
Land Sales Segment operating income was 78% and 84% as a percentage of
its revenues for the years ended December 31, 1997 and 1996, respectively.
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 ("UVT") under the Company's 1994
Long-Term Incentive Plan and Key Employee Long-Term Incentive Plan during
the third quarter of 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 of 1998 and, in the Northwest, due to favorable
harvesting conditions during the fourth quarter of 1997. The profit on
intercompany log sales is deferred (eliminated) 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 UVT under the Company's Long-Term
Incentive Plan and Key Employee Long-Term Incentive Plan resulted in $7.8
million of expense in 1997, the majority of which 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 of 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 General Partner 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 is allocated to the General Partner based on two percent of the
Company's net income (adjusted for the 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
for the year ended 1997, compared to $2.00 per Unit in 1996.
Export Sales
- ------------
The Company sells logs and finished wood products for export. These
sales are denominated in U.S. dollars and are generally sold to Pacific Rim
countries, principally Japan, and to Canada and Europe. Combined export
revenues as a percentage of total revenues were 5%, 9% and 11% for 1998,
1997, and 1996, respectively.
Financial Condition and Liquidity
- ---------------------------------
Net cash provided by operating activities was $164.0 million, $190.0
million and $171.9 million for 1998, 1997 and 1996, respectively. The
decrease of $26.0 million in 1998 was primarily due to lower net income of
$36.3 million, offset in part by a positive working capital variance of $5.9
million and an increase in Other operating cash flow adjustments of $5.8
million. The positive working capital variance is primarily related to a
favorable $12.0 million fluctuation in Inventories and a favorable $5.6
million fluctuation in Other Current Liabilities, offset in part by an
unfavorable $10.0 million fluctuation in Other Current Assets. The
favorable Inventory fluctuation is primarily due to the build-up of log
inventories in the Company's 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
Other Current Liabilities fluctuation is primarily due to the partially
deferred funding of the fifth target of the Company's 1994 long-term
incentive plans until the first quarter of 1999. In January 1999, a final
payment of $6.2 million was made in connection with the funding of the 1994
Plans. The unfavorable Other Current Assets fluctuation is primarily due to
the collection of a $9.9 million installment note receivable in the first
quarter of 1997 related to a fourth quarter 1996 "higher and better use"
land sale. Other operating cash flow adjustments increased operating cash
flow by $7.4 million for 1998, compared to $1.6 million for 1997. The
increase of $5.8 million was primarily due to the amortization of expense
associated with the 1994 long-term incentive plans and land basis
associated with "higher and better use" land sales. On December 31, 1998,
the Company had $113.8 million of cash and cash equivalents.
The increase of net cash provided by operating activities of $18.1
million in 1997 is primarily the result of a favorable $13.3 million
fluctuation in depreciation, depletion and amortization and a favorable
working capital variance of $6.9 million. The increase in depreciation,
depletion and amortization is primarily due to increased harvest activity
as a result of the Southern Region Acquisition.
The Partnership has an unsecured revolving line of credit ("Line of
Credit") with a group of banks. Subject to customary covenants, the Line
of Credit allows the Partnership to borrow up to $225 million for general
corporate purposes, including up to $20 million of standby letters of
credit issued on behalf of the Partnership or Manufacturing. The Line of
Credit matures on December 13, 2001 and bears a floating rate of interest.
As of December 31, 1998, the Partnership had $200 million outstanding under
the Line of Credit with $25 million remaining availability. As of January 4,
1999, $100 million of borrowings on the Line of Credit were repaid.
On November 12, 1998, the Partnership acquired 905,000 acres of forest
lands in central Maine from S.D. Warren Company, a Pennsylvania company, for
a total purchase price of $181.1 million. See Note 3 to Notes to Combined
Financial Statements. The acquisition was financed with approximately $4.0
million in cash and the balance with unsecured promissory notes that were
issued to the seller. The notes have an average maturity of approximately
10 years. The face amount of the unsecured promissory notes totals $171.4
million, with the stated interest rates ranging from 7.62% to 7.83%. The
fair market value of the notes is $177.0 million, reflecting a note premium
due to the notes' above market interest rates. See Note 7 of Notes to
Combined Financial Statements.
On October 18, 1996, the Partnership acquired approximately 529,000
acres (plus approximately 9,000 leased acres) of timberland in Louisiana
and Arkansas, along with two sawmills, a plywood plant and a nursery in
the Southern Region Acquisition for a total purchase price of $540 million,
plus $11.9 million for working capital. The Partnership financed the Southern
Region Acquisition from cash on hand, including proceeds from certain ordinary
course asset dispositions, the proceeds from the Newport Asset Sale, and two
new bank credit facilities dated as of October 17, 1996, (the "New Bank
Facilities"), consisting of the Line of Credit, initially a five-year $400
million unsecured, revolving credit facility and an 18-month $250 million
unsecured bridge facility (the "Bridge Facility"). The Partnership borrowed
$50 million under the Bridge Facility and $322 million under the Line of
Credit to finance the Southern Region Acquisition. No further borrowings are
permitted under the Bridge Facility. 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 net proceeds were used to repay the
Bridge Facility and a portion of the amount outstanding under the Line of
Credit.
On November 13, 1996, the Partnership issued $200 million of senior
notes (the "New Notes") in a private placement. The New Notes have an
average life of 13 years and bear interest at a weighted average rate of
7.88% annually. The New Notes are unsecured obligations of the Partnership
and the terms of the New Notes are substantially similar to the terms of its
existing senior notes. The proceeds from the New Notes were used to repay a
portion of the outstanding borrowings under the Line of Credit. The
commitment under the Line of Credit was reduced to $225 million in November
1996.
The Company's borrowing agreements contain certain restrictive
covenants, including limitations on harvest levels, sale 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 its debt covenants as of December 31, 1998.
With the exception of the Line of Credit, all of the Company's lenders
have provided written consents to the Conversion Transaction. See Note 2 of
Notes to Combined Financial Statements. Management expects to receive the
consent of its Line of Credit lenders. Should the consent not be obtained,
the General Partner believes a replacement line of credit could be obtained
on substantially similar terms, with no material impact to the Company's
financial position, results of operations or liquidity.
The Partnership distributed $0.57 per Unit for the fourth quarter
of 1998. The distribution equaled $35.5 million (including $9.1 million
to the General Partner), and was paid on February 25, 1999 to Unitholders of
record on February 12, 1999. The computation of cash available for
distribution includes required reserves for the payment of principal and
interest, as well as other reserves established at the discretion of the
General Partner for working capital, capital expenditures, and future cash
distributions.
Cash required to meet the Company's quarterly cash distributions,
capital expenditures and principal and interest payments will be
significant. As a result of the indebtedness incurred to finance the Maine
Timberland Acquisition and as a result of current and expected operating
performance, the General Partner expects that the Partnership may not be
able to incur significant levels of additional indebtedness in 1999, under
the terms of its current debt agreements. The General Partner believes,
however, that borrowings under its 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 in
1999.
CAPITAL EXPENDITURES. Capital expenditures were $64.3 million, $28.3
million, and $19.3 million for 1998, 1997 and 1996, respectively, excluding
$181.1 million related to the Maine Timberland Acquisition in 1998 and
$560.7 million related to the Southern Region Acquisition in 1996. Capital
expenditures in 1998 included the reconfiguration of the Joyce, Louisiana
facility and the Meridian Acquisition, as well as approximately $14 million
for equipment replacements and upgrades in our manufacturing facilities and
approximately $15 million primarily for logging roads, reforestation and
expenditures related to our timberlands. Approximately $26 million was
invested during 1998 at Joyce, Louisiana to construct a state-of-the-art,
high volume sawmill. In May 1998, the Partnership completed the Meridian
Acquisition for $9.4 million (which includes $4.0 million of working
capital).
Planned capital expenditures for 1999 are $28 million. Planned capital
expenditures include approximately $5 million to complete the construction
of the Joyce, Louisiana sawmill, $8 million for replacement and equipment
upgrades in our manufacturing facilities and $15 million for logging roads,
reforestation and expenditures related to our timberlands.
Other Information
- -----------------
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 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, 1999; earlier application is permitted.
Adoption of this standard is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Approximately $761 million of the Partnership's long-term debt bears
interest at fixed rates, and therefore the fair value of these instruments
is affected by changes in the market interest rates. The following table
presents principal cash flows (in thousands) based upon maturity dates of
the debt obligations and the related weighted-average interest rates by
expected maturity dates for the fixed rate debt. The interest rate on the
variable rate debt as of December 31, 1998 was LIBOR plus 0.40% (7.0%),
however, this rate could range from LIBOR plus 0.35% to LIBOR plus 0.875%
depending on financial results of the Partnership.
December 31, 1998:
Long-term
debt,
including
current Fair
portion 1999 2000 2001 2002 2003 Thereafter Total Value
- ------------------------------------------------------------------------------
Fixed
Rate $ 18,812 $ 27,392 $ 27,423 $ 27,458 $ 27,494 $632,429 $761,008 $822,775
Avg.
Interest
Rate 9.0% 8.9% 8.8% 8.7% 8.6% 8.3%
Variable
Rate $ 200,000 $200,000 $200,000
As of January 4, 1999, the Partnership had repaid $100 million of borrowings
on the variable rate debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
- --------------------------------------------------------------------
PLUM CREEK TIMBER COMPANY, L. P.
COMBINED STATEMENT OF INCOME
<TABLE>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(In Thousands, Except Per Unit)
<S> <C> <C> <C>
Revenues......................................$ 699,370 $ 725,571 $ 633,741
--------- --------- ---------
Costs and Expenses:
Cost of Goods Sold....................... 505,366 503,259 429,897
Selling, General and Administrative...... 52,917 49,031 38,856
--------- --------- ---------
Total Costs and Expenses................ 558,283 552,290 468,753
--------- --------- ---------
Operating Income.............................. 141,087 173,281 164,988
Interest Expense.............................. (60,622) (60,364) (50,141)
Interest Income............................... 1,042 1,113 1,291
Gain (Loss) on Disposition of Assets - Net.... (805) (1,223) 108,852
Reorganization Costs.......................... (4,763)
Other Expense - Net........................... 14 (1,031)
--------- --------- ---------
Income before Income Taxes.................... 75,953 111,776 224,990
Provision for Income Taxes.................... 517 80 1,391
--------- --------- ---------
Net Income....................................$ 75,436 $ 111,696 $ 223,599
General Partner Interest...................... 33,713 31,918 27,777
--------- --------- ---------
Net Income Allocable to Unitholders...........$ 41,723 $ 79,778 $ 195,822
========= ========= =========
Net Income per Unit...........................$ 0.90 $ 1.72 $ 4.71
========= ========= =========
</TABLE>
See accompanying Notes to Combined Financial Statements.
PLUM CREEK TIMBER COMPANY, L. P.
COMBINED BALANCE SHEET
<TABLE>
December 31,
------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents........................$ 113,793 $ 135,381
Accounts Receivable.............................. 32,007 28,698
Inventories...................................... 55,963 58,956
Timber Contract Deposits......................... 2,647 3,711
Other Current Assets............................. 6,053 5,508
--------- ---------
210,463 232,254
Timber and Timberlands - Net....................... 1,030,484 887,694
Property, Plant and Equipment - Net................ 186,179 163,556
Other Assets....................................... 11,117 17,393
--------- ---------
Total Assets.......................................$ 1,438,243 $ 1,300,897
========= =========
LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt................$ 18,400 $ 18,400
Accounts Payable................................. 15,320 12,990
Interest Payable................................. 10,964 9,556
Wages Payable.................................... 14,795 17,156
Taxes Payable.................................... 4,081 4,757
Workers' Compensation Liabilities................ 1,550 1,450
Other Current Liabilities........................ 15,766 9,683
--------- ---------
80,876 73,992
Long-Term Debt..................................... 742,608 584,000
Line of Credit..................................... 200,000 161,000
Workers' Compensation Liabilities.................. 7,495 8,466
Other Liabilities.................................. 1,849 3,102
--------- ---------
Total Liabilities.................................. 1,032,828 830,560
========= =========
Commitments and Contingencies
PARTNERS' CAPITAL
Limited Partners' Units............................ 406,857 469,824
General Partner.................................... (1,442) 513
--------- ---------
Total Partners' Capital............................ 405,415 470,337
--------- ---------
Total Liabilities and Partners' Capital............$ 1,438,243 $ 1,300,897
========= =========
</TABLE>
See accompanying Notes to Combined Financial Statements.
PLUM CREEK TIMBER COMPANY, L. P.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income..............................$ 75,436 $ 111,696 $ 223,599
Adjustments to Reconcile Net Income to
Net Cash Provided By Operating Activities:
Depreciation, Depletion and
Amortization......................... 69,287 70,243 56,945
Loss (Gain) on Property
Dispositions - Net................... 805 1,223 (108,852)
Working Capital Changes, net of effect
of business acquisitions and disposition:
Accounts Receivable.................. (3,309) (5,001) 8,053
Inventories.......................... 6,974 (5,072) (1,052)
Timber Contract Deposits............. 1,064 2,276 1,663
Other Current Assets................. (513) 9,517 (10,579)
Accounts Payable..................... 2,330 (453) (2,328)
Interest Payable..................... 1,408 26 1,987
Wages Payable........................ (2,361) 3,969 (77)
Taxes Payable........................ (676) (518) (661)
Workers' Compensation Liabilities.... 100 (868)
Other Current Liabilities............ 6,083 471 2,148
Other................................. 7,376 1,599 1,970
------- ------- -------
Net Cash Provided By Operating Activities 164,004 189,976 171,948
------- ------- -------
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........... (54,927) (28,348) (19,280)
Proceeds from Other Property
Dispositions........................... 1,457 917 7,329
Other................................... (11) (649)
------- ------- -------
Net Cash Used In Investing Activities... (65,834) (28,080) (419,241)
------- ------- -------
Cash Flows From Financing Activities:
Cash Distributions...................... (140,358) (133,007) (110,116)
Borrowings on Lines of Credit and
Bridge Facility........................ 695,000 814,950 948,250
Payments on Lines of Credit and
Bridge Facility........................ (656,000) (814,950) (884,750)
Issuance of Long-Term Debt.............. 200,000
Retirement of Long-Term Debt............ (18,400) (17,400) (14,100)
Issuance of Limited Partner Units....... 144,297
------- ------- -------
Net Cash Provided By (Used In) Financing
Activities............................. (119,758) (150,407) 283,581
------- ------- -------
Increase (Decrease) in Cash and Cash
Equivalents............................. (21,588) 11,489 36,288
Cash and Cash Equivalents:
Beginning of Year....................... 135,381 123,892 87,604
------- ------- -------
End of Year.............................$ 113,793 $ 135,381 $ 123,892
======= ======= =======
Supplementary Cash Flow Information
- -----------------------------------
Cash paid during the year for:
Interest Paid - Net.....................$ 58,785 $ 59,650 $ 46,635
Income Taxes Paid - Net.................$ 362 $ 737 $ 972
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.
PLUM CREEK TIMBER COMPANY, L. P.
NOTES TO COMBINED FINANCIAL STATEMENTS
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 of the Company 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.
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 46,323,300, 46,323,300 and
41,619,803 for the years ended December 31, 1998, 1997 and 1996,
respectively.
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.
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 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, 1999; 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. The Plum Creek Defendants intend to
continue to vigorously defend themselves in connection with this appeal.
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 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. The Plum Creek
Defendants dispute the Plaintiff's allegations and intend to defend
themselves vigorously.
The General Partners' decision to proceed with the Conversion Transaction
is in the sole discretion of the General Partner, subject to receipt of the
requisite Unitholder's approval and satisfaction of the other conditions
precedent in the Conversion Agreement. The General Partner currently expects
to delay the consummation of the Conversion Transaction until the Action,
including the appeal and any additional claims that may be brought, is fully
resolved to the General Partners' satisfaction.
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 $105,000 of assumed
liabilities, was allocated as follows (in thousands):
Timber and Timberlands....................................$ 177,618
Property, Plant and Equipment............................. 2,940
Other Assets.............................................. 590
-------
Total Assets Acquired.....................................$ 181,148
=======
Total Liabilities Assumed.................................$ 105
=======
The acquisition was financed with approximately $4 million cash and the
balance with unsecured promissory notes that were issued to the seller
(Senior Notes due 2011, see Note 7 to Notes to Combined Financial
Statements). The Senior Notes due 2011 have an average maturity of 10 years
with effective interest rates ranging from 7.16% to 7.32%.
The unaudited combined results of operations of the Company on a pro
forma basis as though the Maine Timberland Acquisition and the issuance of
the Senior Notes due 2011 had occurred as of the beginning of the years ended
December 31, 1998 and 1997 were as follows (in thousands, except per Unit):
1998 1997
---- ----
Revenues..........................................$ 739,000 $ 774,032
Net Income........................................ 73,540 110,987
Net Income Allocable to Unitholders............... 39,865 79,083
Net Income per Unit...............................$ 0.86 $ 1.71
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 $1,323,000 and $1,285,000 at December 31, 1998 and 1997,
respectively.
NOTE 5. INVENTORIES
Inventories consisted of the following at December 31 (in thousands):
1998 1997
---- ----
Raw materials (logs)..............................$ 25,129 $ 29,177
Work-in-process................................... 6,554 6,108
Finished goods.................................... 15,831 15,295
Export logs....................................... 53 715
------ ------
47,567 51,295
Supplies.......................................... 8,396 7,661
------ ------
Total.............................................$ 55,963 $ 58,956
====== ======
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) at December 31, 1998 and 1997 was $46.9 million
and $50.0 million, respectively.
NOTE 6. TIMBER AND TIMBERLANDS AND PROPERTY, PLANT AND EQUIPMENT
Timber and timberlands consisted of the following at December 31 (in
thousands):
1998 1997
---- ----
Timber and logging roads - net....................$ 907,830 $ 789,513
Timberlands....................................... 122,654 98,181
--------- ---------
Timber and Timberlands - net......................$1,030,484 $ 887,694
========= =========
Property, plant and equipment consisted of the following at December 31
(in thousands):
1998 1997
---- ----
Land, buildings and improvements..................$ 66,714 $ 61,155
Machinery and equipment........................... 275,149 235,349
------- -------
341,863 296,504
Accumulated depreciation.......................... (155,684) (132,948)
------- -------
Property, Plant and Equipment - net...............$ 186,179 $ 163,556
======= =======
NOTE 7. BORROWINGS
Long-term debt and the Line of Credit consisted of the following at
December 31 (in thousands):
1998 1997
---- ----
Senior Notes due 2007.............................$ 122,000 $ 130,300
First Mortgage Notes due 2007..................... 112,000 122,100
Senior Notes due 2009............................. 150,000 150,000
Senior Notes due 2011............................. 177,008
Senior Notes due 2016............................. 200,000 200,000
Line of Credit.................................... 200,000 161,000
------- -------
Total Long-Term Debt.............................. 961,008 763,400
Less: Current Portion............................. (18,400) (18,400)
------- -------
Long-Term Portion.................................$ 942,608 $ 745,000
======= =======
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 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 during 1998 and 1997 was 5.9%
and 6.1%, respectively. 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.
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% through
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.
At December 31, 1998 and 1997, the premium that would have been due upon
early retirement would have approximated $146 million and $116 million,
respectively. 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):
Note Line
Agreements Of Credit
---------- ---------
1999........................................... $ 18,812
2000........................................... 27,392
2001........................................... 27,423 $ 200,000
2002........................................... 27,458
2003........................................... 27,494
Thereafter..................................... 632,429
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, 1998 and 1997.
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 $1.02 billion and $843
million and was carried at $961 million and $763 million as of December 31,
1998 and 1997, respectively.
NOTE 9. PARTNERS' CAPITAL
The changes in Partners' Capital were as follows (in thousands):
Limited General
Partners Partner Total
-------- ------- -----
January 1, 1996....................$ 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
======= ======= =======
The total number of Units outstanding at December 31, 1998 and 1997 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. For the years ended
December 31, 1998, 1997 and 1996, the General Partner declared $2.28, $2.20
and $2.02 per Unit, respectively, to be paid to the Partnership's
Unitholders. For quarterly cash distributions exceeding $0.21-2/3 per Unit,
the General Partner is provided with an incentive distribution. See Note 13
to Notes to Combined Financial Statements.
NOTE 10. INCOME TAXES
The provision for income taxes was as follows (in thousands):
Year Ended December 31,
1998 1997 1996
---- ---- ----
Current Federal.................................$ 426 $ 43 $1,201
Current State................................... 91 37 190
----- ----- -----
Total...........................................$ 517 $ 80 $1,391
===== ===== =====
Reconciliation of the federal statutory rate to the effective income tax
rate was as follows:
1998 1997 1996
---- ---- ----
Statutory tax rate.............................. 35.0% 35.0% 35.0%
State tax net of federal tax benefit............ 0.0 0.0 0.1
Nontaxable partnership income................... (34.3) (34.9) (34.6)
Other........................................... 0.0 0.0 0.1
---- ---- ----
Effective tax rate.............................. 0.7% 0.1% 0.6%
==== ==== ====
NOTE 11. EMPLOYEE PENSION AND RETIREMENT PLANS
PENSION PLAN. The Company provides defined benefit pension plans that
cover substantially all employees. The following tables provide a
reconciliation of benefit obligations, plan assets, and funded status of the
plans for the years ended December 31 (in thousands):
CHANGE IN BENEFIT PLAN
1998 1997
---- ----
Benefit obligation at beginning of year............$ 56,286 $ 48,756
Service cost....................................... 3,668 2,941
Interest cost...................................... 4,046 3,522
Actuarial loss..................................... 5,640 4,130
Benefits paid...................................... (2,917) (3,063)
------ ------
Benefit obligation at end of year..................$ 66,723 $ 56,286
====== ======
Change in plan assets.............................. 1998 1997
---- ----
Fair value of plan assets at beginning of year.....$ 57,635 $ 49,727
Actual return on plan assets....................... 9,341 9,471
Benefits paid...................................... (2,917) (3,063)
Employer contributions............................. 1,500
------ ------
Fair value of plan assets at end of year...........$ 64,059 $ 57,635
====== ======
Funded Status......................................$ (2,664) $ 1,349
Unrecognized net actuarial loss.................... 1,287 855
Unrecognized prior service cost.................... 668 776
------ ------
Prepaid (Accrued) benefit cost.....................$ (709) $ 2,980
====== ======
The components of the Company's pension cost were as follows for the
years ended December 31 (in thousands):
COMPONENTS OF NET PERIODIC BENEFIT COST 1998 1997 1996
---- ---- ----
Service cost...............................$ 3,668 $ 2,941 $ 2,419
Interest cost.............................. 4,046 3,522 3,388
Expected return on plan assets............. (4,342) (3,817) (3,507)
Amortization of prior service cost......... 108 108 108
Recognized actuarial loss.................. 208 169 436
----- ----- -----
Net periodic benefit cost..................$ 3,688 $ 2,923 $ 2,844
===== ===== =====
The following assumptions were used in accounting for the Company's
pension plan as of December 31:
1998 1997 1996
---- ---- ----
Weighted average discount rate............. 6.75% 7.0% 7.5%
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%
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 $2.9 million, $3.9 million and $2.6 million
during 1998, 1997 and 1996, respectively. The Company matched 70%, 100% and
100% for the years 1998, 1997 and 1996, respectively. 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, and January 1, 1994 the General Partner
established a Long-Term Incentive Plan and a Key Employee Long-Term Incentive
Plan, (collectively "the 1994 Plans"), respectively. 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 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 $13.3 million, $7.8 million,
and $3.9 million was recognized in 1998, 1997 and 1996, respectively.
Approximately 70% of the Units will be 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 have 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:
1998 1997 1996
---- ---- ----
(In Thousands, Except per Unit)
Net Income:
As reported........................$ 75,436 $111,696 $223,599
Pro forma.......................... 75,407 111,992 223,624
Net Income per Unit:
As reported........................$ 0.90 $ 1.72 $ 4.71
Pro forma.......................... 0.90 1.73 4.71
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:
1994 PLANS
1998 1997 1996
---- ---- ----
UARs Granted.............................. 16,333 22,533 90,601
Weighted-average fair value of UARs
granted.................................$ 13.98 $ 4.64 $ 6.02
Risk-free interest rate................... 5.25% 6.28% 6.00%
Expected dividend yield................... 6.20% 7.40% 7.50%
Expected life of UARs granted............. 0.83 yrs. 1.67 yrs. 2.17 yrs.
Expected Unit price volatility............ 24.3% 18.2% 23.2%
1998 PLANS
1998
----
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 yrs.
Expected Unit price volatility................ 24.7%
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 two percent and four percent interests in Manufacturing
and Marketing, respectively. The Company reimburses the General Partner for
the actual costs of administering its businesses. Amounts reimbursed to the
General Partner for such costs were $7.7 million, $6.7 million and $5.7
million for the years ended December 31, 1998, 1997 and 1996, respectively.
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. During 1998 and 1997, the Partnership paid the General Partner
$2.4 million and $9.2 million, respectively, for the purchase of 89,780 Units
and 280,482 Units, respectively. 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.
The incentive distributions paid in 1998, 1997 and 1996 were approximately
$32.9 million, $30.3 million and $23.8 million, respectively.
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. As of December 31, 1998 and
1997, the Company had receivables from the General Partner of $507,978 and
$138,502, respectively.
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. At
December 31, 1998 and 1997, the unrecorded amounts of those contract
commitments were approximately $10.8 million and $15.8 million,
respectively. 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.
The Company leases buildings and equipment under non-cancelable
operating lease agreements. The Company's operating lease expense was $3.2
million, $2.9 million and $2.3 million for 1998, 1997 and 1996, respectively.
The following summarizes the future minimum lease payments (in thousands):
1999...................................$ 3,335
2000................................... 2,687
2001................................... 2,197
2002................................... 1,744
2003................................... 1,546
Thereafter............................. 657
------
Total..................................$ 12,166
======
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: Lumber, Northern
Resources, Panel, Southern Resources, and Land Sales.
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 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 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.
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 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 for the
years ending December 31, 1998, 1997, and 1996 (in thousands).
Northern Southern Land
Lumber Resources Panel Resources Sales Other Total
------ --------- ----- --------- ----- ----- -----
1998
External
revenues $281,614 $131,625 $154,640 $ 68,800 $ 32,813 $ 29,878 $699,370
Intersegment
revenues 118,675 49,562 168,237
Export
revenues 7,127 23,197 1,638 31,962
Depreciation,
depletion and
amortization 13,105 29,716 10,598 15,530 274 69,223
Operating
income 2,599 73,715 14,360 53,568 26,598 (2,247) 168,593
1997
External
revenues $294,839 $158,535 $149,618 $ 54,780 $ 17,884 $ 49,915 $725,571
Intersegment
revenues 115,387 64,287 179,674
Export
revenues 16,125 41,003 5,950 63,078
Depreciation,
depletion and
amortization 11,514 30,204 10,004 17,734 678 70,134
Operating
income 34,667 98,792 8,462 54,313 13,963 (1,152) 209,045
1996
External
revenues $239,252 $196,427 $138,947 $ 7,115 $ 42,324 $ 9,676 $633,741
Intersegment
revenues 112,330 11,139 123,469
Export
revenues 16,613 53,111 2,966 72,690
Depreciation,
depletion and
amortization 11,576 32,017 9,024 2,897 156 55,670
Operating
income 18,596 119,767 5,305 8,149 35,434 (1,682) 185,569
Intersegment sales prices are determined quarterly, based upon estimated
market prices and terms in effect at that time. Export revenues consist of
log sales to Japan and Canada, as well as lumber and panel sales primarily to
Canada and Mexico. No single customer provides more than 10% of the Company's
revenue. The Company holds no long-lived foreign assets.
A reconciliation of total operating income to combined income before
income taxes, for the years ended December 31 is as follows (in thousands):
1998 1997 1996
---- ---- ----
Total segment operating income........$ 168,593 $ 209,045 $ 185,569
Gain (Loss) of disposition of
assets - net........................ (805) (1,223) 108,852
Interest expense - net................ (59,580) (59,251) (48,850)
Corporate and other unallocated
expenses............................ (32,255) (36,795) (20,581)
------- ------- -------
Combined income before income taxes...$ 75,953 $ 111,776 $ 224,990
======= ======= =======
NOTE 16. SUBSEQUENT EVENT
On January 26, 1999, the Board of Directors of the General Partner
authorized the Partnership to make a distribution of $0.57 per Unit for the
fourth quarter of 1998. Total distributions will approximate $35.5 million
(including $9.1 million to the General Partner) and will be paid on February
25, 1999 to Unitholders of record on February 12, 1999.
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.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Seattle, Washington
January 26, 1999
REPORT OF MANAGEMENT
The management of Plum Creek Timber Company, L.P. is responsible for the
preparation, fair presentation, and integrity of the information contained in
the financial statements in this Annual Report. These statements have been
prepared in accordance with generally accepted accounting principles and
include amounts determined using management's best estimates and judgments.
The Company maintains a system of internal controls to provide
reasonable assurance that assets are safeguarded and that transactions are
recorded properly to produce reliable financial records. The system of
internal controls includes appropriate divisions of responsibility,
established policies and procedures (including a code of conduct to foster a
strong ethical climate) that are communicated throughout the Company, and
careful selection, training and development of our people. The Company
conducts a corporate audit program to provide assurance that the system of
internal controls is operating effectively.
Our independent certified public accountants have performed audit
procedures deemed appropriate to obtain reasonable assurance that the
financial statements are free of material misstatement.
The Board of Directors provides oversight to the financial reporting
process through its Audit and Compliance Committee, which meets regularly
with management, corporate audit, and the independent certified public
accountants to review the activities of each and to ensure that each is
meeting its responsibilities with respect to financial reporting and internal
controls.
/s/ RICK R. HOLLEY
- ------------------
Rick R. Holley
President and Chief Executive Officer
/s/ DIANE M. IRVINE
- -------------------
Diane M. Irvine
Vice President and Chief Financial Officer
SUPPLEMENTARY FINANCIAL INFORMATION
Combined Quarterly Information
(Unaudited)
(In Thousands, Except per Unit)
1998 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ---- ------- ------- ------- -------
Revenues...........................$ 164,325 $ 171,799 $ 174,476 $ 188,770
Gross profit....................... 45,681 50,675 42,625 55,023
Operating Income................... 36,041 32,885 32,101 40,060
Net Income......................... 21,280 16,131 16,042 21,983
Net Income Allocable to Unitholders 13,181 7,631 7,544 13,367
Net Income per Unit................ $0.28 $0.17 $0.16 $0.29
1997 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ---- ------- ------- ------- -------
Revenues...........................$ 171,248 $ 171,962 $ 198,663 $ 183,698
Gross profit....................... 53,764 53,736 63,639 51,173
Operating Income................... 43,222 42,683 47,666 39,710
Net Income......................... 27,358 27,224 32,801 24,313
Net Income Allocable to Unitholders 20,147 19,006 24,472 16,153
Net Income per Unit................ $0.43 $0.42 $0.52 $0.35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10. AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT and
EXECUTIVE COMPENSATION, Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT and Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS will be filed by amendment to this Form 10-K on Form 10-K/A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements and Supplementary Financial Information
The following combined financial statements of the Company are included
in Part II, Item 8 of this Form 10-K:
Combined Statement of Income...........................33
Combined Balance Sheet.................................34
Combined Statement of Cash Flows.......................35
Notes to Combined Financial Statements.................36
Report of Independent Accountants......................53
Report of Management...................................54
Supplementary Financial Information....................55
(2) Financial Statement Schedules
Not applicable.
(3) List of Exhibits
Each exhibit set forth below in the Index to Exhibits is filed as
a part of this report. Exhibits not incorporated by reference to
a prior filing are designated by an asterisk ("*"); all exhibits
not so designated are incorporated herein by reference to a prior
filing as indicated. Exhibits designated by a positive sign
("+") indicates management contracts or compensatory plans or
arrangements required to be filed as an exhibit to this report.
INDEX TO EXHIBITS
Exhibit
Designation Nature of Exhibit
- ----------- -----------------
2.1 Asset Purchase Agreement Among Plum Creek Timber Company,
L.P., Riverwood International Corporation and New River Timber,
LLC, dated August 6, 1996 (Previously filed as Exhibit 2 to the
Current Report on Form 8-K dated August 7, 1996, filed by
Riverwood Holding, Inc., Commission file No. 1-11113, and
incorporated herein by reference).
2.2 Amendment to Asset Purchase Agreement Among Plum Creek
Timber Company, L.P., Riverwood International Corporation and New
River Timber, LLC, dated October 18, 1996 (Form 8-K, File No. 1-
10239, filed October 23, 1996).
2.3 Timberland Purchase and Sale Agreement for Newport Unit
Timberlands by and between Plum Creek Timber Company, L.P. as
Seller, and Stimson Lumber Company as Purchaser, dated as of
September 27, 1996 (Form 8-K, File No. 1-10239, filed October
23, 1996).
2.4 Mill Asset Purchase and Sale Agreement By and Between Plum Creek
Manufacturing, L.P. as Seller, and Stimson Lumber Company as
Purchaser, dated as of September 27, 1996 (Form 8-K, File No. 1-
10239, filed October 23, 1996).
2.5 Purchase and Sale Agreement by and between S.D. Warren
Company as seller and Plum Creek Timber Company, L.P. as
purchaser dated as of October 5, 1998. (Form 10-Q, File No. 1-
10239, for the quarter ended September 30, 1998).
2.6 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. (Form S-4, Regis. No. 333-71371, filed January 28,
1999).
2.7 Agreement and Plan of Merger, dated as of July 17, 1998, by and
among Plum Creek Timber Company, L.P., Plum Creek Acquisitions
Partners, L.P. and Plum Creek Timber Company, Inc. (Form S-4,
Regis. No. 333-71371, filed January 28, 1999).
2.8 Agreement and Plan of Merger, dated as of July 17, 1998, by and
among Plum Creek Timber Company, Inc. and Plum Creek Management
Company, L.P. (Form S-4, Regis. No. 333-71371, filed January 28,
1999).
3.1 Amended and Restated Agreement of Limited Partnership of Plum
Creek Timber Company, L.P. dated June 8, 1989, as amended and
restated through October 17, 1995 (Form 10-Q, No. 1-10239, for
the quarter ended September 30, 1995).
3.2 Certificate of Limited Partnership of Plum Creek Timber Company,
L.P., as filed with the Secretary of State of the state of
Delaware on April 12, 1989 (Form S-1, Regis. No. 33-28094, filed
May 1989).
4.1 Form of Deposit Agreement by and among Plum Creek Timber
Company, L.P. and The First National Bank of Boston, dated as of
May 1989, (Form S-1, Regis. No. 33-28094, filed May 1989).
4.2 Form of Transfer Application (Form S-1, Regis. No.
33-28094, filed May 1989).
4.3 Senior Note Agreement, dated May 31, 1989, 11 1/8 percent
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. 1, consent and waiver dated January 1, 1991 to
Senior Note Agreement, dated May 31, 1989, 11 1/8 percent 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 1, 1993 to
the Senior Note Agreement (Form 10-K/A, Amendment No. 1, for the
year ended December 31, 1993). Amendment No. 3, Senior Note
Agreement Amendment dated May 20, 1994 (Form 10-K/A, Amendment
No. 1, for the year ended December 31, 1994). 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).
4.4 Mortgage Note Agreement, dated May 31, 1989, 11 1/8 percent
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. 1, consent and waiver dated January 1, 1991
to Mortgage Note Agreement, dated May 31, 1989, 11 1/8 percent
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. 1, for
the year ended December 31, 1994). Amendment to Mortgage Note
Agreement dated June 15, 1995 (Form 10-Q, No. 1-10239, for the
quarter ended September 30, 1995). Mortgage Note Agreement
Amendment 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).
4.5 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. 1, 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).
4.6 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).
4.7 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 8 K/A, File No. 1-10239,
dated November 12, 1998).
10.1 Amended and Restated Revolving Credit Agreement dated as of
December 13, 1996 among Plum Creek Timber Company, L.P., Bank of
America National Trust and Savings Association, as Agent,
NationsBank of North Carolina, N.A., as senior co-agent and the
Other Financial Institutions Party Hereto (Form 10-K, No. 1-
10239, for the year ended December 31, 1996).
10.2+ Plum Creek Supplemental Benefits Plan (Form 10-K/A, Amendment No.
1, for the year ended December 31, 1994). First Amendment to the
Plum Creek Supplemental Benefits Plan (Form 10-Q, No. 1-10239,
for the quarter ended September 30, 1995).
10.3+ 1994 Long-Term Incentive Plan, Plum Creek Management Company,
L.P. (Form 10-K/A, Amendment No. 1, for the year ended December
31, 1993). First Amendment to the Plum Creek Management Company,
L.P. Long-Term Incentive Plan (Form 10-Q, No. 1-10239, for the
quarter ended September 30, 1995).
10.4+ Management Incentive Plan, Plum Creek Management Company, L.P.
(Form 10-K/A, Amendment No. 1, for the year ended December 31,
1993).
10.5+ Executive and Key Employee Salary and Incentive Compensation
Deferral Plan, Plum Creek Management Company, L.P. (Form 10-K/A,
Amendment No. 1, for the year ended December 31, 1994).
10.6+ Deferred Compensation Plan for Directors, PC Advisory Corp. I
(Form 10-K/A, Amendment No. 1, for the year ended December 31,
1994).
10.7+ Plum Creek Director Unit Ownership and Deferral Plan (Form 10-K,
No. 1-10239, for the year ended December 31, 1996).
10.8+ 1998 Long-term Incentive Plan, Plum Creek Management Company,
L.P. (Form 10-Q, No. 1-10239, for the quarter ended June 30,
1998).
21 Subsidiaries of the Registrant. (Form 8 Amendment No. 1, for the
year ended December 31, 1990).
27* Financial Data Schedule for the year ended December 31,
1998. See attached exhibit.
(b) Reports on Form 8-K
The Partnership filed a current report on Form 8-K dated October 6,
1998, announcing the execution of a definitive agreement with S.D.
Warren Company to acquire 905,000 acres of forest lands in central
Maine.
The Partnership filed a current report on Form 8-K dated November 12,
1998, announcing the acquisition of 905,000 acres of forest lands in
central Maine from S.D. Warren Company.
The Partnership filed a current report on Form 8-K dated December 18,
1998, in which it provided the audited financial statement for Plum
Creek Timber Company, Inc., as of November 30, 1998 and June 5, 1998,
which was formed in connection with the proposed conversion of the
Company from a Master Limited Partnership to a publicly traded Real
Estate Investment Trust.
SIGNATURES
Pursuant to the requirements of Section 13 (or 15(d)) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
PLUM CREEK TIMBER COMPANY, L. P.
(Registrant)
By: Plum Creek Management Company, L.P.
as General Partner
BY: /s/ RICK R. HOLLEY
------------------
Rick R. Holley
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, in the capacities
and on the dates indicated, on behalf of, as applicable, Plum Creek
Management Company, L.P., the registrant's general partner, and/or PC
Advisory Corp. I, the general partner of the managing general partner of
the registrant's general partner.
By /s/ DAVID D. LELAND Chairman of the Board of March 17,1999
------------------------ Directors, PC Advisory Corp. I -------------
David D. Leland Date
By /s/ IAN B. DAVIDSON Director, PC Advisory Corp. I March 17, 1999
------------------------ --------------
Ian B. Davidson Date
By /s/ GEORGE M. DENNISON Director, PC Advisory Corp. I March 17, 1999
------------------------ --------------
George M. Dennison Date
By /s/ CHARLES P. GRENIER Executive Vice President, Plum March 17, 1999
------------------------ Creek Management Co., L.P. --------------
Charles P. Grenier Director, PC Advisory Corp. I Date
By /s/ RICK R. HOLLEY President and Chief Executive March 17, 1999
------------------------ Officer, Plum Creek Management --------------
Rick R. Holley Co., L.P. Date
Director, PC Advisory Corp. I
By /s/ WILLIAM E. OBERNDORF Director, PC Advisory Corp. I March 17, 1999
------------------------ --------------
William E. Oberndorf Date
By /s/ WILLIAM J. PATTERSON Director, PC Advisory Corp. I March 17, 1999
------------------------ --------------
William J. Patterson Date
By /s/ JOHN H. SCULLY Director, PC Advisory Corp. I March 17, 1999
------------------------ --------------
John H. Scully Date
By /s/ DIANE M. IRVINE Vice President and Chief March 16, 1999
------------------------ Financial Officer, Plum Creek --------------
Diane M. Irvine Management Co., L.P. Date
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Combined Financial
Statements of Plum Creek Timber Company, L.P. for the year ended December 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 113,793
<SECURITIES> 0
<RECEIVABLES> 33,330
<ALLOWANCES> 1,323
<INVENTORY> 55,963
<CURRENT-ASSETS> 210,463
<PP&E> 1,372,347
<DEPRECIATION> 155,684
<TOTAL-ASSETS> 1,438,243
<CURRENT-LIABILITIES> 80,876
<BONDS> 942,608
0
0
<COMMON> 0
<OTHER-SE> 405,415
<TOTAL-LIABILITY-AND-EQUITY> 1,438,243
<SALES> 699,370
<TOTAL-REVENUES> 699,370
<CGS> 505,366
<TOTAL-COSTS> 558,283
<OTHER-EXPENSES> 4,749
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,622
<INCOME-PRETAX> 75,953
<INCOME-TAX> 517
<INCOME-CONTINUING> 75,436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,436
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0
</TABLE>
