UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10239
PLUM CREEK TIMBER COMPANY, INC.
(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:
Common Stock, par value $.01 per share
The above securities are registered on the New York Stock Exchange
and the Pacific 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. [ X ]
The aggregate market value of the voting common stock held by non-affiliates
based on the closing sales price on February 15, 2000 was approximately
$1,196,898,984. For this calculation, all executive officers, directors and
stockholders owning more than 5% of the outstanding common stock have been
deemed affiliates. Such determination should not be deemed an admission
that such executive officers, directors and stockholders are, in fact,
affiliates of the registrant.
The number of outstanding shares of the registrant's common stock as of
February 15, 2000 was 68,572,009. The number of outstanding shares of the
registrant's special voting stock as of February 15, 2000 was 634,566.
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:
Portions of the Proxy Statement for registrant's 2000 Annual Meeting of
Shareholders to be held on May 10, 2000, are incorporated by reference into
Part III of this Annual Report on Form 10-K
PART I
When we refer to "we," "us" or "our," we mean Plum Creek Timber
Company, Inc. and, where appropriate, its consolidated and unconsolidated
subsidiaries and its predecessor, Plum Creek Timber Company, L.P. When we
refer to the "corporation," we mean Plum Creek Timber Company, Inc. and its
consolidated subsidiaries.
ITEM 1. BUSINESS
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General
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On July 1, 1999, Plum Creek Timber Company, L.P. converted from a
master limited partnership to a corporation. Plum Creek Timber Company,
Inc., the new corporation and successor registrant, will elect to be treated
for Federal income tax purposes as a real estate investment trust or "REIT."
As of the REIT conversion, Plum Creek Timber Company, L.P. ceased to exist.
In order to qualify as a REIT, substantially all assets and associated
liabilities related to manufacturing operations and harvesting activities and
some higher and better use lands, were transferred to several unconsolidated
corporate subsidiaries. Together with the unconsolidated subsidiaries, we own,
manage, and operate approximately 3.2 million acres of timberlands and eleven
wood product conversion facilities in the Northwest, Southern and Northeastern
United States.
In December 1999, we completed an equal value land exchange in our
Cascade Region with the United States Forest Service in which we exchanged
31,713 acres of our timberlands for 11,586 acres of Federal timberlands and
$4.3 million. In January 2000, we sold approximately 90,000 acres of
timberlands near St. Maries, Idaho to Crown Pacific Partners, L.P. for
approximately $73 million.
On November 12, 1998, we acquired 905,000 acres of timberlands in central
Maine from S.D. Warren Company for a purchase price of $180.0 million, plus
$300,000 for working capital.
SEGMENT INFORMATION
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We are the fifth largest owner of private timberlands in the United
States, with a forest resource base of approximately 3.2 million acres. As
of December 31, 1999, our timber portfolio contained approximately 33.0
million cunits of standing timber. A cunit is a measurement of volume equal
to one hundred cubic feet of timber. Our timberlands are well diversified,
not only by species mix but also by age distribution. Growth rates vary
depending on species, location, age and forestry practices. We manage our
timberlands in two business segments, the Northern Resources Segment,
consisting of timberlands in western and central Washington, western
Montana, northern Idaho and central Maine, and the Southern Resources
Segment, consisting of timberlands in Louisiana and Arkansas.
Our manufacturing operations are conducted through our unconsolidated
subsidiaries and include six lumber mills, two plywood plants, one medium
density fiberboard facility, and two lumber remanufacturing facilities. These
facilities, strategically located near our timberlands in Montana, Idaho,
Louisiana and Arkansas, convert logs to lumber, plywood and other wood
products, and convert sawdust and shavings to medium density fiberboard. The
Lumber Segment refers to our lumber facilities and the Panel Segment refers
to our plywood and medium density fiberboard ("MDF") facilities. The Lumber
and Panel segments have established a network of 45 independent warehouses
located strategically throughout the United States in order to enhance
customer service and prompt deliveries. The Land Sales Segment refers to our
higher and better use lands. "Other" refers to a plywood facility in
Louisiana and a chip facility in the State of Washington. In 1998, we closed
the plywood facility and sold the chip facility. Certain financial
information for each business segment is included in Note 14 of the Notes to
Financial Statements and is incorporated herein by reference.
NORTHERN RESOURCES SEGMENT
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CASCADE REGION. The Cascade Region's 285,000 acres of timberland in
western and central Washington contain an estimated 4.4 million cunits of
standing timber. Logs harvested in the Cascade Region are sold for export to
Pacific Rim countries, principally Japan, and to domestic mills owned by
third parties. Logs sold for export are generally of higher quality than logs
sold into the domestic market.
In the Cascade Region, approximately 59% of the logs sold in 1999 were
sold to unaffiliated domestic wood products manufacturers. We also sold 17%
of the logs from the Cascade Region to third parties as pulp logs. These
generally constitute smaller and lower quality logs not suitable for use by
wood products manufacturers. Competitors in the domestic log market include
the United States Forest Service, the state of Washington, and numerous
private individuals and industrial timber owners.
Customers for the Cascade Region's export sawlogs consist primarily of
large Japanese trading companies. Competitors in the export market include
numerous private timberland owners in the United States and Canada, as well
as companies and state-controlled enterprises in Chile, New Zealand, Russia
and Scandinavia, all of which have abundant timber resources. We compete
primarily based on our long-term relationships and our reputation as a
reliable year-round supplier of premium grade logs.
In 1999, approximately 24% of the logs harvested in the Cascade Region
were sold to customers in Japan. Douglas-fir logs sold to Japan have
historically commanded a significant premium over Douglas-fir logs sold
domestically. However, export log prices were flat in 1999 after they
declined significantly in 1998 and 1997, eliminating a large portion of this
premium.
ROCKY MOUNTAIN REGION. In January 2000, we sold approximately 90,000
acres of non-strategic timberlands in Idaho that contained approximately 1.3
million cunits of standing timber. The Rocky Mountain Region now consists of
1,488,000 acres of timberland in western Montana and northern Idaho,
containing an estimated 10.6 million cunits of standing timber. The Rocky
Mountain Region primarily sells logs to our lumber and plywood facilities,
with the remainder sold to third-party domestic mills.
In conjunction with an acquisition in 1993 of 865,000 acres of
timberland in western Montana, we entered into a sourcing agreement with
Stimson Lumber Company to supply logs to Stimson's Montana mills, based upon
prevailing market prices, over a ten-year period ending in 2003. In the Rocky
Mountain Region, we sell virtually all of our logs domestically as saw
timber. In 1999, approximately 73% of the logs sold in the region were sold
to our manufacturing facilities and the remainder were either sold to
unaffiliated domestic mills or traded to other timber companies for logs
better fitting our needs.
Competitors in the Rocky Mountain Region log market include the United
States Forest Service, the states of Montana and Idaho, the Bureau of Land
Management, the Bureau of Indian Affairs, as well as numerous private
individuals and industrial timber owners.
We conduct in-woods chipping operations, primarily in the Rocky
Mountain Region, in conjunction with conventional logging operations when
economically feasible, producing wood chips from treetops and low quality
timber that were previously not used. Chip markets are highly susceptible to
fluctuations in pulp and paper markets and operations occur as market
conditions allow. During the past three years, our in-woods chipping
operations have not operated at full capacity due to a weak market for chips.
NORTHEAST REGION. The Northeast Region consists of 912,000 acres of
timberland in central Maine, containing an estimated 13.5 million cunits of
standing timber. Logs in the Northeast Region are sold for export to Canada
and to domestic mills owned by third parties. In connection with our
acquisition of these timberlands in 1998, we entered into a long-term
agreement to supply wood fiber to S.D. Warren Company's paper facility in
Skowhegan, Maine at prevailing market prices. The fiber supply agreement
covers a 25-year period ending in 2023 and may be extended up to an
additional 15 years at the option of S.D. Warren Company. In the Northeast
Region, approximately 29% of the logs sold in 1999 were exported to lumber
mills in Canada. Pulp logs sold to third parties accounted for 49% of the
total volume harvested in 1999. Competitors in this market include numerous
wood brokers and private individual and industrial timberland owners in Maine
and in the Canadian provinces of Quebec and New Brunswick.
For all regions in the Northern Resources Segment, domestic wood and
fiber consuming facilities tend to purchase raw materials within a 200-mile
radius due to transportation costs. 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. We compete based on our reputation as a stable and consistent
supplier of well-merchandised, high-quality logs, and on price.
SOUTHERN RESOURCE SEGMENT
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The Southern Resource Segment, also referred to as the Southern Region,
consists of 523,000 acres (plus 9,000 acres of leased land) of timberlands in
Louisiana and Arkansas, containing an estimated 4.5 million cunits of
standing timber. In 1999, 79% of sawlogs from this region were sold to our
lumber facilities and 21% were sold to other third party conversion
facilities. During 1999, we nearly completed the conversion of our Southern
Region timberlands from unmanaged forests into actively managed plantation
forests. In connection with our acquisition of the Southern Region
timberlands and manufacturing facilities in 1996, we entered into a long-term
agreement to supply pulp logs and mill residuals to Riverwood International
Corporation at prices that are based upon prevailing market prices. The
fiber supply agreement covers a 20-year period ending in 2016 and can be
extended up to an additional 10 years.
The fee harvest in the Southern Region during 1999 was approximately
55% pulp logs and 45% sawlogs. We expect that our long-term supply agreement
with Riverwood International Corporation will provide us with a secure
market for our local mill residuals and a substantial portion of the pine
and hardwood pulp logs harvested from our Southern Region timberlands. Due
to transportation costs, domestic wood and fiber consuming facilities tend
to purchase raw material within a 100-mile radius. Competitive factors
within our Southern Region include price, species, grade, quality, proximity
to wood consuming facilities and the ability to consistently meet customer
requirements. We compete with numerous private timberland owners in the
Southern United States and Federal and state agencies in Arkansas and
Louisiana.
LUMBER SEGMENT
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We produce a diverse line of lumber products, including common and
select boards, dimension and stud lumber, industrial lumber, edge-glued
boards and finger-jointed studs. In 1999, we produced 743 million board
feet of lumber, compared to 635 million board feet in 1998 and 582 million
board feet in 1997. Our lumber output grew in 1999 as a result of
reconfigurations at the Joyce, Louisiana and Pablo, Montana mills, and the
May 1998 acquisition of an "edge-glued board" remanufacturing facility in
Meridian, Idaho. We expect lumber capacity to increase to approximately 765
MMBF in 2000 due to the completion of the start-up phase at our Joyce,
Louisiana mill. During 1998, lumber production increased primarily due to
the acquisition of the facility in Meridian, Idaho.
Lumber products manufactured in our two studmills, two random-length
mills, and remanufacturing facility in western Montana, along with our
remanufacturing facility in Meridian Idaho, are targeted to domestic lumber
retailers, such as retail home centers, for use in repair and remodeling
projects and to stocking distributors, for use in home construction. Lumber
products manufactured in our Joyce, Louisiana and Huttig, Arkansas dimension
lumber mills 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 are targeted to specialty markets and have made us less
dependent on the more volatile home construction market. In 1999, 43% of our
lumber products were sold into retail markets, 26% to stocking distributors
and 24% to industrial and remanufactured product markets.
Competition in our lumber markets is 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. We compete in
domestic lumber markets with a host of other United States, Canadian and
European producers. Canadian and European lumber producers have increased
their penetration into the United States market due to their lower wood fiber
costs and favorable exchange rates. The lumber market is also subject to
competition from substitute products, primarily in shelving, window and door
markets. Substitute products include radiata pine, medium density
fiberboard, oriented strand board, particleboard, laminates, steel and
plastic. Substitution has significantly increased in the past several years
due to increases in stud and board prices in the early 1990s.
RESIDUAL WOOD CHIPS. Our lumber and plywood mills produce residual
wood chips as a by-product of the conversion of raw logs into finished
products. These wood chips are sold to regional paper and pulp mills. A
substantial portion of our residual wood chips in the Rocky Mountain Region
are sold to Smurfit Stone Container Corporation under a long term supply
agreement.
PANEL SEGMENT
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The Panel Segment consists of two plywood plants and a medium density
fiberboard facility in western Montana. The panel facilities produce a
diverse line of plywood and medium density fiberboard products. Plywood
revenues represented approximately 73% of the panel segment revenues in 1999
and 71% in 1998 and 1997.
PLYWOOD. We produce high-grade plywood that we sell primarily into
specialized industrial markets. In 1999, we produced 337 million square feet
of plywood, compared to 323 million square feet in 1998 and 312 million
square feet in 1997. During 1999, 60% of our plywood products were sold in
specialty industrial markets, including boat, recreational vehicle and
fiberglass-reinforced panel manufacturing and 6% were sold in export markets.
Our plywood products are generally of higher quality than commodity
construction grade products and command higher prices in these specialty
markets. See Lumber Segment for discussion on residual wood chips.
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, a
less expensive substitute wood product. Due to oriented strand board's cost
advantage, its market share in the residential segment has been increasing,
and we expect this trend to continue. Oriented strand board's share of the
North American structural panel market was approximately 50% in 1999. The
quality of oriented strand board continues to improve and has become widely
accepted in most building applications. However, since oriented strand board
does not have plywood's strength-to-weight ratio, moisture resistance and
machinability, it cannot be used in some specialty applications. In order to
avoid closing their facilities, some commodity plywood manufacturers have
been refocusing their products toward the specialty plywood market, resulting
in increased competition in markets we serve. We expect to remain
competitive due to our strong customer base, extensive experience in
industrial markets, supply of superior wood, and reputation for high quality
products, including various trademarked products such as MarineTech(R),
RV-X(R), DuraFloor(R), and Ultra-Core(R).
MEDIUM DENSITY FIBERBOARD. We supply high quality medium density
fiberboard to markets in North America. Medium density fiberboard products
are primarily sold to domestic distributors and to door, molding, fixture and
furniture manufacturers. We produced 136 MMSF (3/4" basis) in 1999, 132 MMSF
in 1998 and 127 MMSF in 1997.
Medium density fiberboard producers compete on a global scale,
primarily on the basis of price, quality and service. Medium density
fiberboard is also subject to competition from solid wood products and
hardboard and particleboard products. Competition in the industry has been
increasing as a result of significant capacity expansion both in the United
States and Canada. During 1995, our medium density fiberboard process was
redesigned to produce MDF2(R) one of the highest quality medium density
fiberboard products available. MDF2(R) commands a price premium over standard
medium density fiberboard due to its superior quality, physical properties
and densities. Moreover, because our fiber supply consists of western
softwoods, a slower growth species with a low abrasive content, MDF2(R) has
proven to have superior machining and finishing qualities over competing
products. In addition, because of the elimination of wood chips from the MDF2(R)
manufacturing process, which substantially reduces raw material costs, and
because of our access to low-cost energy sources, we believe we are one of
the lowest cost medium density fiberboard producers. We source 55% of our
sawdust and wood shavings for medium density fiberboard production internally
from our plywood and lumber operations in the Rocky Mountain Region. The
remaining 45% is purchased from third parties.
LAND SALES SEGMENT
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We have currently identified approximately 150,000 acres of our
properties located in recreational areas or near expanding population centers
that may be better suited for conservation, residential or recreational
purposes, rather than for long-term commercial timberland management. We have
transferred approximately 21,500 acres of these properties, referred to as
higher and better use land, to an unconsolidated subsidiary. Our
unconsolidated subsidiary expects to sell or exchange these properties within
the next five years. Our strategy for the remaining acres is to realize the
value of these properties, through sales or exchanges, over the next ten to
fifteen years. Our on-going review process evaluates properties based on a
number of factors, such as proximity to population centers and major
transportation routes and the presence of special ecological features. We
sold 12,236 acres of higher and better use land in 1999, 14,710 acres in 1998
and 3,350 acres in 1997.
TIMBER RESOURCE MANAGEMENT AND ENVIRONMENTAL STEWARDSHIP
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RESOURCE MANAGEMENT. We view our timberlands as assets with
substantial inherent value. We strive to manage them in an economically
prudent and environmentally responsible manner in order to enhance their
value. We seek to enhance value by improving the productivity of our
forests, controlling harvesting costs, and sorting and merchandising logs to
obtain their highest value.
Value can be enhanced on younger timber stands through thinning
operations. Value increases as trees grow and add wood volume more rapidly.
Thinning a timber stand enables the healthier and potentially more valuable
trees to grow more rapidly. As trees grow larger, they can be used in higher
value applications such as plywood. We also consider the impact of forest
management activities on properties with higher and better uses other than
long-term timber production, and modify harvest plans accordingly.
We use different management techniques in each of our regions,
employing a variety of the most beneficial silvicultural methods available.
We expect timber growth rates on our timberlands to continue to improve over
time as a result of genetic advances in seedlings, intensive forest
management practices such as thinning and fertilization, and the increasing
proportion of our timberlands that are converted from natural forests to
actively managed plantations. Technology and forest management advances have
increased growth rates and shortened harvest cycles. We believe our focus on
intensive management practices will enhance forest productivity and increase
the value of our timberlands over time.
It is our policy to ensure that every acre harvested is promptly
reforested. Based on the geographic and climatic conditions of the harvest
site, harvested areas may be regenerated naturally by leaving mature trees to
reseed the area. Natural regeneration methods are used on approximately 90%
of the timberlands in our Rocky Mountain and Northeast Regions. In both the
Cascade and Southern Regions, substantially all reforestation is done by
planting. During 1999, we planted approximately 5.2 million seedlings on our
Cascade, Rocky Mountain and Northeast Region timberlands and approximately
14.5 million seedlings on our Southern Region timberlands.
Forests are subject to a number of natural hazards, including damage by
fire, insects and disease. Severe weather conditions and other natural
disasters can also reduce the productivity of forest lands and can interfere
with the processing and delivery of forest products. However, damage from
natural causes is typically localized and would only affect a small portion
of the timberlands at any given time. Nevertheless, these hazards are
unpredictable and losses might not be so limited. The size and diversity of
our timberlands, together with our intensive forest management, should help
to minimize these risks. Consistent with the practices of other large timber
companies, we do not maintain insurance against loss to standing timber on
our timberlands, but we do maintain insurance for loss of logs due to fire
and other occurrences following harvesting.
ENVIRONMENTAL STEWARDSHIP. We are a leader in environmentally
responsible resource management. As such we subscribe to the principles and
objectives of the Sustainable Forestry Initiative(SM) which sets forth a
comprehensive nationwide approach to responsible forest stewardship.
Sustainable Forestry Initiative(SM) principles are designed to ensure that
forest management is integrated with the conservation of soil, air and water
resources, wildlife and fish habitat, and aesthetics. In 1999, we retained
PricewaterhouseCoopers LLP, an internationally recognized auditing firm, to
independently audit our forest practices against the standards and objectives
of the Sustainable Forestry Initiative(SM). As part of this process an
independent team audited all of our operating regions. This audit verified
that we are in compliance with the objectives of the Sustainable Forestry
Initiative(SM) on our timberlands in all material respects.
As a part of our environmental leadership, we are in the forefront of
the habitat conservation planning movement. We currently manage nearly a
quarter-million acres under two separate habitat conservation agreements.
The habitats of hundreds of species are protected by these agreements,
including five species listed as threatened under the Endangered Species Act.
The first, approved by the United States Fish and Wildlife Service and the
National Marine Fisheries Service in 1996, provides habitat protection for
285 wildlife species on approximately 149,000 acres in our Cascade Region.
In addition, we have an agreement in place to conserve grizzly bear habitat
covering 83,000 acres of our timberlands in the Swan Valley in western
Montana.
We are currently in the process of developing two additional habitat
conservation plans - one for bull trout and other native fish species such as
steelhead and salmon, covering approximately 1.6 million acres in Montana,
Idaho, and Washington, and another for red-cockaded woodpeckers, covering
approximately 260,000 acres in Arkansas and Louisiana. (See "Federal and
State Regulations, Endangered Species.")
RAW MATERIALS
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The lumber and panel facilities obtain the majority of their raw logs
from our timberlands. Our timberlands provided 75% of the Lumber Segment's
raw log needs in 1999, 63% in 1998 and 60% in 1997. Our timberlands provided
88% of our plywood's raw log needs in 1999, 95% in 1998 and 89% in 1997. The
Rocky Mountain Region and Southern Region provide a consistent supply of
quality logs and preferred species to our 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.
Our lumber and plywood facilities have and will continue to purchase
stumpage and logs from external sources, including the United States Forest
Service, Bureau of Indian Affairs, Bureau of Land Management and state and
private timberland owners. At December 31, 1999, our lumber and plywood
facilities had approximately 137,000 cunits of timber under contract from
external sources which may be harvested over the next three years. The
United States Forest Service harvest plan calls for a 2000 harvest of 400,000
cunits in close proximity to our lumber and plywood facilities in western
Montana. However, due in part to legal challenges and changes in public
policy, the United States Forest Service will likely sell less volume. Our
lumber and plywood facilities are permitted to bid on up to approximately
fifty percent of the volume sold annually by the United States Forest
Service, with the remainder set aside for small businesses. In addition,
approximately 800,000 cunits of timber is expected to be offered annually to
our lumber and plywood facilities from other timberland owners. The
geographic area in which our 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.")
Our MDF facility has a consistent supply of sawdust and wood shavings
from internal and external sources. Our remanufacturing facilities use short
pieces of lumber, a by-product of our lumber facilities' operations, and in
addition, we purchase lumber from third-party mills.
COMPETITION
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Markets for forest products are highly competitive in terms of price
and quality. Many of our competitors have substantially greater financial
and operating resources. 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
oriented strand board and lumber and log markets are subject to competition
from other worldwide suppliers. We believe we can compete effectively due to
our extensive private timber inventory, our proven leadership in
environmental forestry, which has positioned us to meet regulatory challenges
on a cost-effective basis, our reputation as a dependable, long-term supplier
of quality products, our innovative approach to providing high-quality,
value-added products to various specialty and industrial niche markets and
the integration of our timberlands with efficient manufacturing processes.
SEASONALITY
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Domestic log sales volumes from our northern timberlands are typically
at their lowest point in the second quarter of each year when warming weather
thaws and softens roadbeds, restricting access to logging sites. Log sales
volumes from our 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 Cascade 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 construction markets is slower, and higher
in the spring and summer quarters when construction increases. 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 the spring in the North and during the rainy season in the
South.
FEDERAL AND STATE REGULATIONS
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GENERAL ENVIRONMENTAL REGULATION. Our operations are subject to
Federal, state and local environmental laws and regulations, including laws
relating to water, air, solid waste and hazardous substances and the
requirements of the federal Occupational Safety and Health Act and comparable
state statues relating to the health and safety of our employees. Although
we believe that we are in material compliance with these requirements, there
can be no assurance that we will not incur significant costs, civil and
criminal penalties, and liabilities, including those relating to claims for
damages to property or natural resources, resulting from our operations. We
maintain environmental and safety compliance programs and periodically
conduct regular internal and independent third-party audits of our facilities
and timberlands to monitor compliance with these laws and regulations.
ENDANGERED SPECIES. The Endangered Species Act protects species
threatened with possible extinction. A number of species indigenous to our
timberlands have been listed as threatened or endangered or have been
proposed for this status under the Endangered Species Act. As a result, our
activities in or adjacent to the habitat of these species may be subject to
restrictions on the harvesting of timber and the construction of roads.
In June 1996, we received a permit under the Endangered Species Act
from the United States Fish and Wildlife Service and the National Marine
Fisheries Service that now covers our forest management on 149,000 acres in
the Cascade Region (the "Planning Area"). As a part of the permit
application, we prepared a multi-species habitat conservation plan that will
govern our management activities in the Planning Area during the 50-year life
of the permit. The habitat conservation plan requires us to maintain set
levels of wildlife habitat and to take numerous other mitigation measures,
including the protection of riparian areas.
In consideration for this mitigation, the permit authorizes forestry
practices that are consistent with the habitat conservation plan, even though
they may have an adverse impact on spotted owls, grizzly bears, bull trout,
gray wolves or marbled murrelets, the listed species currently covered by the
habitat conservation plan and permit. The habitat conservation plan provides
that the United States Fish and Wildlife Service and the National Marine
Fisheries Service will amend the permit to add subsequently listed species
without requiring us to provide additional mitigation absent extraordinary
circumstances. The bull trout was added to the permit pursuant to this
provision upon its listing in 1998. Extraordinary circumstances would
include situations where continued activity under the habitat conservation
plan would have a significant material adverse impact on the species and
mitigation on Federal land would not alleviate the concern. As an incentive
to us to create additional wildlife habitat in the Planning Area, the permit
provides additional authorization during a second 50-year period if the
wildlife habitat within the Planning Area exceeds levels set in the habitat
conservation plan. Therefore, the permit is expected to provide long-term
certainty and predictability for our harvest activities in the Planning Area.
In December 1999, Plum Creek and the Federal government consummated an
exchange of specific Federal lands and some cash for some of our lands of
equal value (the "I-90 Exchange"). In connection with this exchange, we
obtained an amendment to the habitat conservation plan to add the lands we
received in the land exchange that are within the Planning Area and deleting
lands that were exchanged to the Federal government. Previously disclosed
litigation filed by us in the Federal District Court for the Eastern District
of Washington naming those parties who had appealed the I-90 Exchange and
seeking to establish its legality, as well as the legality of the United
States Forest Service's actions in implementing the land exchange, was
settled in December 1999 (the "Exchange Litigation Settlement").
In December 1995, we entered into an agreement to conserve grizzly
bears with the United States Fish and Wildlife Service, the United States
Forest Service, and the state of Montana covering 83,000 acres of our
timberlands in the Swan Valley in western Montana. Under the grizzly bear
agreement, we have agreed to protect habitat and to minimize the impact of
our forestry activities on the grizzly bear. In consideration for this
mitigation, the United States Fish and Wildlife Service authorized forestry
practices in the Swan Valley that are consistent with the agreement, but that
may have an effect on grizzly bears.
Although the habitat conservation plan and grizzly bear agreement have
both been implemented and are functioning as expected, there can be no
assurance that the terms of these agreements will remain in force or be
sufficient to protect us against subsequent amendments of the Endangered
Species Act or additional listings thereunder, or against changes to other
applicable laws and regulations. Any of these changes could materially and
adversely affect our operations. In addition, legal challenges could disrupt
the continued operation of the habitat conservation plan or the grizzly bear
agreement, and thereby reduce the level of certainty offered by these plans.
In 1998, the United States Fish and Wildlife Service listed some
population segments of the bull trout as threatened under the Endangered
Species Act. Bull trout are present in numerous streams and rivers which
flow across our lands in Montana, Idaho and Washington. In addition, the
red-cockaded woodpecker, listed as threatened, is found on our lands in
Louisiana and Arkansas. In December 1999, we submitted a draft habitat
conservation plan and a permit application to the United States Fish and
Wildlife Service and the National Marine Fisheries Service for bull trout and
other native fish species. This plan is currently out for public review. We
are also working with the United States Fish and Wildlife Service to develop
a habitat conservation plan for the red-cockaded woodpecker. If these plans
are approved, we will receive permits authorizing forest practices consistent
with those plans. Although discussions are underway, we are unable to
predict whether either of these plans will ultimately be approved or what
their terms would be. We are unable, at this time, to predict the nature or
scope of any land management restrictions that might be required to protect
native salmonids or red-cockaded woodpeckers.
In 1999, the State of Washington, the United States Fish and Wildlife
Service, the National Marine Fisheries Service, the Environmental Protection
Agency, private land owners and certain tribes agreed upon a set of rules to
protect bull trout and other native salmonids in the State of Washington.
These rules were approved by the Washington State legislature. We anticipate
that the United States Fish and Wildlife Service and the National Marine
Fisheries Service will pass rules under the Endangered Species Act that are
consistent with the agreement.
The Endangered Species Act also prohibits the Federal government from
jeopardizing species listed under the Endangered Species Act or from
destroying or adversely modifying their designated critical habitat. Private
landowners are potentially affected by these restrictions if a private
activity requires Federal action, such as the granting of access or Federal
funding. Where there is a Federal connection, the Federal agency involved
must consult with the United States Fish and Wildlife Service or, in the case
of anadromous fish, the National Marine Fisheries Service, to determine that
the proposed activity would not jeopardize the listed species or cause direct
or indirect adverse modification of its designated critical habitat. If the
landowner's proposed activity would have these effects, the United States
Fish and Wildlife Service or the National Marine Fisheries Service must
propose, where possible, alternatives or modifications to the proposed
activity.
Some of our land holdings in the Rocky Mountain Region are intermingled
with Federal land and access across Federal lands may require Federal
approval. In the past, our access to these areas has been delayed by
administrative processes and legal challenges and restricted under the
Endangered Species Act. Although we believe that access to these lands
should be facilitated by the grizzly bear agreement, and should be further
facilitated if the native fish habitat conservation plan is approved, there
can be no assurance that access delays will not continue to occur. As a
result of the I-90 Exchange with the United States Forest Service, completed
in December 1999, as well as the Exchange Litigation Settlement, we now have,
or expect in the near future to be able to receive, all easements or permits
necessary to access our lands in the Cascade Region.
At this time, we believe that Federal and state laws and regulations
related to the protection of endangered species will not have a material
adverse effect on our financial position, results of operations or liquidity.
We anticipate, however, that increasingly strict laws and regulations
relating to the environment, natural resources and forestry operations, as
well as increased social concern over environmental issues, may result in
additional restrictions on us leading to increased costs, additional capital
expenditures and reduced operating flexibility.
TIMBERLANDS. Our forest practices are and will in the future be
subject to specialized statutes and regulations in the states where we
operate, which currently include Montana, Washington, Idaho, Louisiana,
Arkansas and Maine. Many of these states have enacted laws which regulate
forestry operations, such as growing, harvesting and processing activities on
forest lands. Among other requirements, these laws impose some reforestation
obligations on the owners of forest lands. Several states require prior
notification before beginning harvesting activities. The states of
Washington and Maine require a regulatory review taking from 15 to 30 days or
more prior to harvesting, depending upon the environmental and other
sensitivities of the proposed activity. Other state laws and regulations
control the following activities: slash burning and harvesting during fire
hazard periods; activities that affect water courses or are in proximity to
inland shore lines; activities that affect water quality, and some grading
and road construction activities.
LOG EXPORTS. Federal legislation currently prohibits the sale of
unprocessed logs harvested from Federal lands located in the western half of
the United States if the logs will be exported from the United States by the
purchaser, or if they will be used by the purchaser as a substitute for
timber from private lands which is exported by a purchaser. In order to
enforce this substitution prohibition, the legislation requires persons who
export private logs and who wish to purchase Federal timber, to obtain an
approved Federal timber "sourcing area." In 1991, we applied for and
obtained an approved sourcing area for our Northwest manufacturing
facilities. Under the legislation, sourcing areas are subject to review and
renewal at least every five years. Revisions to the export law were enacted
in November 1997 which we believe ensure that our sourcing area will be
renewed. However, there can be no assurance of this.
ENCUMBRANCES
- ------------
Under the terms of our debt agreements, we have agreed not to pledge,
assign or transfer timberlands, except under limited circumstances. The
holders of our First Mortgage Notes have a first mortgage lien on a
significant portion of the Lumber and Panel Facilities. The corporation
guarantees the First Mortgage Notes recorded on the books of the
unconsolidated subsidiaries.
The title to our timberlands generally includes substantially all the
related hard rock mineral interests. However, we 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, we do not own oil and
gas rights to the majority of our 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.
EMPLOYEES
- ---------
We currently have approximately 544 salaried and 1,781 hourly
employees. Most of the employees work for one of the unconsolidated
subsidiaries. We believe that our employee relations are good. Our wage
scale and benefits are generally competitive with other forest products
companies. Hourly employees (186 employees) at the Huttig, Arkansas lumber
mill participate in the UBC Southern Council of Industrial Workers, Local
Union No. 2346. A one-year agreement has been reached with the union,
effective upon execution by the union. The union is in the process of
obtaining the necessary signatures at this time. The majority of the
harvesting and delivery of logs for the unconsolidated subsidiaries are
conducted by independent contractors who are not our employees.
ITEM 2. PROPERTIES
- ------------------
We believe that our Northern and Southern timberlands and lumber and
panel facilities are suitable and adequate for current operations. The
lumber and panel facilities are owned and 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. 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
- -------------------------
There is no pending or threatened litigation involving the corporation
that we believe would have a material adverse effect on the corporation's
financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
Executive officers are elected annually at the first quarterly meeting of
the board of directors following the annual meeting of stockholders.
Officer
Name Age Office (g) Since
- ---- --- ---------- -------
Rick R. Holley (a) 48 President and Chief Executive Officer 1989
Charles P. Grenier (b) 50 Executive Vice President 1989
William R. Brown (c) 48 Executive Vice President and Chief 1995
Financial Officer
Michael J. Covey (d) 42 Vice President, Resources 1998
Barbara L. Crowe (e) 49 Vice President, Human Resources 1997
James A. Kraft (f) 44 Vice President, General Counsel and 1989
Secretary
(a) Served since January 1994 as President and Chief Executive Officer. Mr.
Holley was Vice President and Chief Financial Officer from April 1989 to
December 1993.
(b) Served since January 1994 as Executive Vice President. Mr. Grenier was
Vice President, Rocky Mountain Region from 1989 to December 1993.
(c) Served since May 1999 as Executive Vice President and Chief Financial
Officer. Mr. Brown was Vice President, Strategic Business Development from
January 1998 to May 1999, Vice President, Resource Management from February
1995 to January 1998, and Director, Planning from August 1990 to February
1995.
(d) Served since January 1998 as Vice President, Resources. Mr. Covey was
the General Manager, Rocky Mountain Timberlands from August 1996 to
January 1998, Director of Operations, Rocky Mountain Region from June 1995
to August 1996, and Plant Manager, Ksanka Sawmill from August 1992 to June
1995.
(e) Served since April 1997 as Vice President, Human Resources. From
October 1995 through March 1997, Ms. Crowe was Vice President, Human
Resources for Weight Watchers Gourmet Food Co., a subsidiary of the H.J.
Heinz Company. From November 1991 through September 1995, Ms. Crowe
worked in Human Resources at Ore-Ida Foods, Inc., a subsidiary of the H.J.
Heinz Company, first as Manager, then as General Manager.
(f) Served since April 1996 as Vice President, General Counsel and
Secretary. Mr. Kraft was Vice President, Law from January 1994 to April
1996 and Vice President, Law and Corporate Affairs from April 1989 to
December 1993
(g) Since July 1, 1999 the listed individuals have served as officers of
Plum Creek Timber Company, Inc. Prior to the REIT conversion, the listed
individuals served as officers of the general partner of Plum Creek Timber
Company, L.P. or the predecessor of the general partner. There are no
family relationships among them.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
- -------------------------------------------------
AND RELATED STOCKHOLDER MATTERS
- -------------------------------
Plum Creek Timber Company, Inc.'s common stock is traded on the New
York Stock Exchange and the Pacific Exchange. As of February 15, 2000,
there were approximately 63,589 beneficial owners of 69,206,575 outstanding
shares.
Trading price data, as reported on the New York Stock Exchange
Composite Tape, and declared cash distribution information for 1999 and
1998, are as follows:
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
---- -------- -------- -------- --------
High $ 29 7/16 $ 32 1/8 $ 31 7/8 $ 29 1/2
Low 25 1/2 25 3/4 26 1/8 23 13/16
Cash distribution $ 0.57 $ 0.57 $ 0.57 $ 0.57
per Share or Unit
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 $ 0.57 $ 0.57 $ 0.57 $ 0.57
per Unit
Cash dividends are determined by our board of directors. Future
dividends will be determined by our board of directors, in its sole
discretion, based on our results of operations, cash flow and capital
requirements, economic conditions, tax considerations and other factors,
including harvest levels and future acquisitions. In addition, our debt
agreements have certain restrictive covenants limiting the amount of cash
dividends.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
<TABLE>
1999(1)(2) 1998(3) 1997 1996(4) 1995
---------- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C>
For the year:
(In millions, except per
Share/Unit):
Revenues $ 460.6 $ 699.4 $ 725.6 $ 633.7 $ 585.1
Depreciation, Depletion
and Amortization 59.7 69.3 70.2 56.9 54.1
Operating Income 146.4 141.1 173.3 165.0 159.0
Income before Cumulative
Effect of Accounting
Change 113.4 75.4 111.7 223.6 110.7
Cumulative Effect of
Accounting Change 12.2
Net Income 125.6 75.4 111.7 223.6 110.7
Capital Expenditures (5) 25.6 64.3 28.3 19.3 30.7
Net Cash Provided by
Operations 138.0 164.0 190.0 171.9 165.2
Income before Cumulative
Effect of Accounting
Change per Share/Unit 1.72 0.90 1.72 4.71 2.17
Net Income per Share/Unit 1.94 0.90 1.72 4.71 2.17
Cash Distributions
Declared per Share/Unit 2.28 2.28 2.20 2.02 1.96
Pro forma amounts, assuming the
change in accounting was applied
retroactively:
Net Income 113.4 77.2 112.9 224.7 112.5
Net Income Allocable to
Common Stockholders/
Unitholders 96.3 43.5 81.0 197.0 90.0
Net Income per Share/Unit 1.72 0.94 1.75 4.73 2.22
At year end (in millions):
Working Capital 59.1 129.6 158.3 153.0 111.5
Total Assets 1,250.8 1,438.2 1,330.9 1,336.4 826.1
Total Debt 649.1 961.0 763.4 780.8 531.4
Stockholders' Equity/
Partners' Capital (6) 533.0 405.4 470.3 491.6 233.9
Operating Data:
Northwest Timberlands
Fee Timber Harvested
(M Cunits) (7) 987 1,048 1,091 1,234 1,195
Southern Timberlands Fee
Timber Harvested
(M Cunits) 697 764 799 127
Northeastern Timberlands
Fee Timber Harvested
(M Cunits) (7) 404 44
Lumber Production (MMBF) 743 635 582 461 433
Plywood Production (MMSF)
(3/8" basis)(8) 337 323 312 297 294
MDF Production (MMSF)
(3/4" basis) 136 132 127 113 102
</TABLE>
(1) Revenues; Depreciation, Depletion and Amortization; Operating Income;
Capital Expenditures; Net Cash Provided by Operations; Working Capital; Total
Assets and Total Debt are not comparable with the prior years as a result of
the July 1, 1999, REIT conversion. See Note 1 of the Notes to Financial
Statements.
(2) During 1999 the corporation changed its accounting policy for
reforestation costs. See Note 1 of the Notes to Financial Statements.
(3) Results include the impact of an acquisition of 905,000 acres of
timberland in Maine from November 12, 1998.
(4) Included in 1996 results of operations was a gain of $105.7 million
related to the sale of 107,000 acres of timberlands in northeast Washington
and northern Idaho and the impact from that sale from October 12, 1996.
Results also include the impact of the acquisition from Riverwood
International Corporation of 538,000 acres of timberland and related assets
in Louisiana and Arkansas from October 19, 1996.
(5) Does not include $181.1 million related to the Maine acquisition in 1998
or $560.7 million related to the Southern Region acquisition in 1996.
(6) The partnership issued 5.7 million units during 1996 for net proceeds of
$144.3 million. The corporation issued 5.75 million shares during the fourth
quarter of 1999 for net proceeds of $141.7 million.
(7) Historical data has been converted from MMBF in the Northwest and M Tons
in the Northeast to M Cunits for comparability.
(8) Does not include 111 MMSF in 1998, 200 MMSF in 1997 and 37 MMSF in 1996,
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
- ---------------------
Forward-Looking Statements
- --------------------------
This Report contains forward-looking statements within the meaning of
the Private Litigation Reform Act of 1995, which are generally identified by
words such as "may," "should," "seeks," "believes," "expects," "intends,"
"estimates," "projects," "strategy" and similar expressions or the negative
of those words. Forward-looking statements are subject to a number of known
and unknown risks and uncertainties that could cause actual results to differ
materially from those projected, expressed or implied in the statements.
These risks and uncertainties, many of which are not within the corporation's
control, include, but are not limited to, the cyclical nature of the forest
products industry, our ability to harvest our timber, our ability to execute
our acquisition strategy, and regulatory constraints. These risks are
detailed from time to time in our Securities and Exchange Commission filings.
Forward-looking statements speak only as of the date made, and neither the
company nor its management undertakes any obligation to update or revise any
forward-looking statements. It is likely that if one or more of the risks
and uncertainties materializes, the current expectations of the corporation
and its management will not be realized.
Overview
- --------
REIT CONVERSION. On July 1, 1999, Plum Creek Timber Company, L.P., the
former partnership and registrant, converted from a master limited
partnership to a Real Estate Investment Trust (REIT) in the form of a
corporation. In order to qualify as a REIT, substantially all assets and
associated liabilities related to manufacturing operations and harvesting
activities and some higher and better use lands were transferred to several
unconsolidated corporate subsidiaries. Following the transfers, Plum Creek
Timber Company, Inc., the new corporation and successor registrant, is entitled
to approximately 99% of the economic value of the unconsolidated subsidiaries
through a combination of preferred stock and nonvoting common stock. The
remaining 1% of the economic value and 100% of the voting control of the
manufacturing and harvesting subsidiaries are owned by four individuals who are
also officers of the corporation.
The corporation's financial statements reflect the deconsolidation of
the manufacturing and harvesting operations along with some higher and better
use land sales effective July 1, 1999. Therefore, the financial statements
for the year ending December 31, 1999, are not comparable to prior period
financial statements. However, in accordance with Statement of Financial
Accounting Standard No. 131, "Disclosure about Segments of an Enterprise and
Related Information," the corporation has the same five reportable business
segments as the former registrant. Furthermore, the segment disclosure has
been prepared on a basis consistent with that of the partnership. See Notes
1, 5, 8, 9 and 12 of the Notes to Financial Statements for further discussion
of how the financial statements have been impacted by the REIT conversion.
NON-RECURRING ITEMS. During 1999 we had the following unusual items
which impacted our results of operations:
1. Income Tax Benefit. In connection with the REIT
conversion, a one-time income tax benefit of approximately
$14.0 million was recorded by the corporation for the net
temporary differences associated with the assets and
liabilities transferred to the unconsolidated
subsidiaries. See Note 1 of the Notes to Financial
Statements.
2. Accounting Method Change. We changed our accounting
policy with respect to reforestation costs and other costs
associated with the planting and growing of trees. The
cumulative effect of the accounting method change
increased 1999 net income by $12.2 million. Furthermore,
1999's operating income increased by $2.9 million as a
result of the accounting method change. See Notes 1 and
14 of the Notes to Financial Statements.
3. REIT Conversion Costs. In connection with the REIT
conversion, we incurred $5.1 million of reorganization
costs in 1999 and $4.8 million in 1998. See Note 1 of the
Notes to Financial Statements.
4. Land Exchange. In our Cascade Region, we received
11,586 acres of timberlands plus $4.3 million of cash from
the United States Forest Service in exchange for 31,713
acres of timberlands. The cash portion of this exchange
resulted in a non-operating income gain of $3.6 million.
See Note 9 of the Notes to Financial Statements.
Events and Trends Affecting Operating Results
- ---------------------------------------------
MARKET FORCES. The demand for logs and manufactured wood products
depends upon international and domestic market conditions, the value of the
United States dollar in foreign exchange markets, competition, the
availability of substitute products and other factors. In particular, the
demand for logs, lumber, plywood and medium density fiberboard is affected
by 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. Prices for domestic logs in our Cascade
Region increased in 1999 by 10% from 1998 levels, primarily due to strong
lumber markets and the redirection of export logs to the domestic market as
a result of a weak Japanese economy. Prices for domestic logs in our Rocky
Mountain Region improved modestly in 1999 compared to 1998 prices, primarily
due to favorable lumber markets and a declining supply of logs in the
region. The supply of logs in the Rocky Mountain Region has decreased due
to the continued reduction in Federal and state timber sales. Pulp log and
chip prices in the Northwest remained weak during 1999, primarily due to the
abundant supply of chips as a result of strong lumber and plywood
production. Prices for sawlogs and pulp logs in our Northeast Region
generally remained weak during 1999, primarily due to the abundant supply of
logs as a result of favorable weather-related harvesting conditions.
Domestic log prices in the Southern Region for 1999 were 12% lower than 1998
prices, and pulp log prices decreased by 7% compared to 1998 prices. The
decrease in Southern log prices was primarily due to the abundant supply of
logs throughout the region. The supply of logs increased primarily due to
exceptionally favorable harvesting conditions as result of unusually dry
weather conditions during most of 1999.
Export log prices for the Cascade Region in 1999 were comparable to
1998 prices. Demand for export logs during 1999 remained flat primarily due
to a weak Japanese economy and low consumer confidence in that country.
Japanese housing starts in 1999 of 1.2 million were comparable to the number
of housing starts in the prior year.
Composite indices for commodity lumber prices were 15% higher in 1999
than in 1998, primarily due to the strong demand for lumber as a result of a
robust United States economy and strong consumer confidence. United States
housing starts for 1999 were at the highest level since 1986. Lumber prices
in the Southern United States during 1999, however, improved only moderately
over the prior year. The limited price improvement in the South was
primarily due to the region's record lumber production during 1999 and the
greater use of Western species versus Southern Yellow Pine in the housing
sector. Board prices during 1999 strengthened over the prior year primarily
due to the robust United States economy, strong repair and remodeling
activity, and a declining supply of boards. The supply of boards has
decreased as a result of European producers shifting their production to
dimension lumber.
Composite indices for commodity plywood prices were 21% higher in 1999
than in 1998, primarily due to strong United States building activity, low
field inventories, rising oriented strand board prices and several plywood
mill closures. Industrial and specialty-grade plywood prices also improved
in 1999 compared to 1998, primarily due to a strong United States economy,
low interest rates and favorable demographics. However, commodity and
industrial plywood prices declined sharply during the fourth quarter of
1999. The fourth quarter price decline was primarily due to the seasonal
slowdown in building activity and an excess supply of plywood in the market.
Oriented strand board sales now account for over 50% of the structural panel
market. Fourth quarter 1999 commodity plywood prices were comparable to
commodity plywood prices during the fourth quarter of 1998.
Medium density fiberboard prices improved by 6% in 1999 over 1998
prices, primarily due to demand outpacing supply. North American annual
consumption continues to rise at a rate of about 12%, largely due to
increased acceptance in a wide range of existing and new applications. At
the same time, North American medium density fiberboard production growth
has slowed as a result of recently constructed mills now being at or near
full capacity.
COMPARABILITY OF FINANCIAL STATEMENT PERIODS. The corporation has
pursued and will continue to pursue the acquisition of additional
timberlands to increase inventories of fee timber. On November 12, 1998,
the corporation completed the acquisition of 905,000 acres in Maine. On
October 18, 1996, the corporation completed the acquisition of approximately
529,000 (plus 9,000 acres of leased land) acres in Louisiana and Arkansas.
The corporation may also, from time to time, sell timberlands and facilities
if attractive opportunities arise. On January 14, 2000, we sold
approximately 90,000 acres of timberlands near St. Maries, Idaho.
Accordingly, the comparability of periods covered by the corporation's
financial statements is, and in the future may be, affected by the impact of
acquisitions and divestitures.
HARVEST PLANS. We determine our annual roundwood (sawlogs and
pulpwood) harvesting plans based on a number of factors. At the stand
level, ranging in size from 10 to 200 acres, we consider the age, size,
density, health and economic maturity of the timber. A stand is a
continuous block of trees of a similar age, species mix and silvicultural
regime. At the forest level, ranging in size from 240,000 to 760,000 acres,
we consider the long-term sustainability and environmental impact of certain
levels of harvesting, a forest's progression from an unmanaged to a managed
forest, and the level of demand for wood within the region. A forest is a
broad administrative unit, made up of a large number of stands.
Active forest management involves the conversion of a forest from an
unmanaged to a managed state. An unmanaged forest is made up largely of
mature and over-mature stands of timber which are growing slowly, both in
terms of volume and value. In a managed forest, there exists a range of age
classes, from recently planted stands to economically mature stands. The
conversion of a forest from an unmanaged to a managed state can take from
one to two forest generations, or rotations. Toward the end of the initial
conversion process, a decline in the inventory volume is normal as the
harvest of mature and over-mature stands ends, and the younger, faster
growing stands have yet to reach final harvest age.
Harvest levels in the Rocky Mountain Region, after adjusting for the
January 14, 2000, disposition of approximately 90,000 acres near St. Maries,
Idaho, were 652,000 cunits in 1998 and 653,000 cunits in 1999. Harvest
levels in 2000 are expected to decline by 4% compared to the adjusted 1999
harvest. (Actual, non-adjusted harvest levels in the Rocky Mountain Region
were 715,000 cunits in 1998 and 706,000 cunits in 1999.) Beyond 2000, we
expect harvest levels to decline moderately as the process of converting
slower growing forests to younger, more productive stands nears completion.
Harvest levels in the Cascade Region (including sawlogs and pulpwood)
were 333,000 cunits in 1998 and 281,000 cunits in 1999. Harvest levels in
2000 are expected to decline by 5% compared to 1999. Beyond 2000, we expect
harvest levels to continue to decline for the foreseeable future as the
conversion of slower growing forests to younger, more productive stands is
completed.
Harvest levels in the Northeast Region were 404,000 cunits in 1999,
and are anticipated to approximate this level for the foreseeable future.
The Northeast Region's forests are in a managed state where the acreage is
relatively evenly distributed among age classes, and harvest levels
approximate growth rates.
Harvest levels in the Southern Region were 764,000 cunits in 1998 and
697,000 cunits in 1999. Harvest levels in 2000 are expected to decline by
8% compared to the 1999 harvest level. During 1999, we substantially
completed both the conversion of mature second growth pine timberlands into
intensively managed pine plantations and the acceleration of thinning
operations to improve growth rates. As a result, the corporation
anticipates moderate declines in harvest levels through 2003. Thereafter,
harvest levels are expected to gradually increase as we benefit from faster
growing, intensively managed plantations.
Actual harvest levels may vary from planned levels due to log demand,
sales prices, the availability of timber from other sources, the
availability of legal access, and other factors that may be outside of our
control. We believe that our harvest plans are sufficiently flexible to
permit modification in response to short-term fluctuations in the markets
for logs and lumber in order to minimize the variance to planned harvest
levels.
SMURFIT STONE CONTAINER CORPORATION. A substantial portion of our wood
chips derived from the manufacturing lumber and plywood operations in the
Rocky Mountain Region were sold to Smurfit Stone Container Corporation under
a long-term supply agreement. This agreement generally provided for market-
based pricing for residual wood 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 previously set by the
supply agreement, annual operating income related to sales of residual wood
chips will be reduced by approximately $11 million starting in the year
2000. The actual impact will depend on future market prices.
Results of Operations
- ---------------------
The following table compares operating income by segment for the years
ended December 31:
<TABLE>
Operating Income by Segment
(In Thousands)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Northern Resources $ 90,712 $ 73,715 $ 98,792
Southern Resources 37,117 53,568 54,313
Lumber 23,274 2,599 34,667
Panel 26,491 14,360 8,462
Land Sales 19,846 26,598 13,963
Other - (2,247) (1,152)
----------- ----------- -----------
Total Segment Operating Income 197,440 168,593 209,045
Other Costs & Eliminations (21,701) (27,506) (35,764)
----------- ----------- -----------
Total Combined Operating Income 175,739 141,087 173,281
Less Operating Income recognized
by Unconsolidated Subsidiaries (29,315)
----------- ----------- -----------
Operating Income $ 146,424 $ 141,087 $ 173,281
=========== =========== ===========
</TABLE>
The accounting policies of the segments are substantially the same as
those described in Note 1 of the Notes to Financial Statements. For segment
purposes, however, inventories are stated at the lower of average cost or
market on the first-in, first-out method. The difference in computing cost
of goods sold under the last-in, first-out and first-in, first-out methods
is included in "Other Costs & Eliminations."
1999 Compared to 1998
- ---------------------
NORTHERN RESOURCES SEGMENT. Revenues increased by $41.6 million, or
17%, to $291.9 million in 1999, compared to $250.3 million in 1998. This
increase was primarily due to $46.4 million of additional revenue as a
result of our Maine acquisition in November 1998 and higher domestic log
prices in both the Rocky Mountain and Cascade Regions, offset in part by
lower harvest levels in the Cascade Region and lower export log sales to
Japan. Domestic log prices in the Cascade Region increased by 10%,
primarily due to continued strong building activity in the United States and
the selling of export quality logs to domestic mills. Domestic log prices
in the Rocky Mountain Region increased by 3%, primarily due to the limited
supply of logs in the region as a result of declining Federal and state
timber sales and strong building activity. Harvest levels (both export and
domestic sawlogs) in the Cascade Region decreased by 16%, primarily due to
planned harvest reductions. Furthermore, export log sales volume decreased
by 23%, primarily due to the weak Japanese economy, increased availability
of substitute products (e.g., Russian logs and European lumber) and the
diversion of export quality logs to the stronger domestic market.
Northern Resources Segment operating income was 31% of its revenues for
1999 and 29% for 1998. Northern Resources Segment costs and expenses
increased by $24.6 million, or 14%, to $201.2 million in 1999, compared to
$176.6 million in 1998. This increase was primarily due to $34.4 million of
additional costs as a result of the Maine acquisition, offset in part by
lower harvest levels in the Cascade Region and a $2.2 million decline in
reforestation expenses as a result of our change in accounting for
reforestation costs.
SOUTHERN RESOURCES SEGMENT. Revenues decreased by $19.2 million, or
16%, to $99.2 million in 1999, compared to $118.4 million in 1998. This
decrease was primarily due to lower sawlog and pulp log prices and lower pulp
log sales volume. Sawlog prices decreased by 12%, primarily due to an
abundant supply of logs throughout the region and a higher percentage of
smaller logs. Log sizes declined in 1999 due to the near completion by the
end of 1998 of the conversion of our mature second growth pine timberlands
into intensively managed pine plantations. Pulp log sales volume decreased
by 14%, primarily due to a planned reduction in harvest levels as a result of
the near completion of accelerated thinning operations to improve growth
rates. Pulp log prices decreased by 7%, primarily due to an abundant supply
of wood fiber and weak paper markets.
Southern Resources Segment operating income was 38% as a percentage of
its revenues for 1999 and 45% for 1998. This decline was primarily due to
lower sawlog and pulp log prices. Southern Resources Segment costs and
expenses decreased by $2.7 million, or 4%, to $62.1 million in 1999, compared
to $64.8 million in 1998, primarily due to lower pulp log sales volume.
LUMBER SEGMENT. Revenues increased by $61.8 million, or 22%, to $343.4
million in 1999, compared to $281.6 million in 1998. Excluding the
incremental increase in revenues of $14.7 million related to the May 1998
acquisition of the Meridian, Idaho remanufacturing facility, revenues
increased by $47.1 million. This increase was primarily due to a 12%
increase in lumber sales volume and a 7% increase in Northwest lumber
prices. Lumber sales volume increased primarily due to a 51% increase in
production volume at our Joyce, Louisiana sawmill and a 12% increase in
production volume at our Pablo, Montana sawmill as a result of mill
reconfiguration projects. Northwest lumber prices increased primarily due
to the robust United States economy and strong housing starts. Northwest
board prices were also favorably impacted by a temporary reduction of
European board imports into the United States.
Lumber Segment operating income was 7% as a percentage of its revenues
for 1999 and 1% for 1998. This increase was primarily due to higher
Northwest lumber prices and lower Southern log costs. Lumber Segment costs
and expenses increased by $41.1 million, or 15%, to $320.1 million in 1999,
compared to $279.0 million in 1998. Excluding the incremental increase in
expense of $13.8 million related to the May 1998 acquisition of the
Meridian, Idaho remanufacturing facility, expenses increased by $27.3
million. This increase was primarily due to increased lumber sales volume,
offset in part by lower log costs in our Southern Region.
PANEL SEGMENT. Revenues increased by $18.0 million, or 12%, to $172.6
million in 1999, compared to $154.6 million in 1998. This increase was
primarily due to higher plywood prices and a 3% increase in plywood sales
volume. Plywood prices increased by 10% primarily due to the robust United
States economy and strong building activity. During the second and third
quarters of 1999, commodity plywood prices reached record high levels due to
low field inventories and exceptionally strong building activity.
Panel Segment operating income was 15% as a percentage of its revenues
for 1999 and 9% for 1998. This increase was primarily due to higher plywood
prices. Panel Segment costs and expenses increased by $5.8 million, or 4%,
to $146.1 million in 1999, compared to $140.3 million in 1998. This
increase was primarily due to a 3% increase in plywood sales volume and a 4%
increase in plywood production costs. Plywood production and related costs
were increased to capture additional profits associated with record high
plywood prices.
LAND SALES SEGMENT. Revenues decreased by $9.1 million, or 28%, to
$23.7 million in 1999, compared to $32.8 million in 1998. This decrease was
primarily due to 12,236 acres of higher and better use lands being sold
during 1999, compared to 14,710 acres in 1998.
Land Sales Segment operating income was 84% as a percentage of its
revenues for 1999 and 81% for 1998. Land Sales Segment costs and expenses
decreased by $2.4 million, or 39%, to $3.8 million in 1999, compared to $6.2
million in 1998, as a result of decreased sales.
Other Costs and Eliminations (which consists of corporate overhead,
intercompany log profit elimination and the change in the LIFO reserve)
decreased combined operating income by $21.7 million in 1999, compared to a
decrease of $27.5 million in the 1998. The change of $5.8 million was
primarily due to lower corporate overhead, offset in part by a decline in
the amount of intercompany log profit recognized. Corporate overhead
decreased by $12.3 million during 1999, primarily due to $11.4 million of
expense recorded in 1998 related to long-term incentive plans for which no
expense was incurred in 1999. Deferred intercompany log profit of $0.4
million was recognized during 1999, compared to $6.2 million during 1998.
This decrease of $5.8 million was primarily due to the build-up of log
inventories in the Southern Resources Segment in the fourth quarter of 1997
and the subsequent processing of these logs in the first quarter of 1998.
Similar log inventories were not built up during the fourth quarter of 1998.
The profit on intercompany log sales is deferred until the lumber and
plywood manufacturing facilities convert existing log inventories into
finished products and sell them to third parties, at which time intercompany
profit is recognized.
Interest expense increased by $2.9 million, or 5%, to $63.5 million
for 1999, compared to $60.6 million for 1998. This increase was primarily
due to the issuance of $177 million of senior notes in the fourth quarter of
1998 to finance our Maine timberland acquisition, offset in part by the
$170.1 million of debt transferred on July 1, 1999, to the unconsolidated
subsidiaries in the REIT conversion.
The income allocated to the general partner decreased by $16.5 million
to $17.2 million for 1999, compared to $33.7 million for 1998. This
decrease was primarily due to the elimination of the general partner
interest on July 1, 1999, as a result of the REIT conversion. See Note 1 of
the Notes to Financial Statements. Prior to July 1, 1999, net income was
allocated to the general partner based on 2% of the partnership's net income
(after adjusting for the incentive distribution), plus the incentive
distribution.
1998 Compared to 1997
- ---------------------
NORTHERN RESOURCES SEGMENT. Revenues decreased by $23.6 million, or
9%, to $250.3 million in 1998, compared to $273.9 million in 1997. This
decrease was primarily due to declining harvest levels in the Cascade
Region, lower Rocky Mountain and Cascade Regions domestic log prices, lower
export log prices and the redirection of export quality logs to the domestic
market, offset in part by $5.8 million of additional revenues as a result of
our acquisition in Maine. An approximate 15% planned decline in the sawlog
harvest level in the Cascade Region decreased revenue by approximately $13
million. Rocky Mountain Region domestic prices decreased by 4% and Cascade
Region decreased 13% 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 redirected to the domestic
market, primarily due to a decline in Japanese demand for logs.
Northern Resources Segment operating income was 29% as a percentage of
its revenues for 1998 and 36% for 1997. This decrease is primarily due to
the decline in domestic and export log prices and the redirection 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 our acquisition in Maine, offset
in part by a decrease in harvesting costs in the Cascade Region as a result
of reduced harvest levels.
SOUTHERN RESOURCES SEGMENT. Revenues decreased by $0.7 million, to
$118.4 million in 1998, compared to $119.1 million in 1997. This decrease
is primarily due to a 7% decline in Southern domestic log sales volume,
offset in part by slightly higher Southern pulp log prices and increased in-
woods chipping operations.
Southern Resources Segment operating income was 45% as a percentage of
its revenues for 1998 and 46% for 1997. Southern Resources Segment costs
and expenses remained flat year to year, with $64.8 million of costs and
expenses in each of 1998 and 1997.
LUMBER SEGMENT. Revenues decreased by $13.2 million, or 4%, to $281.6
million in 1998, compared to $294.8 million in 1997. Excluding revenues
associated with the May 1998 acquisition of the Meridian, Idaho
remanufacturing facility, 1998 revenues decreased by $29.4 million, or 10%,
to $265.4 million, compared to $294.8 in 1997. This decrease was primarily
due to lower Northwest and Southern lumber prices, offset in part by
increased Southern lumber sales volume. Northwest lumber prices decreased
12% and Southern lumber prices decreased 13% compared to 1997, primarily due
to the worldwide overproduction of lumber resulting from weak Asian demand.
Southern lumber sales volume increased by 4% compared to 1997, primarily due
to the processing of additional logs following the July 1998 Southern
plywood facility closure.
Lumber Segment operating income was 1% as a percentage of its revenues
for 1998 and 12% for 1997. This decrease is primarily due to the severe
decline in Northwest and Southern lumber prices. Lumber Segment costs and
expenses increased by $18.8 million, or 7%, to $279.0 million in 1998,
compared to $260.2 million in 1997. This increase was primarily due to $15.7
million of additional operating costs related to the acquisition of the
Meridian, Idaho remanufacturing facility and increased Southern lumber sales
volume.
PANEL SEGMENT. Revenues increased by $5.0 million, or 3%, to $154.6
million in 1998, compared to $149.6 million in 1997. This increase was
primarily due to increased 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% as a percentage of its revenues
for 1998 and 6% for 1997, 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.
LAND SALES SEGMENT. Revenues increased by $14.9 million, or 83%, to
$32.8 million in 1998, compared to $17.9 million in 1997. This increase was
primarily due to two large land sales consummated in the fourth quarter of
1998 for total proceeds of $17.7 million.
Land Sales Segment operating income was 81% as a percentage of its
revenues for 1998 and 78% for 1997. Land Sales Segment costs and expenses
increased by $2.3 million, or 59%, to $6.2 million in 1998, compared to $3.9
million in 1997, primarily due to additional sales.
Other Costs and Eliminations (which consists of corporate overhead,
intercompany log profit elimination and the change in the LIFO reserve)
decreased operating income by $27.5 million in 1998, compared to $35.8 million
in 1997. The change in Other Costs and Eliminations of $8.3 million was
primarily due to a decrease in the deferral of intercompany log profit
elimination, offset in part by increased corporate overhead. 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 was 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 profit on intercompany log sales is deferred until the lumber and plywood
manufacturing facilities convert existing log inventories into finished
products and sell them to third parties (at which time intercompany profit is
recognized). The decrease in operating income due to corporate overhead was
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 were costs associated with
the conversion of the partnership to a REIT. See Note 1 of the Notes to
Financial Statements. Reorganization Costs consist of fees for legal,
investment banking and tax consultants, as well as printing and other related
costs. Reorganization costs were expensed as incurred.
The income allocated to the 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 was allocated
to the general partner based on 2% of net income (adjusted for the incentive
distribution), plus the incentive distribution. The general partner's
incentive distribution was based on the number of outstanding units times a
percentage of the per unit distribution paid to limited partners, which
totaled $2.26 per unit for the year ended 1998, compared to $2.16 per unit
for the year ended 1997.
Financial Condition and Liquidity
- ---------------------------------
Net cash provided by operating activities totaled $138.0 million in
1999, $164.0 million in 1998 and $190.0 million in 1997. As a result of the
REIT conversion, net cash provided by operating activities for 1999 is not
comparable with net cash provided by operating activities in 1998 and 1997
because of the following:
- --Substantially all of the working capital changes after the REIT
conversion are reflected on the books of the unconsolidated subsidiaries.
However, working capital changes will indirectly impact the corporation
through advances to it from the unconsolidated subsidiaries.
- --The corporation's share of equity earnings from the unconsolidated
subsidiaries is not reflected in its net cash provided by operating
activity until the earnings are distributed as either a preferred or
common stock dividend. However, to the extent the unconsolidated
subsidiaries have excess undistributed cash, these funds are reflected on
the corporation's cash flow statement as interest-bearing advances from
unconsolidated subsidiaries.
Net cash provided by operating activites for 1999 was $26.0 million
below the prior year despite an increase in net income of $50.2 million. Net
cash provided by operating activites was lower primarily because the
unconsolidated subsidiares did not distribute to the REIT their excess cash
of approximately $33.5 million. Additionally, the higher net income for 1999
included significant non-cash items such as approximately $14.0 million
related to a one-time income tax benefit and approximately $12.2 million
related to the accounting method change. Furthermore, an unfavorable working
capital variance of approximately $21.9 million reduced net cash provided by
operating activites. The unfavorable working capital variance was primarily
due to the funding in 1999 of the fifth and final target of a five year long-
term incentive plan that vested on December 31, 1998, and to changes in
inventory levels.
Net cash provided by operating activities in 1998 was $26.0 million
below the net cash provided by operating activities in 1997. The decrease
was primarily due to lower net income of $36.3 million, offset in part by a
favorable working capital variance of $5.9 million.
We have an unsecured line of credit with a group of banks. Subject to
customary covenants, the line of credit allows for borrowings from time to
time of up to $225 million for general corporate purposes, including up to
$20 million of standby letters of credit. The line of credit matures on
December 13, 2001, and bears a floating rate of interest. As of December 31,
1999, $77.0 million was outstanding with $148.0 million remaining available.
As of January 4, 2000, we repaid the entire balance.
On November 12, 1998, we acquired 905,000 acres of forest lands in
central Maine from S.D. Warren Company for a total purchase price of $181.1
million. See Note 2 of the Notes to 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 ten 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 at the
time of issuance was $177.0 million, reflecting a note premium due to the
notes' above market interest rates. See Note 6 of the Notes to Financial
Statements.
In November of 1999 the corporation issued 5,750,000 shares of common
stock for proceeds of $141.7 million, net of issuance costs of $7.8 million.
The proceeds were used to repay borrowings on our line of credit, with the
excess invested in money market funds. The equity offering has improved our
debt-to-equity ratio and gives us greater financial flexibility in pursuing
our growth strategy.
On January 14, 2000, we sold approximately 90,000 acres of timberlands
and higher and better use lands near St. Maries, Idaho to Crown Pacific
Limited Partnership for approximately $73 million. Proceeds from the sale
will primarily be used to acquire additional timberlands or reduce our
outstanding indebtedness. This sale of non-strategic timberlands provides us
greater financial flexibility in pursuing our growth strategy.
Our borrowing agreements contain certain restrictive covenants,
including limitations on harvest levels, sales of assets, cash distributions
and the incurrence of indebtedness. In addition, the line of credit requires
the maintenance of an interest coverage ratio. We were in compliance with
these debt covenants as of December 31, 1999.
We will distribute $0.57 per share with respect to the fourth quarter
of 1999. The dividend will be paid on February 29, 2000, to shareholders of
record on February 16, 2000. Future dividends will be determined by our
board of directors, in its sole discretion, based on our results of
operations, cash flow and capital requirements, economic conditions, tax
considerations, debt covenant restrictions and other factors, including
harvest levels and future acquisitions. Our debt agreements restrict
distributions to stockholders based on available cash, which is generally our
net income after adjusting for non-cash charges (such as depreciation and
depletion), changes in various reserves and capital expenditures and
principal payments on indebtedness that are not financed.
Cash required to meet our quarterly cash dividends, capital
expenditures and principal and interest payments will be significant.
Management believes that cash on hand, cash flows from continuing operations
and borrowings under our line of credit will be sufficient to fund planned
capital expenditures, dividends, and interest and principal payments for the
next 12 months.
The corporation's capital expenditures for 1999, excluding the $3.3
million non-cash purchase of timberlands, totaled $25.6 million, compared to
$64.3 million for 1998 and $28.3 million for 1997. The amount for 1998 does
not include $181.1 million related to the acquisition of timberlands in
Maine. After the July 1, 1999 REIT conversion, capital expenditures for the
manufacturing operations are reflected on the books of the unconsolidated
subsidiaries.
Capital expenditures for 1999 include $18.6 million for our timberland
operations and $7.0 million for our manufacturing operations prior to the
REIT conversion. Capital expenditures for our timberlands are primarily for
logging roads, reforestation costs and other costs associated with the
planting and growing of trees. Capital expenditures for 1999 include $5.5
million of costs that were previously expensed under our prior accounting
policy for reforestation costs. See Note 1 of the Notes to Financial
Statements. Capital expenditures for our manufacturing facilities for the
six months ended June 30, 1999 include $5 million of costs associated with
the reconfiguration of our Joyce, Louisiana sawmill as well as additional
equipment and upgrades for our other manufacturing facilities. Capital
expenditures for our unconsolidated subsidiaries for the six months ended
December 31, 1999, totaled $4.4 million.
Planned capital expenditures for the corporation during 2000 are
expected to be $25 million and are primarily for logging roads, reforestation
and other costs associated with the planting and growing of trees.
Approximately $9 million of these capital expenditures would have been
expensed under our prior accounting policy for reforestation costs. Planned
capital expenditures for the unconsolidated subsidiaries during 2000 are
expected to be approximately $50 million. Year 2000 capital expenditures
include $40 million toward construction of a thin-board production line being
added to our existing medium density fiberboard facility in Columbia Falls,
Montana. Total construction costs for the new production line are expected
to be $69 million plus approximately $6 million in capitalized interest. It
is expected to be operational by the end of 2001. The remaining $10 million
of capital expenditures for the unconsolidated subsidiaries is for additional
equipment and upgrades for our other manufacturing facilities.
Other Information
- -----------------
In June 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133-an amendment of FASB Statement 133." SFAS 133 establishes
a new model for accounting for derivatives and hedging activities. The
implementation is required for financial statements issued for periods
beginning after June 15, 2000. Earlier application is permitted. Adoption
of this standard is not expected to have a material impact on the
corporation's financial position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------------------
Approximately $742 million of the long-term debt of the corporation and
the unconsolidated subsidiaries bears interest at fixed rates, and therefore
the fair value of these instruments is affected by changes in market interest
rates. Approximately $170.1 million of the long-term debt is recorded on the
books of the unconsolidated subsidiaries. The corporation's operating
partnership guarantees the long-term debt of the unconsolidated subsidiaries.
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, 1999, was LIBOR
plus .40% (8.3%), however, this rate could range from LIBOR plus 0.35% to
LIBOR plus 0.875% depending on our financial results.
December 31, 1999:
Long-term
debt,
including
current Fair
portion 2000 2001 2002 2003 2004 Thereafter Total Value
- ------------------------------------------------------------------------------
Fixed rate
Debt $27,392 $27,423 $27,458 $27,494 $27,533 $604,898 $742,198 $729,375
Avg.
interest
rate 8.9% 8.8% 8.7% 8.6% 8.5% 8.2%
Variable
rate debt(1) $77,000 $77,000 $77,000
(1) As of January 4, 2000, the $77 million of variable rate debt was repaid.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED / COMBINED STATEMENT OF INCOME
<TABLE>
Year Ended December 31,
------------------------------
1999 1998 1997
(REIT/MLP) (MLP) (MLP)
-------- --- ---
(In Thousands, Except Per Share / Unit)
<S> <C> <C> <C>
Revenues.........................$ 460,620 $ 699,370 $ 725,571
---------- ---------- ----------
Costs and Expenses:
Cost of Goods Sold............. 285,822 505,366 503,259
Selling, General and
Administrative............... 28,374 52,917 49,031
---------- ---------- ----------
Total Costs and Expenses..... 314,196 558,283 552,290
---------- ---------- ----------
Operating Income................. 146,424 141,087 173,281
Interest Expense................. (63,456) (60,622) (60,364)
Interest Income.................. 1,982 1,042 1,113
Gain (Loss) on Disposition of
Assets - Net................... 3,697 (805) (1,223)
Reorganization Costs............. (5,053) (4,763) -
Other (Expense) Income - Net..... (789) 14 (1,031)
---------- ---------- ----------
Income before Income Taxes,
Equity in Earnings of
Unconsolidated Subsidiaries
and Preferred Stock Dividends
and Cumulative Effect of
Accounting Change.............. 82,805 75,953 111,776
(Provision) Benefit for Income
Taxes.......................... 13,105 (517) (80)
Equity in Earnings of
Unconsolidated Subsidiaries
and Preferred Stock Dividends.. 17,522 - -
---------- ---------- ----------
Income before Cumulative Effect
of Accounting Change...........$ 113,432 $ 75,436 $ 111,696
Cumulative Effect of Accounting
Change......................... 12,169 - -
---------- ---------- ----------
Net Income.......................$ 125,601 $ 75,436 $ 111,696
General Partner Interest......... 17,162 33,713 31,918
---------- ---------- ----------
Net Income Allocable to Common
Stockholders/Unitholders.......$ 108,439 $ 41,723 $ 79,778
========== ========== ==========
Income Allocable to Common
Stockholders/Unitholders per
Share before Cumulative Effect
of Accounting Change...........$ 1.72 $ 0.90 $ 1.72
========== ========== ==========
Cumulative Effect of Accounting
Change per Share...............$ 0.22
==========
Net Income per Share/Unit........$ 1.94 $ 0.90 $ 1.72
========== ========== ==========
Dividends Declared Per
Share/Unit.....................$ 2.28 $ 2.28 $ 2.20
========== ========== ==========
Weighted average number of
Shares/Units outstanding-Basic
and Diluted.................... 55,819,390 46,323,300 46,323,300
========== ========== ==========
Pro forma amounts, assuming the
change in accounting was
applied retroactively:
Net Income.......................$ 113,432 $ 77,223 $ 112,937
========== ========== ==========
Net Income Allocable to Common
Stockholders/Unitholders.......$ 96,270 $ 43,510 $ 81,019
========== ========== ==========
Net Income per Share/Unit........$ 1.72 $ 0.94 $ 1.75
========== ========== ==========
See accompanying Notes to Consolidated/Combined Financial Statements
</TABLE>
PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED/COMBINED BALANCE SHEET
<TABLE>
December 31, December 31,
1999 1998
(REIT) (MLP)
---- ---
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents..................$ 115,389 $ 113,793
Accounts Receivable........................ 828 32,007
Inventories................................ - 55,963
Timber Contract Deposits................... - 2,647
Investments in Grantor Trusts.............. 13,721 -
Other Current Assets....................... 3,378 6,053
---------- ----------
133,316 210,463
Timber and Timberlands - Net................. 1,010,524 1,030,484
Property, Plant and Equipment - Net.......... 1,203 186,179
Investment in Unconsolidated Subsidiaries.... 100,202 -
Other Assets................................. 5,511 11,117
---------- ----------
Total Assets...............................$ 1,250,756 $ 1,438,243
========== ==========
LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt..........$ 6,127 $ 18,400
Accounts Payable........................... 1,674 15,320
Related Party Payables..................... 26,522 -
Interest Payable........................... 9,623 10,964
Wages Payable.............................. 949 14,795
Taxes Payable.............................. 2,034 4,081
Workers' Compensation Liabilities.......... 26 1,550
Liabilities Associated with Grantor Trust.. 13,411 -
Deferred Income............................ 8,556 -
Other Current Liabilities.................. 5,282 15,766
---------- ----------
74,204 80,876
Long-Term Debt............................... 565,950 742,608
Line of Credit............................... 77,000 200,000
Workers' Compensation Liabilities............ 225 7,495
Other Liabilities............................ 330 1,849
---------- ----------
Total Liabilities.......................... 717,709 1,032,828
---------- ----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY/PARTNERS' CAPITAL
Preferred Stock, $0.01 par value, authorized
shares - 75 million, outstanding - none.... - -
Common Stock, $0.01 par value, authorized
shares - 300 million, outstanding
- 68,572,009............................... 686 -
Special Voting Stock, $0.01 par value,
convertible to common stock, authorized
and outstanding - 634,566.................. 6 -
Additional Paid-In Capital................... 522,244 -
Retained Earnings............................ 9,586 -
Other Equity ................................ 525 -
Limited Partners'Units....................... - 406,857
General Partner.............................. - (1,442)
---------- ----------
Total Stockholders' Equity / Partners'
Capital.................................. 533,047 405,415
---------- ----------
Total Liabilities and Stockholders' /
Partners' Capital........................$ 1,250,756 $ 1,438,243
========== ==========
</TABLE>
See accompanying Notes to Consolidated / Combined Financial Statements
PLUM CREEK TIMBER COMPANY, INC.
CONSOLIDATED / COMBINED STATEMENT OF CASH FLOWS
<TABLE>
Year Ended December 31,
1999 1998 1997
(REIT/MLP) (MLP) (MLP)
-------- --- ---
(In Thousands)
Cash Flows From Operating
Activities:
<S> <C> <C> <C>
Net Income.......................$ 125,601 $ 75,436 $ 111,696
Adjustments to Reconcile Net
Income to Net Cash Provided
By Operating Activities:
Depreciation, Depletion and
Amortization................. 59,689 69,287 70,243
Deferred Income Taxes.......... (14,030) - -
Cummulative Effect of
Accounting Change............ (12,169) - -
(Gain) Loss on Asset
Dispositions - Net........... (3,697) 805 1,223
Equity in Earnings of
Unconsolidated Subsidiaries
and Preferred Stock Dividends (17,522) - -
Preferred Stock Dividends...... 7,838 - -
Working Capital Changes, net
of effect of business
acquisition and contribution
to unconsolidated subsidiaries:
Accounts Receivable.......... (12,369) (3,309) (5,001)
Inventories.................. 9,987 6,974 (5,072)
Timber Contract Deposits and
Other Current Assets....... (4,675) 551 11,793
Accounts Payable............. (3,427) 2,330 (453)
Deferred Income.............. 8,556 - -
Wages Payable................ (1,651) (2,361) 3,969
Other Accrued Liabilities.... (7,178) 6,915 (21)
Other.......................... 3,041 7,376 1,599
---------- ---------- ----------
Net Cash Provided By Operating
Activities..................... 137,994 164,004 189,976
---------- ---------- ----------
Cash Flows From Investing
Activities:
Business Acquisitions.......... - (12,353) -
Additions to Properties........ (25,611) (54,927) (28,348)
Proceeds from Asset
Dispositions................. 4,460 1,457 917
Investment in Unconsolidated
Subsidiaries................. (24,821) - -
Advances/Distributions from
Unconsolidated Subsidiaries.. 58,365 - -
Other.......................... (1,371) (11) (649)
---------- ---------- ----------
Net Cash Provided By (Used In)
Investing Activities........... 11,022 (65,834) (28,080)
---------- ---------- ----------
Cash Flows From Financing Activities:
Cash Distributions............. (146,534) (140,358) (133,007)
Retirement of Long-Term Debt... (18,810) (18,400) (17,400)
Borrowings on Line of Credit... 559,400 695,000 814,950
Repayments on Line of Credit... (682,400) (656,000) (814,950)
Issuance of Common Stock-net... 141,707 - -
Other.......................... (783) - -
---------- ---------- ----------
Net Cash Used In Financing
Activities..................... (147,420) (119,758) (150,407)
---------- ---------- ----------
Increase (Decrease) In Cash
and Cash Equivalents........... 1,596 (21,588) 11,489
Cash and Cash Equivalents:
Beginning of Period............ 113,793 135,381 123,892
---------- ---------- ----------
End of Period..................$ 115,389 $ 113,793 $ 135,381
========== ========== ==========
Supplementary Cash Flow Information
- -----------------------------------
Cash paid during the year for:
Interest-Net...................$ 63,082 $ 58,785 $ 59,650
Income Taxes-Net...............$ 270 $ 362 $ 737
Noncash activities:
Assets contributed to
unconsolidated subsidiaries..$ 291,513
Liabilities contributed to
unconsolidated subsidiaries..$ 221,755
Assets received related to
the PCMC merger..............$ 13,726
Liabilities received related
to the PCMC merger...........$ 12,134
Purchase accounting related
basis step-up of assets......$ 3,939
Exchanges of timber and
timberlands..................$ 3,294
Business acquisition........... $ 177,060
Issuance of unsecured debt for
business acquisition......... $ 177,060
</TABLE>
See accompanying Notes to Consolidated / Combined Financial Statements
PLUM CREEK TIMBER COMPANY, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Note 1. Accounting Policies
- ----------------------------
Basis of Presentation. On July 1, 1999, Plum Creek Timber Company,
L.P. converted from a master limited partnership to a corporation. Plum
Creek Timber Company, Inc., the new Delaware corporation and successor
registrant, will elect to be treated for Federal income tax purposes as a
real estate investment trust or REIT. As part of the REIT conversion, Plum
Creek Timber Company, L.P., ceased to exist.
Prior to July 1, 1999, Plum Creek Timber Company, L.P., Plum Creek
Manufacturing, L.P., and Plum Creek Marketing, Inc., owned, managed and
operated approximately 3.2 million acres of timberland and eleven wood
products conversion facilities in the Northwest, Southern and Northeastern
United States. Plum Creek Timber Company, L.P. owned 98% of Plum Creek
Manufacturing, L.P. and 96% of Plum Creek Marketing, Inc. Plum Creek
Management Company, L.P., the general partner, managed all of the businesses
and owned the remaining general partner interest of the manufacturing and 4%
of marketing. As a part of the reorganization, Plum Creek Management Company,
L.P. was merged into the corporation.
The REIT conversion was accounted for as a reorganization of affiliated
entities. Reorganization costs have been expensed in the period incurred and
are reflected in a separate line item in the financial statements. In order
to qualify as a REIT, substantially all of the assets and liabilities of the
manufacturing operations, harvesting operations and some higher and better
use lands (for use other than for forest management purposes) were
transferred to several unconsolidated subsidiaries at their historical costs.
The corporation's balance sheet does not separately reflect the assets and
liabilities associated with the manufacturing and harvesting operations and
some higher and better use lands. Instead, the book value of these assets,
net of related liabilities, is reflected in the corporation's investment in
nonvoting common stock and preferred stock of the unconsolidated
subsidiaries.
Following the REIT conversion, the corporation owns and manages
approximately 3.2 million acres of timberlands in the Northwest, Southern and
Northeastern United States, and the unconsolidated subsidiaries own and
operate eleven wood product conversion facilities in the Northwest and
Southern United States, as well as approximately 21,500 acres of higher and
better use lands.
As a part of the REIT conversion, the partnership's outstanding units
were converted on a one-for-one basis into 46,323,300 shares of common stock of
the corporation. Additionally, the equity interests of the partnership's
general partner were converted into 16,498,709 shares of common stock and
634,566 shares of special voting stock. The special voting stock is convertible
into common stock at the option of the holder on a one-for-one basis and is
entitled to receive the same dividends as the common stock. The special voting
stock is considered outstanding and is used in computing basic and diluted
earnings per share.
The corporation is entitled to approximately 99% of the economic value of
the unconsolidated subsidiaries through a combination of preferred stock and
nonvoting common stock. The remaining 1% of the economic value and 100% of the
voting control of the manufacturing and harvesting subsidiaries are owned by
four individuals who are also officers of the corporation. See Note 5 of the
Notes to Financial Statements for summarized combined financial information
of the unconsolidated subsidiaries.
The financial statements of the corporation reflect the deconsolidation
of the manufacturing and harvesting operations along with some higher and
better use land sales which occurred on July 1, 1999, as part of the REIT
conversion. The statements of income and cash flows for the year ended
December 31, 1999 were prepared based on the partnership's basis of
accounting for the first two quarters of 1999 and the corporation's basis of
accounting for the third and fourth quarters of 1999.
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,
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. The
consolidated financial statements of the corporation include the accounts of
Plum Creek Timber Company, Inc. and its subsidiaries, including its operating
partnership. Prior to the REIT conversion, the combined financial statements
included all the accounts of the partnership, Plum Creek Manufacturing, L.P.,
and Plum Creek Marketing, Inc. All significant intercompany transactions
have been eliminated in consolidation/combination. All transactions are
denominated in United States dollars.
EARNINGS PER SHARE. The corporation computes its earnings per share by
dividing its net income by the weighted-average number of shares outstanding.
For the year ended 1999, earnings per share is computed by dividing net
income allocable to common stockholders by the weighted-average number of
shares outstanding, which include the 17,133,275 shares issued to the
partnership's general partner in the REIT conversion and the 5,750,000
million shares issued in connection with the October 28, 1999, equity
offering. The partnership historically computed net income per unit by
dividing the partnership's net income available to unitholders by the
weighted-average number of limited partner units outstanding. Net income
available to unitholders was equal to the partnership's net income less the
income allocated to the general partner, which consisted of an incentive
distribution allocation and 2% of earnings. Due to the incentive
distribution, for any given level of net income, earnings per share reported
by the corporation may be different than the per unit amounts historically
reported by the partnership. The weighted-average number of shares (units)
outstanding was 55,819,390 for the year ended December 31, 1999, and
46,323,300 for the years ended December 31, 1998 and 1997.
REVENUE RECOGNITION. The corporation owns and manages timberlands and
sells timber pursuant to timber cutting contracts. In order to meet REIT
income qualification tests under the Internal Revenue Code, the corporation
has entered into timber cutting contracts with the unconsolidated
subsidiaries, and, unlike the partnership, the corporation does not recognize
revenue from the harvesting and delivery of logs. Therefore, the
corporation's revenues consist primarily of proceeds from timber cutting
contracts, some land sales and other miscellaneous real estate related
income. The corporation's revenues and associated expenses related to the
timber cutting contracts are deferred until the timber (in the form of either
whole logs, lumber, plywood or other wood products) is sold outside the
unconsolidated subsidiaries. The corporation's sales of timberlands which
have been identified as higher and better use lands are included in revenues
when the sale is consummated. In addition, the consolidated financial
statements of the corporation do not include the revenues associated with the
manufacturing operations, primarily lumber, plywood and medium density
fiberboard sales, and some higher and better use land sales.
Revenues prior to the REIT conversion came from the sale of logs, wood
products and by-products, primarily wood chips, and were generally recorded
as revenue at the time of shipment. Sales of timberlands prior to the REIT
conversion identified as higher and better use lands were included in the
revenues of the partnership when the sale was consummated.
COSTS AND EXPENSES. After the REIT conversion, the corporation's cost
of goods sold and selling, general and administrative expenses do not include
the expenses associated with the manufacturing operations, harvesting
activities and some higher and better use land sales.
INTEREST EXPENSE. The corporation's interest expense does not include
the interest expense associated with the approximately $170.1 million of debt
transferred to the unconsolidated subsidiaries as a result of the REIT
conversion.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES AND PREFERRED STOCK
DIVIDENDS. Subsequent to the REIT conversion, approximately 99% of the net
earnings or loss from the manufacturing operations, harvesting activities and
some higher and better use land sales are reflected in the corporation's net
income through a single line item titled "Equity in Earnings (Loss) of
Unconsolidated Subsidiaries and Preferred Stock Dividends." See Note 5 of
the Notes to Financial Statements.
CASH AND CASH EQUIVALENTS. All highly liquid investments purchased with
an original maturity of three months or less are considered to be cash
equivalents. Substantially all of the cash and cash equivalents are
deposited with one financial institution.
ACCOUNTS RECEIVABLE. Accounts receivable at December 31, 1998, are
presented net of an allowance of $1.3 million for doubtful accounts. In
connection with the REIT conversion, substantially all of the partnership's
accounts receivable and related allowance for doubtful accounts were
transferred to the unconsolidated subsidiaries.
GRANTOR TRUSTS. The former general partner of the partnership had
established a grantor trust for deferred compensation. In connection with
the REIT conversion, the assets and liabilities of the grantor trust were
recorded on the books of the corporation. Assets which include money market
and mutual fund investments are classified as "trading securities" and are
carried at market value. Realized gains and losses and changes in unrealized
gains and losses and a corresponding amount of compensation expense are
recorded in the consolidated/combined statement of income.
INVENTORIES. Prior to the REIT conversion, logs, work-in-process and
finished goods inventories of the partnership were stated at the lower of
average cost or market on the last-in, first-out method. Cost for
manufactured inventories included raw materials, labor, supplies, energy,
depreciation and production overhead. Cost of log inventories included timber
depletion, stumpage, associated logging and harvesting costs, road costs and
production overhead. The average cost method was used to value the supplies
inventories. Following the REIT conversion, the unconsolidated subsidiaries
have maintained the same method of accounting for inventories.
TIMBER AND TIMBERLANDS. In the fourth quarter of 1999, the corporation
changed its accounting policy to capitalize certain timber reforestation
costs and other costs associated with the planting and growing of timber that
were previously expensed in order to achieve a better matching of these costs
with the revenues realized from the eventual sale of timber. The corporation
believes that this change is more consistent with industry practice and is
preferable under the circumstances in which the corporation now manages its
timberlands. Costs related to pre-merchantable and merchantable timber that
are now capitalized include site preparation, planting, fertilization,
herbicide application and pre-commercial thinning. These costs are charged
against revenue at the time the timber is sold.
The new capitalization policy was applied retroactively as of January
1, 1999, and resulted in a restatement of first quarter 1999 results for the
cumulative effect of the accounting change from June 1989 through December
31, 1998. This restatement increased 1999 net income by $12.2 million or
$0.22 per share. Implementation of the new accounting method increased
1999's operating income by approximately $2.9 million or $0.05 per share.
Pro forma amounts, assuming the change in accounting method was applied
retroactively back to 1989, are shown on the face of the
consolidated/combined statement of income.
Timber and timberlands, including logging roads, are stated at cost
less accumulated depletion for timber previously sold and accumulated road
amortization. The corporation capitalizes timber and timberland purchases,
and reforestation costs and other costs associated with the planting and
growing of timber, such as site preparation, growing or purchase of
seedlings, planting, fertilization, herbicide application and the thinning of
tree stands to improve growth. Timber carrying costs, such as real estate
taxes, insect control, wildlife control and forest management personnel
salaries and fringe benefits, are expensed as incurred.
Costs attributable to timber harvested, or depletion, are charged
against income as trees are cut. Depletion rates for our Northwest
timberlands are determined annually based on the relationship of remaining
capitalized costs to estimated recoverable volume. Depletion rates for our
Southern and Northeastern timberlands are determined annually based on the
relationship between net carrying value of the timber plus capitalized costs
expected to be incurred over the growth cycle and total timber volume
estimated to be available over the growth cycle. Timber inventory is
estimated using statistical information and data obtained from physical
measurement, site maps, photo-types and other information gathering
techniques. The cost of logging roads is amortized over their 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
calculated on a straight-line basis. Buildings and improvements are
depreciated over 20 to 31-1/2 years and equipment is depreciated over 3 to 15
years. Assets under capitalized leases and leasehold improvements are
depreciated over the lease term. 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. Manufacturing machinery
and equipment prior to the REIT conversion was depreciated on a unit-of-
production basis, which approximated a straight-line basis. The
unconsolidated subsidiaries have maintained a similar policy.
STOCK-BASED COMPENSATION. Stock-based compensation plans are
accounted for under the provisions of Accounting Principles Board Opinion No.
25. The disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" have been
adopted. See Note 11 of the Notes to Financial Statements.
INCOME TAXES. The Corporation will elect to be taxed as a REIT under
sections 856-860 of the United States Internal Revenue Code. Under these
sections of the Internal Revenue Code, the corporation is permitted to deduct
dividends paid to stockholders in computing its taxable income. The
corporation made distributions in excess of its taxable income and,
therefore, no federal income tax provision has been reflected in the
accompanying financial statements. State income taxes are not significant.
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," a one-time tax benefit of approximately $14.0
million was recorded by the corporation for the net temporary differences
associated with the assets and liabilities transferred to the unconsolidated
subsidiaries in the REIT conversion.
Prior to the REIT conversion, the partnership's taxable subsidiary
recorded a tax provision of $985,000 for the six months ended June 30, 1999,
$517,000 for 1998 and $80,000 for 1997. The partnership was not subject to
federal income tax, and its income or loss was included in the tax returns of
individual unitholders. The partnership filed composite returns in the
states in which it did business, paying taxes on behalf of nonresident
unitholders. State taxes paid on behalf of nonresident unitholders were
included in other expense.
SEGMENT REPORTING. The corporation has the same five reportable
business segments as did the partnership. The segment disclosure has been
prepared on a basis consistent with that of the partnership. See Note 14 of
the Notes to Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133-an amendment of FASB Statement 133."
SFAS 133 establishes a new model for accounting for derivatives and hedging
activities. The implementation is required for financial statements issued
for periods beginning after June 15, 2000; earlier application is permitted.
Adoption of this standard is not expected to have a material impact on the
corporation's financial position, results of operations or cash flows.
Note 2. Acquisition
- --------------------
On November 12, 1998, the partnership acquired 905,000 acres of
timberlands in central Maine from S.D. Warren Company for a purchase price of
$180.0 million, plus $300,000 for working capital. As part of the
acquisition, we entered into a long-term 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 consolidated/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 6 of the Notes to 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 partnership on a pro
forma basis, as though the acquisition in Maine 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 acquisition in Maine
occurred as of those dates, nor of results which may occur in the future.
Note 3. Inventories
- --------------------
All inventories were contributed to the unconsolidated subsidiaries as
part of the REIT conversion. After July 1, 1999, the corporation does not
have any raw material or manufacturing related inventories.
Inventories at December 31, 1998, accounted for using the last-in,
first-out cost method, consisted of the following (in thousands):
Raw materials (logs) $ 25,129
Work-in-process 6,554
Finished goods 15,831
Export logs 53
------
47,567
Supplies 8,396
------
Total $ 55,963
======
Excluding supplies, which are valued at average cost, the cost of
inventories valued at the lower of average cost or market (which approximates
current cost) at December 31, 1998 was $46.9 million.
Note 4. Timber and Timberlands and Property, Plant and Equipment
- -----------------------------------------------------------------
Timber and timberlands consisted of the following at December 31 (in
thousands):
1999 1998
---- ----
Timber and logging roads-net $ 887,417 $ 907,830
Timberlands 123,107 122,654
--------- ---------
Timber and Timberlands-net $1,010,524 $1,030,484
========= =========
Substantially all of the property, plant and equipment was
contributed to the unconsolidated subsidiaries as part of the REIT
conversion. Property, plant and equipment consisted of the following at
December 31 (in thousands):
1999 1998
---- ----
Land, buildings and improvements $ 1,184 $ 66,714
Machinery and equipment 699 275,149
------- -------
1,883 341,863
Accumulated depreciation (680) (155,684)
------- -------
Property, Plant and Equipment-net $ 1,203 $ 186,179
======= =======
Note 5. Investment in Equity of Unconsolidated Subsidiaries and
- ----------------------------------------------------------------
Preferred Stock
- ---------------
In connection with the REIT conversion, substantially all of the
partnership's assets and associated liabilities related to the manufacturing
operations and harvesting activities and some higher and better use lands
were transferred to several unconsolidated corporate taxable subsidiaries in
exchange for preferred stock and nonvoting common stock. The corporation is
entitled to approximately 99% of the economic value of the unconsolidated
subsidiaries through its preferred and nonvoting common stock ownership. The
corporation accounts for its preferred stock investment in the unconsolidated
subsidiaries using the cost method of accounting and uses the equity method
of accounting for its nonvoting common stock investment. The equity method
of accounting is used for the nonvoting common stock investment because the
corporation is entitled to substantially all of the economic benefits of the
unconsolidated subsidiaries.
The $34.9 million difference between the corporation's carrying amount
in its nonvoting common stock of the unconsolidated subsidiaries and the
corporation's share of the underlying equity in the net assets of the
unconsolidated subsidiaries at July 1, 1999, has been assigned to a deferred
tax asset. This difference arose as a result of some timber and timberlands
being sold to the unconsolidated subsidiaries just prior to the REIT
conversion. For financial reporting purposes, this sale was recorded as a
capital contribution. The difference is being amortized as the related
timber is harvested or the timberlands are sold. The corporation's equity
earnings and preferred stock dividends from the unconsolidated subsidiaries
for the six months ended December 31, 1999, is comprised of the following (in
thousands):
Share of Equity Earnings $ 4,874
Preferred Stock Dividends 7,838
Amortization of difference between carrying
amount and share of underlying equity 4,810
------
Total Equity Earnings and Preferred Stock Dividends $ 17,522
======
Summarized combined financial data for the unconsolidated subsidiaries'
operations as of December 31, 1999 are as follows (in thousands):
Current Assets $ 146,210
Noncurrent Assets 222,259
Current Liabilities 76,458
Noncurrent Liabilities 157,890
Current and noncurrent liabilities include $170.1 million of
indebtedness. This indebtedness consists of the 11.125% First Mortgage Notes
due 2007 (collateralized by the manufacturing facilities), and $68.2 million
face value of the 11.125% Senior Notes due 2007. The First Mortgage Notes
and the Senior Notes are guaranteed by the corporation's operating
partnership. Annual principal payments in the aggregate for the above notes
are approximately $21.3 million for each of the next eight years.
Six months ended
December 31, 1999
-----------------
Revenues $ 384,667
Gross Profit 45,490
Operating Income 29,315
Interest Expense 9,498
Income Tax Expense 6,387
Net Income 12,915
Gross profit includes depreciation and amortization expense of $15,271.
The Income Tax Expense includes a benefit of $1,334 related to interest
expense that is allowed for tax purposes but eliminated for financial
reporting purposes. The tax deduction for interest expense is from an
installment note exchanged for certain timberlands as a part of the REIT
conversion. The related interest expense of $3,335 and the installment note
are eliminated for accounting purposes. For the six months ended December
31, 1999, the unconsolidated subsidiaries had capital expenditures of $4.4
million.
In accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock," the revenues and associated expenses of the
corporation related to the sale of timber to the unconsolidated subsidiaries
is deferred until the logs or finished goods are sold outside the group of
unconsolidated subsidiaries. Therefore, all sales by the corporation to the
unconsolidated subsidiaries will also be included in the revenue of the
unconsolidated subsidiaries in the period in which the timber (in the form of
either whole logs, lumber, plywood or other wood products) is sold outside the
unconsolidated subsidiaries. Sales and investments between the unconsolidated
subsidiaries are eliminated in preparing the summarized combined financial
information of the unconsolidated subsidiaries. Revenues reported by the
corporation that were also included in the revenues of the unconsolidated
subsidiaries amounted to $86.4 million for the six-month period ended December
31, 1999.
Note 6. Borrowings
- -------------------
Long-term debt and the line of credit consisted of the following at
December 31 (in thousands):
1999 1998
---- ----
Senior Notes due 2007 $ 45,480 $ 122,000
First Mortgage Notes due 2007 112,000
Senior Notes due 2009 150,000 150,000
Senior Notes due 2011 176,597 177,008
Senior Notes due 2016 200,000 200,000
Line of Credit 77,000 200,000
------- -------
Total Long-Term Debt 649,077 961,008
Less: Current Portion (6,127) (18,400)
------- -------
Long-Term Portion $ 642,950 $ 942,608
======= =======
On July 1, 1999, the unconsolidated subsidiaries assumed $170.1 million
of the indebtedness of the corporation in connection with the REIT
conversion. The $170.1 million consists of the First Mortgage Notes, which
are collateralized by some of the manufacturing facilities, and $68.2 million
face value of the Senior Notes due 2007.
On November 12, 1998, the partnership issued $171.4 million of senior
notes to S.D. Warren Company to finance the acquisition in Maine. The
partnership 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
is being 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 corporation has an unsecured revolving line of credit that matures
on December 13, 2001 and bears interest at a floating rate (8.3% as of
December 31, 1999 and 7.0% as of December 31, 1998). The weighted average
interest rate for borrowings under the line of credit was 5.8% in 1999 and
5.9% in 1998. Borrowings on the line of credit fluctuate daily based on cash
needs. Subject to customary covenants, the line of credit allows for
borrowings from time to time up to $225 million, including up to $20 million
of standby letters of credit. As of December 31, 1999, $148 million remained
available for borrowing under the line of credit and there were no
outstanding standby letters of credit. On January 4, 2000, $77 million of the
borrowings under the line of credit were repaid.
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
United States Treasury securities having similar average maturities as these
notes. The premium that would have been due upon early retirement
approximated $39 million at December 31, 1999, and $146 million at December
31, 1998. The premium that would have been due upon early retirement of the
Senior and the First Mortgage Notes assumed by the unconsolidated
subsidiaries approximated $27 million at December 31, 1999. The four series
of senior notes are unsecured.
The aggregate maturities on the Senior Notes and the line of credit are
as follows (in thousands):
Note Line
Agreements Of Credit
---------- ---------
2000 $ 6,127
2001 6,158 $ 77,000
2002 6,193
2003 6,229
2004 6,268
Thereafter 541,102
All principal and interest payments due under the note agreements are
nonrecourse to the former 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 corporation was in compliance with such
covenants at December 31, 1999 and 1998.
Note 7. 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 corporation's debt, based on current interest rates for
similar obligations with like maturities, was approximately $622 million at
December 31, 1999 and $1.02 billion at December 31, 1998. The carrying
amount was $649 million at December 31, 1999, and $961 million as of December
31, 1998. In connection with the REIT conversion, the unconsolidated
subsidiaries assumed debt with a carrying value of $170.1 million. A net
unrealized holding loss of $35,000 was recorded in the consolidated/combined
statement of income relating to the mutual fund investments held in a grantor
trust.
Note 8. Capital
- ----------------
In connection with the REIT conversion on July 1, 1999, the partnership
converted to a corporate entity. The changes in partners' capital prior to
the REIT conversion were as follows (in thousands):
Limited General
Partners Partner Total
-------- ------- -----
January 1, 1997 $ 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
Net Income 23,235 17,162 40,397
Cash Distributions (52,808) (18,108) (70,916)
Other - 60 60
------- ------- -------
June 30, 1999 $ 377,284 $ (2,328) $ 374,956
======= ======= =======
The total number of units outstanding at June 30, 1999, and December
31, 1998, was 46,323,300.
In accordance with the partnership agreement, the general partner was
authorized to make quarterly cash distributions. The general partner
declared to be paid to the unitholders $1.14 per unit during the six-month
period ended June 30, 1999 and $2.28 per unit for 1998 and $2.20 per unit for
1997. For quarterly cash distributions exceeding $0.21-2/3 per unit, the
general partner was provided with an incentive distribution. The incentive
distribution no longer exists after the REIT conversion. See Note 1 of the
Notes to Financial Statements.
A reconciliation of the ending partners' capital of the partnership at
June 30, 1999 and the opening stockholders' equity of the corporation at July
1, 1999 is as follows (in thousands):
Partners' Capital at June 30, 1999 $ 374,956
Purchase of minority interest 4,464
Merger of Plum Creek Management Company, L.P. 1,683
Unit-Award Plans 1,046
-------
Stockholders' Equity at July 1, 1999 $ 382,149
=======
The changes in stockholders' equity were as follows (in thousands):
Special Deferred
Common Stock Voting Stock Paid-in Incentive Retained
Stock Amount Stock Amount Capital Plans Earnings Total
---------------------------------------------------------------
Balances At
July 1, 1999 62,822 $ 628 635 $ 6 $380,595 $ 920 $382,149
Net income
for the six
months ended
December 31,
1999,
including
cumulative
effect of
accounting
change $ 85,204 85,204
Dividend Paid (75,618) (75,618)
Issuance of
Common Stock 5,750 58 141,649 141,707
Purchase of
Common
Stock (783) (783)
Deferred
Incentive
Plans
Liability 388 388
----------------------------------------------------------------
Balances At
December
31, 1999 68,572 $ 686 635 $ 6 $522,244 $ 525 $ 9,586 $533,047
================================================================
The corporation has authorized 525,634,567 shares of capital stock,
consisting of:
- --300,000,000 shares of common stock, par value $.01 per share;
- --634,566 shares of special voting stock, par value $.01 per share;
- --150,000,001 shares of excess stock, par value $.01 per share; and
- --75,000,000 shares of preferred stock, par value $.01 per share.
In connection with the REIT conversion, 46,323,300 limited partnership
units were converted into common stock of the corporation on a one-for-one
basis. Also in connection with the REIT conversion, the general partnership
interest was converted into 16,498,709 shares of common stock and 634,566
shares of special voting stock. The special voting stock is convertible into
common stock at the option of the holder on a one-for-one basis and has the
same dividend and liquidation rights as the common stock. The special voting
stock entitles the holders to vote as a separate class on matters submitted
for stockholder approval such as mergers, dissolution and amendments to the
certificate of incorporation.
Also in connection with the REIT conversion, the corporation acquired
the general partner's 2% interest in Plum Creek Manufacturing, L.P., and 4%
interest in Plum Creek Marketing, Inc., and Plum Creek Management Company,
L.P. merged with the corporation. See Note 9 of the Notes to Financial
Statements for a description of the above transactions. Furthermore, equity
was adjusted by $1,046 for the difference between the total expense
recognized in connection with the partnership's 1994 long-term unit-award
incentive plans and the cost of purchasing units to fund these plans. See
Note 11 of the Notes to Financial Statements for a summary of the
corporation's long-term incentive plans.
At December 31, 1999, there were 69,206,575 shares outstanding. For
the six-month period ending December 31, 1999, the corporation made
distributions of $1.14 per share, of which $0.59 was a 20% long-term capital
gain dividend and $0.55 represented a non-taxable return of capital. Total
distributions declared by the corporation and the partnership for the year
ended December 31, 1999 were $2.28 per share/unit. On a tax basis we have
distributed all of our ordinary and capital gain income.
In November of 1999 the corporation issued 5,750,000 shares of common
stock for proceeds of $141.7 million, net of issuance costs of $7.8 million.
The proceeds were used to repay borrowings on our revolving line of credit.
At December 31, 1999, there were 387,745 shares of common stock held in
a trust to fund deferred incentive plan awards. At December 31, 1999, these
shares were recorded at $10.2 million and the related liability was $10.7
million. The common stock and liability are shown as a net amount in the
equity section of the consolidated/combined balance sheet. See Notes 11 and
12 of the Notes to Financial Statements.
Note 9. Non-Cash Transactions
- -------------------------------
During 1999 the corporation entered into the following non-cash
transactions:
1. Unconsolidated Subsidiaries - In connection with the REIT conversion,
substantially all of the partnership's assets and associated
liabilities related to manufacturing operations, harvesting activities
and some higher and better use lands were transferred to
unconsolidated corporate subsidiaries. Excluding cash, the book
value of assets transferred to the unconsolidated subsidiaries was
$291.5 million. The book value of liabilities transferred to the
unconsolidated subsidiaries was $221.8 million.
2. Merger - In connection with the REIT conversion, Plum Creek
Management Company L.P., the general partner of the partnership, was
merged with the corporation. As a result of the merger, the
corporation received assets of $13.8 million and liabilities of $12.1
million. The assets and liabilities are primarily associated with
deferred compensation and long-term incentive compensation awards.
The assets are primarily held in a grantor trust and consist of
mutual and money market funds. The investments are recorded at fair
value. Additionally, included in a grantor trust are 387,745 shares
of common stock of the corporation to fund several incentive
compensation plans. The shares and a corresponding amount of deferred
incentive compensation are recorded at cost in Stockholders' Equity.
3. Purchase of Minority Interest - In connection with the REIT
conversion, the corporation acquired the general partner's 2%
interest in Plum Creek Manufacturing, L.P., and 4% interest in Plum
Creek Marketing, Inc., both subsidiaries of the former partnership.
The corporation issued common stock valued at $4.5 million in
exchange for these interests. In accordance with APB No. 16,
"Business Combinations," these acquisitions were accounted for as a
purchase, and as a result, the corporation's investment in
unconsolidated subsidiaries was increased by $3.9 million.
4. Land Exchanges - In our Cascade Region we received 11,586 acres of
timberlands and $4.3 million of cash in exchange for 31,713 acres of
timberlands. Except for the cash proceeds of $4.3 million, which
resulted in a non-operating gain of approximately $3.6 million, the
exchange was accounted for as a nonmonetary transaction. In our
Northeastern Region we received some timberlands in exchange for
higher and better use lands with an estimated value of $3.3 million.
The gain associated with this exchange was included in operating
income.
Note 10. Employee Pension and Retirement Plans
- -----------------------------------------------
PENSION PLAN. The corporation provides multi-employer defined benefit
pension plans that cover substantially all employees of the corporation and
the unconsolidated subsidiaries. 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 obligation 1999 1998
---------------------------- ---- ----
Benefit obligation at beginning of year $ 66,723 $ 56,286
Service cost 3,913 3,668
Interest cost 4,314 4,046
Actuarial (gain) loss (10,621) 5,640
Benefits paid (3,808) (2,917)
------- -------
Benefit obligation at end of year $ 60,521 $ 66,723
======= =======
Change in plan assets
---------------------
Fair value of plan assets at beginning of year 64,059 $ 57,635
Actual return on plan assets 12,484 9,341
Benefits paid (3,808) (2,917)
Employer contributions 0 0
------- -------
Fair value of plan assets at end of year $ 72,735 $ 64,059
======= =======
Funded status $ 12,214 $ (2,664)
Unrecognized net actuarial (gain) loss (16,365) 1,287
Unrecognized prior service cost 513 668
------- -------
Prepaid (accrued) benefit cost $ (3,638) $ (709)
======= =======
The components of pension cost were as follows for the years ended
December 31 (in thousands):
Components of net periodic benefit cost 1999 1998 1997
--------------------------------------- ---- ---- ----
Service cost $ 3,913 $ 3,668 $ 2,941
Interest cost 4,314 4,046 3,522
Expected return on plan assets (5,364) (4,342) (3,817)
Amortization of prior service cost 106 108 108
Recognized actuarial (gain) loss (41) 208 169
------- ------- -------
Net periodic benefit cost $ 2,928 $ 3,688 $ 2,923
======= ======= =======
The following assumptions were used in accounting for the pension plans
as of December 31:
1999 1998 1997
---- ---- ----
Weighted average discount rate 8.0% 6.75% 7.0%
Rate of increase in compensation
levels 5.0% 5.0% 5.0%
Expected long-term rate of return on
plan assets 9.0% 8.5% 8.5%
The corporation and the partnership recorded aggregate pension expense
of $2.2 million for the year ended December 31, 1999. The unconsolidated
subsidiaries recorded pension expense of approximately $775,000 for the six
months ending December 31, 1999.
THRIFT AND PROFIT SHARING PLAN. The corporation and unconsolidated
subsidiaries sponsor an employee thrift and profit sharing plan under Section
401(k) of the Internal Revenue Code. This plan covers substantially all
full-time employees. The corporation and unconsolidated subsidiaries match
employee contributions of up to six percent of compensation at rates ranging
from 35 to 100 percent, depending upon financial performance. The
partnership sponsored the plan prior to the REIT conversion.
Amounts charged to expense relating to the Thrift and Profit Sharing
Plan by the corporation and the unconsolidated subsidiaries was $4.3 million
in 1999. The partnership charged $2.9 million to expense in 1998 and $3.9
million during 1997. The employer match was 100% in 1999. The partnership
matched 70% in 1998 and 100% in 1997.
OTHER BENEFIT PLANS. Certain executives and key employees of the
corporation or general partner participate in incentive benefit plans which
provide for the granting of shares/units and/or cash bonuses upon meeting
performance objectives. See Note 11 of the Notes to Financial Statements.
Note 11. Stock/Unit-Based Compensation Plans
- --------------------------------------------
As of October 1, 1993, and January 1, 1994, the general partner of the
partnership had established a Long-Term Incentive Plan and a Key Employee
Long-Term Incentive Plan that authorized the granting of up to 2,500,000 unit
appreciation rights to certain executives and key employees of the general
partner. When any of five unit value targets established by the 1993 and
1994 long-term incentive plans were met through a combination of unit market
price appreciation plus partnership cash distributions, a percentage of the
unit appreciation rights was triggered and units were credited to the
participants' accounts. In general, each successive unit value target was
met when unit market appreciation plus cash distributions equaled
approximately 15% compounded annual growth. Units in participants' accounts
earned additional units equal to the amount of any subsequent partnership
distribution. The performance period under the 1993 and 1994 long-term
incentive plans ended December 31, 1998, at which time all earned units
vested. Costs incurred by the general partner in administering and funding
the unit value targets were borne by the partnership.
On April 17, 1998, the fifth and final target under the 1993 and 1994
long-term incentive plans was met. Total compensation expense for the 1993
and 1994 long-term incentive plans was $27.3 million, of which $13.3 million
was recognized in 1998 and $7.8 million in 1997. Approximately 70% of the
units were distributed during the first quarter of 1999, with the remainder
to be distributed subsequent to the participant's separation of employment.
Effective April 18, 1998, the general partner established a new Long-
Term Incentive Plan and a new Key Employee Long-Term Incentive Plan with terms
similar to the previously adopted 1993 and 1994 long-term incentive plans.
The 1998 plans authorize granting up to 1,175,000 unit appreciation rights to
certain executives and key employees. The performance period during which unit
appreciation rights may be earned ends December 31, 2003. The vesting date
for unit appreciation rights is generally December 31, 2003. In connection
with the REIT conversion, these unit-based compensation plans were converted
to share-based compensation plans, payable in shares of stock of the
corporation.
Under the plans established in 1998 1,016,000 unit appreciation rights,
net of forfeitures, have been granted to participants, which could result in
1,016,000 shares being earned if all targets are met. No unit value targets
have been achieved. Accordingly, no compensation cost has been recognized.
The corporation applies APB 25 in accounting for the 1993, 1994 and the
1998 plans. In general, under APB 25 no compensation expense is recognized
until a unit value target 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 1993 and 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 stock/unit-based compensation plans been
determined consistent with SFAS 123, net income and net income per share/unit
would have been as follows (in thousands, except per share/unit):
1999 1998 1997
---- ---- ----
Net Income:
As reported $125,601 $ 75,436 $111,696
Pro forma 123,699 75,407 111,992
Net Income per Share/Unit:
As reported $ 1.94 $ 0.90 $ 1.72
Pro forma 1.91 0.90 1.73
The corporation used the Monte Carlo path dependent model to determine
the fair value of unit appreciation right grants. The following tables
summarize the grants and assumptions applied in determining pro forma
compensation expense under the 1993, 1994 and 1998 plans for the years ended
December 31:
1993 and 1994 PLANS
- ------------------- 1998 1997
---- ----
Unit appreciation rights granted 16,333 22,533
Weighted-average fair value
of unit appreciation rights granted $ 13.98 $ 4.64
Risk-free interest rate 5.25% 6.28%
Expected dividend yield 6.20% 7.40%
Expected life of unit appreciation
rights granted 0.83 years 1.67 years
Expected unit price volatility 24.3% 18.2%
1998 PLANS
- ---------- 1999 1998
---- ----
Unit appreciation rights granted 51,500 1,163,500
Weighted-average fair valueof unit
appreciation rights granted $11.76 $12.25
Risk-free interest rate 5.18% 5.70%
Expected dividend yield 8.43% 7.13%
Expected life of unit appreciation
rights granted 4.67 years 5.67 years
Expected unit price volatility 24.1% 24.7%
Under the 1993 and 1994 plans, if all five targets were met, one unit
appreciation right was converted into approximately one-half unit. Under the
1998 plans, if all five targets are met, one unit appreciation right is
converted into one share.
The effect of applying SFAS 123 for the pro forma disclosures may not
be representative of the effects expected on reported net income and net
income per share in future years, since unit appreciation right valuations
are based on highly subjective assumptions about the future, including share
price volatility, and the disclosures do not reflect compensation expense for
grants prior to 1995.
Effective January 1, 1994, the former general partner of the
partnership established a management incentive plan for certain executives of
the general partner. As a part of the REIT conversion, this plan is being
maintained by the corporation. An annual bonus of up to 100% of the
respective executive's base salary may be awarded if certain performance
objectives established by the board of directors are met by the corporation
and by the executive. One-half of the bonus is paid annually in cash and the
remaining half is converted into stock/units at fair market value and will be
distributed at the end of three years. The board of directors approved the
payment of 1999 bonuses 100% in cash during the first quarter of 2000. Shares
of stock/units in executives' accounts earn additional shares of stock based
on any subsequent cash distributions. Costs incurred in administering and
funding the plan were borne by the general partner through June 30, 1999. The
liability for the shares to be paid from the management incentive plan is
recorded in the equity section of the consolidated/combined balance sheet as
deferred incentive compensation.
Note 12. Related-Party Transactions
- ------------------------------------
In order to meet REIT income qualification tests under the Internal
Revenue Code, the corporation has entered into timber cutting contracts with
the unconsolidated subsidiaries. The corporation's revenue consists primarily
of proceeds from these timber-cutting contracts. Revenue and associated
expenses related to the timber cutting contracts with our unconsolidated
subsidiaries are deferred until the timber (in the form of either whole logs,
lumber, plywood or other wood products) is sold outside the unconsolidated
subsidiaries.
The corporation and the unconsolidated subsidiaries have entered into a
cost sharing and administrative service agreement. The cost sharing and
administrative service agreement covers accounting, transaction processing,
human resources, information technology, legal, environmental, treasury,
corporate affairs, and other day-to-day operational activities. As a result,
there are receivables and payables between the corporation and the
unconsolidated subsidiaries which are settled in the ordinary course of
business. The unconsolidated subsidiaries earn interest at market rates for
any cash advances to the corporation that are in excess of any distributions
to the corporation. At December 31, 1999, the net related party payable to
the unconsolidated subsidiaries was $26,522.
Current assets include a receivable of $811,000 from the owners of the
former general partner of the partnership related to their share of the 1999
management incentive plan award. See Note 11 of the Notes to Financial
Statements for a summary of the management incentive plan. Non-current assets
include notes receivable of $1.9 million and accrued interest from four
officers, representing loans to these officers to fund their purchases of the
voting common stock of the corporate subsidiaries. The notes are due in ten
years, payable on demand, with an interest rate of 9%.
Prior to the REIT conversion, the general partner had overall
responsibility for management of the operations. The general partner owned a
two percent general partner interest in the income and cash distributions of
the partnership, subject to certain adjustments, and owned two percent of the
manufacturing subsidiary and four percent of the marketing subsidiary. Plum
Creek Timber Company, L.P. reimbursed the general partner for the actual costs
of administering the businesses. Amounts reimbursed to the general partner for
such costs were $4.4 million for the six months ended June 30, 1999, $7.7
million for 1998 and $6.7 million for 1997.
Plum Creek Timber Company, L.P. was 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 11 of the Notes to
Financial Statements. During January 1999, a final payment of $6.2 million
was paid to the general partner in connection with the funding of the 1994
plans. Additionally, the general partner was paid $2.4 million in 1998 and
$9.2 million in 1997.
Prior to the REIT conversion, net income was allocated to the general
partner based on two percent of the combined net income (adjusted for the
incentive distribution), plus the incentive distribution, as provided under
the partnership agreement. The incentive distribution was $16.7 million in
1999, $32.9 million in 1998 and $30.3 million in 1997.
Certain conflicts of interest could arise as a result of the
relationships described above. The board of directors and management of the
general partner had a duty to manage the operation of the business in the
best interests of the unitholders and, consequently, had to exercise good
faith and integrity in handling the assets and affairs of the business.
Related non-interest bearing receivables and payables with the general
partner were settled in the ordinary course of business. At December 31,
1998, there was a receivable from the general partner of $507,978 and at
December 31, 1997, there was a receivable of $138,502.
Note 13. Commitments and Contingencies
- ---------------------------------------
During 1993, the partnership entered into a sourcing contract to sell
logs to a customer over a ten-year period ending in 2003, based upon
prevailing market rates. The partnership also had 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 1998 acquisition
in Maine, the partnership entered into a long-term 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. As a part of the REIT conversion, these contracts and
commitments were transferred to the unconsolidated subsidiaries.
The corporation and the unconsolidated subsidiaries are subject to
regulations regarding forest and harvest practices and are, from time to
time, 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, it is
anticipated that no pending legal proceedings or regulatory matters will have
a materially adverse effect on the financial position, results of operations
or liquidity of the corporation.
The corporation leases buildings and equipment under non-cancelable
operating lease agreements. A large portion of the non-cancelable operating
lease agreements were transferred to the unconsolidated subsidiaries as part
of the REIT conversion. Operating lease expense was $3.3 million in 1999,
$3.2 million in 1998 and $2.9 million in 1997. The following summarizes the
future minimum lease payments for the corporation and unconsolidated
subsidiaries (in thousands):
2000 $ 2,967
2001 2,488
2002 2,004
2003 1,475
2004 706
Thereafter 554
--------
Total $ 10,194
========
In June 1999, the partnership and its general partner settled
previously disclosed unitholder litigation relating to the REIT conversion.
The settlement obligates the former general partner to pay up to $30 million
into a fund for distribution to eligible unitholders if specified five-year
financial targets of the corporation are not met. Payments by the general
partner, if any, would generally be made following the end of the five-year
period, on or about April 15, 2004, and may be accelerated upon the
occurrence of an extraordinary transaction.
Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletin No. 79, any payment made by the former general partner under the
settlement will be accounted for as a deemed capital contribution by the
former general partner to the corporation, followed by a non-cash expense of
the corporation. The Staff Accounting Bulletin requires that payments made by
a principal shareholder of a corporation or a general partner of a
partnership be expensed by the corporation or partnership if the entity
receives any benefit as a result of such payment. Therefore, in accordance
with Staff Accounting Bulletin No. 79, the corporation will record a non-cash
expense in the period(s) in which, and to the extent that, it appears
probable that a payment is required. Payments by the former general partner,
if any, will have no impact on the corporation's cash flow.
There are no other contingent liabilities which would have a materially
adverse effect on the financial position, the results of operations or
liquidity of the corporation.
Prior to the REIT conversion, a portion of the partnership's log
requirements were acquired through contracts with public and private sources.
Except for required deposits, no amounts were recorded until such time as
timber was harvested. The unrecorded amounts of those contract commitments
were approximately $10.8 million at December 31, 1998, and $15.8 million at
December 31, 1997.
Note 14. Segment Information
- -----------------------------
The corporation is organized into eight business units on the basis of
both product line and geographic region. For accounting purposes, the
corporation's business segments have not been impacted by the REIT
conversion, and except for the change in accounting method discussed below,
the segment information has been prepared on a basis consistent with the
prior year. 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 corporation's and
unconsolidated subsidiaries' reportable segments are Northern Resources,
Southern Resources, Lumber, Panel and Land Sales.
The Cascade 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 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 to the Lumber and Panel segments and to
unaffiliated wood product manufacturers, as well as pulp logs and chips to
third-party domestic pulp and paper manufacturers.
The Southern Resources segment consists of timberlands located in the
Southern United States. Southern Resources grows timber for sale in domestic
markets, primarily Arkansas and Louisiana. Southern Resources' revenues are
derived from sawlog sales to the Lumber segment, and to unaffiliated
domestic mills, as well as pulp logs and chips to third-party domestic pulp
and paper manufacturers.
The Northwest Lumber unit and the Southern Lumber unit are aggregated
into the Lumber segment. The Lumber segment consists of eight manufacturing
facilities in the Northwest and Southern United States. These facilities
produce boards, studs, and dimension lumber targeted to domestic lumber
retailers, home construction, and industrial customers, and to a lesser
extent, Pacific Rim countries and Western Europe. Residual chip products are
sold to regional pulp and paper manufacturers.
The Panel segment consists of two plywood facilities and one MDF
manufacturing facility 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, Canada, Western Europe and
the Pacific Rim countries. Residual chip products are sold to regional pulp
and paper manufacturers. Plywood revenues represented approximately 73% of
the panel segment revenues in 1999 and 71% in 1998 and 1997.
The Land Sales segment consists of timberlands 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." In
1998, we closed the plywood and chip facility.
The accounting policies of the segments are substantially the same as
those described in Note 1 of the Notes to Financial Statements. For segment
purposes, however, inventories are stated at the lower of average cost or
market on the first-in, first-out method. Segment data includes external
revenues, intersegment revenues and operating income, as well as export
revenues and depreciation, depletion, and amortization. The corporation
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 is not reported by segment,
as the corporation does not produce such information internally.
The table below presents information about reported segments for the
years ending December 31, 1999, 1998, and 1997 (in thousands).
Northern Southern Land
Resources Resources Lumber Panel Sales Other Total
1999 ----------------------------------------------------------------
- ----
External
revenues $167,078 $ 52,104 $343,423 $172,570 $ 23,682 $758,857
Intersegment
revenues 124,837 47,109 171,946
Export
revenues 27,245 4,380 11,154 42,779
Depreciation,
depletion
and
amortization 32,067 16,190 15,596 11,107 74,960
Operating
income 90,712 37,117 23,274 26,491 19,846 197,440
1998
- ----
External
revenues $131,625 $ 68,800 $281,614 $154,640 $ 32,813 $ 29,878 $699,370
Intersegment
revenues 118,675 49,562 168,237
Export
revenues 23,197 7,127 1,638 31,962
Depreciation,
depletion
and
amortization 29,716 15,530 13,105 10,598 274 69,223
Operating
income 73,715 53,568 2,599 14,360 26,598 (2,247) 168,593
1997
- ----
External
revenues $158,535 $ 54,780 $294,839 $149,618 $ 17,884 $ 49,915 $725,571
Intersegment
revenues 115,387 64,287 179,674
Export
revenues 41,003 16,125 5,950 63,078
Depreciation,
depletion
and
amortization 30,204 17,734 11,514 10,004 678 70,134
Operating
income 98,792 54,313 34,667 8,462 13,963 (1,152) 209,045
A reconciliation of total operating income to income before income
taxes, for the years ended December 31, is presented below (in thousands). In
the fourth quarter of 1999, the corporation changed its accounting policy with
respect to certain reforestation costs. See Note 1 of the Notes to Financial
Statements for further details. The new accounting policy was applied
retroactively to the beginning of 1999. As a result of this new accounting
policy, the Northern Resources segment's 1999 operating income was favorably
impacted by $2.2 million and the Southern Resources segment's 1999 operating
income was favorably impacted by $0.7 million.
1999 1998 1997
---- ---- ----
Total segment operating income $197,440 $168,593 $209,045
Operating income recognized by
unconsolidated subsidiaries (29,315)
Gain (loss) on disposition of
assets-net 3,697 (805) (1,223)
Interest expense-net (61,474) (59,580) (59,251)
Corporate and other unallocated
expenses (27,543) (32,255) (36,795)
------ ------ ------
Income before income taxes and
equity earnings of unconsolidated
subsidiaries, preferred stock
dividends and cumulative effect of
accounting change $ 82,805 $ 75,953 $111,776
======= ======= =======
Intersegment sales prices are determined quarterly, based upon
estimated market prices and terms in effect at that time. Export revenues
consist of log sales primarily to Japan and Canada, as well as lumber and
panel sales primarily to Canada, Western Europe and the Pacific Rim
countries. No single customer provides more than 10% of the combined revenues
of the corporation and unconsolidated subsidiaries. The corporation and
unconsolidated subsidiaries hold no long-lived foreign assets.
Note 15. Subsequent Events
- ---------------------------
On January 11, 2000, the corporation announced that it will add a 95
million square foot thin-board production line to its medium density
fiberboard facility in Columbia Falls, Montana. The new facility is
expected to cost approximately $69 million plus approximately $6 million of
capitalized interest and is expected to be operational by the end of 2001.
On January 14, 2000, the corporation sold approximately 90,000 acres
of timberlands and higher and better use lands near St. Maries, Idaho to
Crown Pacific Limited Partnership for approximately $73 million. The sale
will result in approximately $8.8 million of operating income (portion of
sales proceeds related to higher and better use land) and $50.2 million of
gain on sale of assets in the first quarter of 2000. Proceeds from the
sale will primarily be used to acquire additional timberlands or reduce our
outstanding indebtedness.
On January 27, 2000, the board of directors authorized the
corporation to make a dividend distribution of $0.57 per share. Total
dividends will approximate $39.4 million and will be paid on February 29,
2000, to stockholders of record on February 16, 2000.
Report of Independent Accountants
To the Board of Directors and Stockholders of Plum Creek Timber Company, Inc.
In our opinion, the accompanying consolidated/combined balance sheets and the
related consolidated/combined statements of income and of cash flows present
fairly, in all material respects, the financial position of Plum Creek Timber
Company, Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards
generally accepted in the United States, 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.
On July 1, 1999, the Company converted from a master limited partnership to a
REIT entity and accordingly, the manufacturing and harvesting operations are
now conducted in unconsolidated subsidiaries.
As discussed in Note 1 of the Notes to Financial Statements, the Company
changed its method of accounting for reforestation and silviculture costs
effective January 1, 1999.
Seattle, Washington
January 25, 2000
REPORT OF MANAGEMENT
- --------------------
The management of Plum Creek Timber Company, Inc. 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 promote
strong ethics) 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/ WILLIAM R. BROWN
- --------------------
William R. Brown
Executive Vice President and Chief Financial Officer
Supplementary Financial Information
- -----------------------------------
Consolidated / Combined Quarterly Information
(Unaudited)
(In Thousands, Except per Share/Unit)
1999 as filed in the Form 10-Qs 1st Qtr 2nd Qtr 3rd Qtr(1)
------------------------------- ------- ------- ----------
Revenues $178,221 $184,349 $ 51,999
Gross profit 49,110 55,553 36,215
Operating Income 38,667 44,449 33,270
Net Income 17,862 22,535 45,648
Net Income Allocable to
Stockholders/Unitholders 9,328 13,907 45,648
Net Income per Share/Unit $0.20 $0.30 $0.72
In the fourth quarter of 1999 the corporation adopted a new accounting
policy to capitalize certain timber reforestation costs that were previously
expensed. The new capitalization policy was applied retroactively as of
January 1, 1999, and resulted in restating previously reported quarterly
information. Presented blow are the restated first, second and third
quarters along with the fourth quarter information.
1999 1st Qtr 2nd Qtr 3rd Qtr (1) 4th Qtr(2)
---- ------- ------- ----------- ----------
Revenues $178,221 $184,349 $ 51,999 $ 46,051
Gross profit 48,826 57,051 36,660 32,261
Operating Income 38,838 45,947 33,715 28,379
Income before Cumulative
Effect of Accounting
Change 17,578
Cumulative Effect of
Accounting Change 12,169
Net Income 29,747 24,033 46,093 25,728
Net Income Allocable to
Stockholders/Unitholders 21,213 15,405 46,093 25,728
Income Allocable to
Stockholders/Unitholders
per Share/Unit before
Cumulative Effect
of Accounting Change $0.20
Cumulative Effect of
Accounting Change
per Share/Unit $0.26
Net Income per Share/Unit (3) $0.46 $0.33 $0.73 $0.38
1998 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
---- ------- ------- ------- -------
Revenues $164,325 $ 71,799 $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
Stockholders/Unitholders 13,181 7,631 7,544 13,367
Net Income per Unit $0.28 $0.17 $0.16 $0.29
(1) A one-time income tax benefit of approximately $14.0 million was
included in the third quarter 1999 results of operations associated with the
assets and liabilities transferred to the unconsolidated subsidiaries in the
REIT conversion. See Note 1 of the Notes to Financial Statements.
(2) Included in the fourth quarter 1999 results of operations was a
gain of $3.6 million related to a land exchange in the Cascades Region. See
Note 9 of the Notes to Financial Statements.
(3) Net income per unit/share is computed independently for each of
the quarters presented. Therefore the sum of the quarterly net income per
share/unit does not equal the total computed for the year due to the
issuance of shares during the third and fourth quarters of 1999. See Note 8
of the Notes to Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- --------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
- ------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information with respect to directors included in the definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on May 10, 2000,
under the caption "Election of Directors", is incorporated by reference. The
executive officers are presented in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information with respect to executive compensation included in the
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
on May 10, 2000, under the caption "Executive Compensation", is incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Information with respect to security ownership of certain beneficial
owners and management included in the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 10, 2000, under the caption
"Security Ownership of Certain Beneficial Owners and Management", is
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information with respect to certain relationships and related
transactions included in the definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 10, 2000, under the captions
"Related Party Transactions" and "Indebtedness of Management", is incorporated
by reference.
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 consolidated/combined financial statements of the
corporation are included in Part II, Item 8 of this Form 10-K:
Consolidated/Combined Statement of Income 32
Consolidated/Combined Balance Sheet 33
Consolidated/Combined Statement of Cash Flows 34
Notes to Consolidated/Combined Financial Statements 35
Report of Independent Accountants 59
Report of Management 60
Supplementary Financial Information 61
(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 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).
2.2 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).
2.3 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).
2.4 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 Certificate of Incorporation of Plum Creek Timber Company, Inc.
(Form 10-Q, File No. 1-10239, for the quarter ended September 30,
1999).
3.2 Amended and Restated By-laws of Plum Creek Timber Company, Inc.
(Form S-4, Regis. No. 333-71371, filed January 28, 1999).
4.1 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). Senior Note Agreement
Amendment effective July 1, 1999 (Form 10-Q, No. 1-10239, for the
quarter ended June 30, 1999).
4.2 Mortgage Note Agreement, dated May 31, 1989, 11 1/8 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). Mortgage Note Agreement Amendment effective July 1, 1999
(Form 10-Q, No. 1-10239, for the quarter ended June 30, 1999).
4.3 Senior Note Agreement, dated August 1, 1994, 8.73% Senior Notes
due August 1, 2009, Plum Creek Timber Company, L.P. (Form 10-K/A,
Amendment No. 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). Senior Note Agreement
Amendment effective July 1, 1999 (Form 10-Q, No. 1-10239, for the
quarter ended June 30, 1999).
4.4 Senior Note Agreement, dated as of November 13, 1996, $75 million
Series A due November 13, 2006, $25 million Series B due November
13, 2008, $75 million Series C due November 13, 2011, $25 million
Series D due November 13, 2016 (Form 10-K, No. 1-10239, for the
year ended December 31, 1996). Senior Note Agreement Amendment
effective July 1, 1999 (Form 10-Q, No. 1-10239, for the quarter
ended June 30, 1999).
4.5 Senior Note Agreement, dated as of November 12, 1998, Series E
due February 12, 2007, Series F due February 12, 2009, Series G
due February 12, 2011 (Form 8-K and 8 K/A, File No. 1-10239,
dated November 12, 1998). Senior Note Agreement Amendment
effective July 1, 1999 (Form 10-Q, No. 1-10239, for the quarter
ended June 30, 1999).
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). Amendment
effective July 1, 1999 (Form 10-Q, No. 1-10239, for the quarter
ended June 30, 1999).
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).
10.9* Secured Promissory Note between Rick R. Holley and Plum Creek
Timberlands, L.P.
10.10* Secured Promissory Note between Charles P. Grenier and Plum
Creek Timberlands, L.P.
10.11* Secured Promissory Note between William R. Brown and Plum Creek
Timberlands, L.P.
10.12* Secured Promissory Note between Michael J. Covey and Plum Creek
Timberlands, L.P.
18.1* Letter re change in accounting principle from
PricewaterhouseCoopers LLP
21* Subsidiaries of the Registrant.
27* Financial Data Schedule for the year ended December 31,
1999. See attached exhibit.
b) Reports on Form 8-K
- -----------------------
Plum Creek Timber Company, Inc. filed a current report on Form 8-K
dated October 5, 1999, in which it announced it had signed a letter of
intent to sell approximately 90,000 acres of timberlands to Crown Pacific
Parnters, L.P.
Plum Creek Timber Company, Inc. filed a current report on Form 8-K
dated October 19, 1999, in which it attached its press release announcing
earnings for the nine months and third quarter ended September 30, 1999.
Plum Creek Timber Company, Inc. filed a current report on Form 8-K
dated December 2, 1999, in which it advised that the deadline for the
submission of shareholder proposals for inclusion in the Registrant's year
2000 Annual Meeting proxy materials was January 10, 2000.
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, INC.
(Registrant)
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
Annual Report has been signed below by the following persons on behalf of
the Registrant and in the capacities on the dates indicated.
By /s/ DAVID D. LELAND Chairman of the Board February 25, 2000
- -------------------------------- -----------------
David D. Leland Date
By /s/ IAN B. DAVIDSON Director February 25, 2000
- -------------------------------- -----------------
Ian B. Davidson Date
By /s/ CHARLES P. GRENIER Executive Vice President, February 28, 2000
- --------------------------------Director -----------------
Charles P. Grenier Date
By /s/ RICK R. HOLLEY President and Chief February 25, 2000
- --------------------------------Executive Officer, Director -----------------
Rick R. Holley Date
By /s/ JOHN G. MCDONALD Director February 25, 2000
- -------------------------------- -----------------
John G. McDonald Date
By /s/ HAMID R. MOGHADAM Director February 28, 2000
- -------------------------------- -----------------
Hamid R. Moghadam Date
By /s/ WILLIAM E. OBERNDORF Director February 29, 2000
- -------------------------------- -----------------
William E. Oberndorf Date
By /s/ WILLIAM J. PATTERSON Director February 28, 2000
- -------------------------------- -----------------
William J. Patterson Date
By /s/ JOHN H. SCULLY Director February 27, 2000
- -------------------------------- -----------------
John H. Scully Date
By /s/ WILLIAM R. BROWN Executive Vice President February 25, 2000
- --------------------------------and Chief Financial -----------------
William R. Brown Officer, (Principal Date
Financial and Accounting
Officer)
Exhibit 10.9
SECURED PROMISSORY NOTE
$646,000
Seattle, Washington
July 1, 1999
FOR VALUE RECEIVED, Rick R. Holley (the "Borrower"), hereby
promises to pay to the order of Plum Creek Acquisition Partners, L.P., a
Delaware limited partnership (the "Lender"), the principal sum of six hundred
forty six thousand dollars ($646,000), in lawful money of the United States of
America, on [July 1, 2009] or when demanded pursuant to Section 6 hereof (the
"Repayment Date"), together with accrued and unpaid interest thereon from the
date hereof.
1. Interest Rate. The outstanding principal amount of this
Note, together with all accrued and unpaid interest thereon, shall bear
interest at a rate per annum equal to 9.0%.
2. Interest Payments. Interest payments on the Note shall be
payable annually on [July 1] of each year through the Repayment Date.
Interest shall be calculated on the basis of a year comprised of twelve (12)
thirty (30) day months. Each payment on this Note shall be credited first to
interest on past due interest, then to past due interest, then to accrued
interest and then to principal.
3. Method of Payment. All payments hereunder shall be made to
Plum Creek Acquisition Partners, L.P., 999 Third Avenue, Suite 2300, Seattle,
Washington 98104-4096, or at such other place, or by such other means, as the
Lender shall designate to the Borrower in writing. If any payment of
principal or interest on this Note is due on a day which is not a Business
Day, such payment shall be due on the next succeeding Business Day, and such
extension of time shall be taken into account in calculating the amount of
interest payable under this Note. "Business Day" means any day other than a
Saturday, Sunday or legal holiday in the State of Washington.
4. Prepayment. The Borrower shall have the right to prepay the
principal amount hereof in full or in part, together with all accrued interest
on the amount prepaid to the date of such prepayment, at any time without
penalty.
5. Security. Pursuant to the Security and Pledge Agreement,
dated as of the date hereof (the "Security Agreement"), by and between the
Lender and the Borrower, the obligations of the Borrower hereunder are secured
by the Collateral (as defined in the Security Agreement), and the holder of
this Note is entitled to the Proceeds (as defined in the Security Agreement),
but not the voting rights, of the Collateral.
6. Events of Default.
(a) Each of the following shall constitute an event of
default ("Event of Default") hereunder: (i) the Borrower's failure to pay,
within 15 days after the date when such payment is due, any payment of
principal or interest on the Note; (ii) the Borrower's failure to observe or
perform any covenant or agreement contained in the Note; and (iii) the
Borrower's violation of any of the transfer restrictions contained in the
Certificate of Incorporation of Plum Creek Manufacturing Holding Company, Inc.
(b) Upon the occurrence of any Event of Default, the holder
of this Note may, by notice in writing to the Borrower, declare this Note and
the principal of and accrued interest on this Note and all other charges owing
to the Lender to be, and the same shall upon such notice forthwith become, due
and payable. Upon the occurrence of an Event of Default, the holder of this
Note, may, in addition to all rights and remedies available to it at law,
exercise any or all of its rights under the Security Agreement.
7. Recourse. In addition to recourse against the Collateral as
provided in the Security Agreement, the Lender shall be entitled to recourse
against the Borrower for the payment of any principal of or interest on the
Note or for any claim based hereon (including costs of collection).
8. Payable Upon Demand. The holder of this Note shall have the
right, at its option, by notice in writing to the Borrower, to declare the
entire unpaid principal balance of this Note, irrespective of the maturity
date of this Note, together with accrued interest on this Note and any other
charges owing to the Lender, and the same shall upon such notice forthwith
become, due and payable.
9. Costs of Collection. Upon the failure of the Borrower to
pay any amount due hereunder as and when due (taking into account the
additional 15 days provided in section 5 of the Security Agreement), the
Borrower shall pay on demand any reasonable costs and expenses incurred by the
holder hereof in connection with the collection of any outstanding principal
balance and interest accrued hereunder, and in connection with the enforcement
of any rights or remedies provided for pursuant to this Note and the Security
Agreement. If not paid on demand, all such costs and expenses automatically
shall be added to the remaining principal balance hereunder as of the date
immediately following the date of such demand.
10. Waiver. The Borrower hereby waives any right it might
otherwise have to require notice or acceptance by any other person of its
obligations or liabilities under this Note which are unconditional and
absolute and waives diligence, presentment, demand of payment, protest and
notice with respect to all of the obligations of the Borrower under this Note
and with respect to any action under this Note and all other notices and
demands whatsoever, except as specifically provided for in this Note. This
Note may be amended, and the observance of any term of this Note may be
waived, with (and only with) the written consent of the Lender.
11. Governing Law. This Note shall be governed by and construed
in accordance with the laws of the State of Washington.
12. Assignment or Pledge of Note. The Lender shall promptly
notify the Borrower of any endorsement, assignment, pledge or hypothecation of
this Note to a person not affiliated with the Lender.
13. Loss, Mutilation, Etc. Upon notice from the holder of this
Note to the Borrower of the loss, theft, destruction or mutilation of this
Note, and upon receipt of an indemnity reasonably satisfactory to the Borrower
from the holder of this Note or, in the case of mutilation hereof, upon
surrender of the mutilated Note, the Borrower will make and deliver a new note
of like tenor in lieu of this Note.
14. Notices. All notices and other communications required or
permitted under this Note shall be in writing and shall be personally
delivered or sent by certified first class United States mail, postage
prepaid, return receipt requested, and if mailed, shall be deemed to have been
received on the third business day after deposit in the mail, addressed to the
Lender, Plum Creek Acquisition Partners, L.P., 999 Third Avenue, Suite 2300,
Seattle, Washington 98104-4096, Attention: Chief Financial Officer, or to the
Borrower at the address set forth below the Borrower's signature. Notice of
any change of either party's address shall be given by written notice in the
manner set forth in this paragraph.
IN WITNESS WHEREOF, the Borrower has executed this Note on the
date first above written.
BORROWER:
/s/ Rick R. Holley
- ---------------------------
(Signature of Borrower)
Rick R. Holley
- ---------------------------
(Print or Type Name)
- ---------------------------
(Address)
- ---------------------------
(City, State, Zip Code)
- ---------------------------
(Telephone Number)
Exhibit 10.10
SECURED PROMISSORY NOTE
$418,000
Seattle, Washington
July 1, 1999
FOR VALUE RECEIVED, Charles P. Grenier(the "Borrower"),
hereby promises to pay to the order of Plum Creek Acquisition Partners,
L.P., a Delaware limited partnership (the "Lender"), the principal sum of
six hundred forty six thousand dollars ($418,000), in lawful money of the
United States of America, on [July 1, 2009] or when demanded pursuant to
Section 6 hereof (the "Repayment Date"), together with accrued and unpaid
interest thereon from the date hereof.
1. Interest Rate. The outstanding principal amount of
this Note, together with all accrued and unpaid interest thereon, shall
bear interest at a rate per annum equal to 9.0%.
2. Interest Payments. Interest payments on the Note shall
be payable annually on [July 1] of each year through the Repayment Date.
Interest shall be calculated on the basis of a year comprised of twelve
(12) thirty (30) day months. Each payment on this Note shall be credited
first to interest on past due interest, then to past due interest, then
to accrued interest and then to principal.
3. Method of Payment. All payments hereunder shall be
made to Plum Creek Acquisition Partners, L.P., 999 Third Avenue, Suite
2300, Seattle, Washington 98104-4096, or at such other place, or by such
other means, as the Lender shall designate to the Borrower in writing.
If any payment of principal or interest on this Note is due on a day
which is not a Business Day, such payment shall be due on the next
succeeding Business Day, and such extension of time shall be taken into
account in calculating the amount of interest payable under this Note.
"Business Day" means any day other than a Saturday, Sunday or legal
holiday in the State of Washington.
4. Prepayment. The Borrower shall have the right to
prepay the principal amount hereof in full or in part, together with all
accrued interest on the amount prepaid to the date of such prepayment, at
any time without penalty.
5. Security. Pursuant to the Security and Pledge
Agreement, dated as of the date hereof (the "Security Agreement"), by and
between the Lender and the Borrower, the obligations of the Borrower
hereunder are secured by the Collateral (as defined in the Security
Agreement), and the holder of this Note is entitled to the Proceeds (as
defined in the Security Agreement), but not the voting rights, of the
Collateral.
6. Events of Default.
(a) Each of the following shall constitute an event of
default ("Event of Default") hereunder: (i) the Borrower's failure to
pay, within 15 days after the date when such payment is due, any payment
of principal or interest on the Note; (ii) the Borrower's failure to
observe or perform any covenant or agreement contained in the Note; and
(iii) the Borrower's violation of any of the transfer restrictions
contained in the Certificate of Incorporation of Plum Creek Manufacturing
Holding Company, Inc.
(b) Upon the occurrence of any Event of Default, the
holder of this Note may, by notice in writing to the Borrower, declare
this Note and the principal of and accrued interest on this Note and all
other charges owing to the Lender to be, and the same shall upon such
notice forthwith become, due and payable. Upon the occurrence of an
Event of Default, the holder of this Note, may, in addition to all rights
and remedies available to it at law, exercise any or all of its rights
under the Security Agreement.
7. Recourse. In addition to recourse against the
Collateral as provided in the Security Agreement, the Lender shall be
entitled to recourse against the Borrower for the payment of any
principal of or interest on the Note or for any claim based hereon
(including costs of collection).
8. Payable Upon Demand. The holder of this Note shall
have the right, at its option, by notice in writing to the Borrower, to
declare the entire unpaid principal balance of this Note, irrespective of
the maturity date of this Note, together with accrued interest on this
Note and any other charges owing to the Lender, and the same shall upon
such notice forthwith become, due and payable.
9. Costs of Collection. Upon the failure of the Borrower
to pay any amount due hereunder as and when due (taking into account the
additional 15 days provided in section 5 of the Security Agreement), the
Borrower shall pay on demand any reasonable costs and expenses incurred
by the holder hereof in connection with the collection of any outstanding
principal balance and interest accrued hereunder, and in connection with
the enforcement of any rights or remedies provided for pursuant to this
Note and the Security Agreement. If not paid on demand, all such costs
and expenses automatically shall be added to the remaining principal
balance hereunder as of the date immediately following the date of such
demand.
10. Waiver. The Borrower hereby waives any right it might
otherwise have to require notice or acceptance by any other person of its
obligations or liabilities under this Note which are unconditional and
absolute and waives diligence, presentment, demand of payment, protest
and notice with respect to all of the obligations of the Borrower under
this Note and with respect to any action under this Note and all other
notices and demands whatsoever, except as specifically provided for in
this Note. This Note may be amended, and the observance of any term of
this Note may be waived, with (and only with) the written consent of the
Lender.
11. Governing Law. This Note shall be governed by and
construed in accordance with the laws of the State of Washington.
12. Assignment or Pledge of Note. The Lender shall
promptly notify the Borrower of any endorsement, assignment, pledge or
hypothecation of this Note to a person not affiliated with the Lender.
13. Loss, Mutilation, Etc. Upon notice from the holder of
this Note to the Borrower of the loss, theft, destruction or mutilation
of this Note, and upon receipt of an indemnity reasonably satisfactory to
the Borrower from the holder of this Note or, in the case of mutilation
hereof, upon surrender of the mutilated Note, the Borrower will make and
deliver a new note of like tenor in lieu of this Note.
14. Notices. All notices and other communications required
or permitted under this Note shall be in writing and shall be personally
delivered or sent by certified first class United States mail, postage
prepaid, return receipt requested, and if mailed, shall be deemed to have
been received on the third business day after deposit in the mail,
addressed to the Lender, Plum Creek Acquisition Partners, L.P., 999 Third
Avenue, Suite 2300, Seattle, Washington 98104-4096, Attention: Chief
Financial Officer, or to the Borrower at the address set forth below the
Borrower's signature. Notice of any change of either party's address
shall be given by written notice in the manner set forth in this
paragraph.
IN WITNESS WHEREOF, the Borrower has executed this Note on
the date first above written.
BORROWER:
/s/ Charles P. Grenier
- ---------------------------
(Signature of Borrower)
Charles P. Grenier
- ---------------------------
(Print or Type Name)
- ---------------------------
(Address)
- ---------------------------
(City, State, Zip Code)
- ---------------------------
(Telephone Number)
Exhibit 10.11
SECURED PROMISSORY NOTE
$418,000
Seattle, Washington
July 1, 1999
FOR VALUE RECEIVED, William R. Brown(the "Borrower"), hereby
promises to pay to the order of Plum Creek Acquisition Partners, L.P., a
Delaware limited partnership (the "Lender"), the principal sum of six hundred
forty six thousand dollars ($418,000), in lawful money of the United States of
America, on [July 1, 2009] or when demanded pursuant to Section 6 hereof (the
"Repayment Date"), together with accrued and unpaid interest thereon from the
date hereof.
1. Interest Rate. The outstanding principal amount of this
Note, together with all accrued and unpaid interest thereon, shall bear
interest at a rate per annum equal to 9.0%.
2. Interest Payments. Interest payments on the Note shall be
payable annually on [July 1] of each year through the Repayment Date.
Interest shall be calculated on the basis of a year comprised of twelve (12)
thirty (30) day months. Each payment on this Note shall be credited first to
interest on past due interest, then to past due interest, then to accrued
interest and then to principal.
3. Method of Payment. All payments hereunder shall be made to
Plum Creek Acquisition Partners, L.P., 999 Third Avenue, Suite 2300, Seattle,
Washington 98104-4096, or at such other place, or by such other means, as the
Lender shall designate to the Borrower in writing. If any payment of
principal or interest on this Note is due on a day which is not a Business
Day, such payment shall be due on the next succeeding Business Day, and such
extension of time shall be taken into account in calculating the amount of
interest payable under this Note. "Business Day" means any day other than a
Saturday, Sunday or legal holiday in the State of Washington.
4. Prepayment. The Borrower shall have the right to prepay the
principal amount hereof in full or in part, together with all accrued interest
on the amount prepaid to the date of such prepayment, at any time without
penalty.
5. Security. Pursuant to the Security and Pledge Agreement,
dated as of the date hereof (the "Security Agreement"), by and between the
Lender and the Borrower, the obligations of the Borrower hereunder are secured
by the Collateral (as defined in the Security Agreement), and the holder of
this Note is entitled to the Proceeds (as defined in the Security Agreement),
but not the voting rights, of the Collateral.
6. Events of Default.
(a) Each of the following shall constitute an event of
default ("Event of Default") hereunder: (i) the Borrower's failure to pay,
within 15 days after the date when such payment is due, any payment of
principal or interest on the Note; (ii) the Borrower's failure to observe or
perform any covenant or agreement contained in the Note; and (iii) the
Borrower's violation of any of the transfer restrictions contained in the
Certificate of Incorporation of Plum Creek Manufacturing Holding Company, Inc.
(b) Upon the occurrence of any Event of Default, the holder
of this Note may, by notice in writing to the Borrower, declare this Note and
the principal of and accrued interest on this Note and all other charges owing
to the Lender to be, and the same shall upon such notice forthwith become, due
and payable. Upon the occurrence of an Event of Default, the holder of this
Note, may, in addition to all rights and remedies available to it at law,
exercise any or all of its rights under the Security Agreement.
7. Recourse. In addition to recourse against the Collateral as
provided in the Security Agreement, the Lender shall be entitled to recourse
against the Borrower for the payment of any principal of or interest on the
Note or for any claim based hereon (including costs of collection).
8. Payable Upon Demand. The holder of this Note shall have the
right, at its option, by notice in writing to the Borrower, to declare the
entire unpaid principal balance of this Note, irrespective of the maturity
date of this Note, together with accrued interest on this Note and any other
charges owing to the Lender, and the same shall upon such notice forthwith
become, due and payable.
9. Costs of Collection. Upon the failure of the Borrower to
pay any amount due hereunder as and when due (taking into account the
additional 15 days provided in section 5 of the Security Agreement), the
Borrower shall pay on demand any reasonable costs and expenses incurred by the
holder hereof in connection with the collection of any outstanding principal
balance and interest accrued hereunder, and in connection with the enforcement
of any rights or remedies provided for pursuant to this Note and the Security
Agreement. If not paid on demand, all such costs and expenses automatically
shall be added to the remaining principal balance hereunder as of the date
immediately following the date of such demand.
10. Waiver. The Borrower hereby waives any right it might
otherwise have to require notice or acceptance by any other person of its
obligations or liabilities under this Note which are unconditional and
absolute and waives diligence, presentment, demand of payment, protest and
notice with respect to all of the obligations of the Borrower under this Note
and with respect to any action under this Note and all other notices and
demands whatsoever, except as specifically provided for in this Note. This
Note may be amended, and the observance of any term of this Note may be
waived, with (and only with) the written consent of the Lender.
11. Governing Law. This Note shall be governed by and construed
in accordance with the laws of the State of Washington.
12. Assignment or Pledge of Note. The Lender shall promptly
notify the Borrower of any endorsement, assignment, pledge or hypothecation of
this Note to a person not affiliated with the Lender.
13. Loss, Mutilation, Etc. Upon notice from the holder of this
Note to the Borrower of the loss, theft, destruction or mutilation of this
Note, and upon receipt of an indemnity reasonably satisfactory to the Borrower
from the holder of this Note or, in the case of mutilation hereof, upon
surrender of the mutilated Note, the Borrower will make and deliver a new note
of like tenor in lieu of this Note.
14. Notices. All notices and other communications required or
permitted under this Note shall be in writing and shall be personally
delivered or sent by certified first class United States mail, postage
prepaid, return receipt requested, and if mailed, shall be deemed to have been
received on the third business day after deposit in the mail, addressed to the
Lender, Plum Creek Acquisition Partners, L.P., 999 Third Avenue, Suite 2300,
Seattle, Washington 98104-4096, Attention: Chief Financial Officer, or to the
Borrower at the address set forth below the Borrower's signature. Notice of
any change of either party's address shall be given by written notice in the
manner set forth in this paragraph.
IN WITNESS WHEREOF, the Borrower has executed this Note on the
date first above written.
BORROWER:
/s/ William R. Brown
- ---------------------------
(Signature of Borrower)
- ---------------------------
(Print or Type Name)
- ---------------------------
(Address)
- ---------------------------
(City, State, Zip Code)
- ---------------------------
(Telephone Number)
Exhibit 10.12
SECURED PROMISSORY NOTE
$418,000
Seattle, Washington
July 1, 1999
FOR VALUE RECEIVED, Michael J. Covey(the "Borrower"), hereby
promises to pay to the order of Plum Creek Acquisition Partners, L.P., a
Delaware limited partnership (the "Lender"), the principal sum of six hundred
forty six thousand dollars ($418,000), in lawful money of the United States of
America, on [July 1, 2009] or when demanded pursuant to Section 6 hereof (the
"Repayment Date"), together with accrued and unpaid interest thereon from the
date hereof.
1. Interest Rate. The outstanding principal amount of this
Note, together with all accrued and unpaid interest thereon, shall bear
interest at a rate per annum equal to 9.0%.
2. Interest Payments. Interest payments on the Note shall be
payable annually on [July 1] of each year through the Repayment Date.
Interest shall be calculated on the basis of a year comprised of twelve (12)
thirty (30) day months. Each payment on this Note shall be credited first to
interest on past due interest, then to past due interest, then to accrued
interest and then to principal.
3. Method of Payment. All payments hereunder shall be made to
Plum Creek Acquisition Partners, L.P., 999 Third Avenue, Suite 2300, Seattle,
Washington 98104-4096, or at such other place, or by such other means, as the
Lender shall designate to the Borrower in writing. If any payment of
principal or interest on this Note is due on a day which is not a Business
Day, such payment shall be due on the next succeeding Business Day, and such
extension of time shall be taken into account in calculating the amount of
interest payable under this Note. "Business Day" means any day other than a
Saturday, Sunday or legal holiday in the State of Washington.
4. Prepayment. The Borrower shall have the right to prepay the
principal amount hereof in full or in part, together with all accrued interest
on the amount prepaid to the date of such prepayment, at any time without
penalty.
5. Security. Pursuant to the Security and Pledge Agreement,
dated as of the date hereof (the "Security Agreement"), by and between the
Lender and the Borrower, the obligations of the Borrower hereunder are secured
by the Collateral (as defined in the Security Agreement), and the holder of
this Note is entitled to the Proceeds (as defined in the Security Agreement),
but not the voting rights, of the Collateral.
6. Events of Default.
(a) Each of the following shall constitute an event of
default ("Event of Default") hereunder: (i) the Borrower's failure to pay,
within 15 days after the date when such payment is due, any payment of
principal or interest on the Note; (ii) the Borrower's failure to observe or
perform any covenant or agreement contained in the Note; and (iii) the
Borrower's violation of any of the transfer restrictions contained in the
Certificate of Incorporation of Plum Creek Manufacturing Holding Company, Inc.
(b) Upon the occurrence of any Event of Default, the holder
of this Note may, by notice in writing to the Borrower, declare this Note and
the principal of and accrued interest on this Note and all other charges owing
to the Lender to be, and the same shall upon such notice forthwith become, due
and payable. Upon the occurrence of an Event of Default, the holder of this
Note, may, in addition to all rights and remedies available to it at law,
exercise any or all of its rights under the Security Agreement.
7. Recourse. In addition to recourse against the Collateral as
provided in the Security Agreement, the Lender shall be entitled to recourse
against the Borrower for the payment of any principal of or interest on the
Note or for any claim based hereon (including costs of collection).
8. Payable Upon Demand. The holder of this Note shall have the
right, at its option, by notice in writing to the Borrower, to declare the
entire unpaid principal balance of this Note, irrespective of the maturity
date of this Note, together with accrued interest on this Note and any other
charges owing to the Lender, and the same shall upon such notice forthwith
become, due and payable.
9. Costs of Collection. Upon the failure of the Borrower to
pay any amount due hereunder as and when due (taking into account the
additional 15 days provided in section 5 of the Security Agreement), the
Borrower shall pay on demand any reasonable costs and expenses incurred by the
holder hereof in connection with the collection of any outstanding principal
balance and interest accrued hereunder, and in connection with the enforcement
of any rights or remedies provided for pursuant to this Note and the Security
Agreement. If not paid on demand, all such costs and expenses automatically
shall be added to the remaining principal balance hereunder as of the date
immediately following the date of such demand.
10. Waiver. The Borrower hereby waives any right it might
otherwise have to require notice or acceptance by any other person of its
obligations or liabilities under this Note which are unconditional and
absolute and waives diligence, presentment, demand of payment, protest and
notice with respect to all of the obligations of the Borrower under this Note
and with respect to any action under this Note and all other notices and
demands whatsoever, except as specifically provided for in this Note. This
Note may be amended, and the observance of any term of this Note may be
waived, with (and only with) the written consent of the Lender.
11. Governing Law. This Note shall be governed by and construed
in accordance with the laws of the State of Washington.
12. Assignment or Pledge of Note. The Lender shall promptly
notify the Borrower of any endorsement, assignment, pledge or hypothecation of
this Note to a person not affiliated with the Lender.
13. Loss, Mutilation, Etc. Upon notice from the holder of this
Note to the Borrower of the loss, theft, destruction or mutilation of this
Note, and upon receipt of an indemnity reasonably satisfactory to the Borrower
from the holder of this Note or, in the case of mutilation hereof, upon
surrender of the mutilated Note, the Borrower will make and deliver a new note
of like tenor in lieu of this Note.
14. Notices. All notices and other communications required or
permitted under this Note shall be in writing and shall be personally
delivered or sent by certified first class United States mail, postage
prepaid, return receipt requested, and if mailed, shall be deemed to have been
received on the third business day after deposit in the mail, addressed to the
Lender, Plum Creek Acquisition Partners, L.P., 999 Third Avenue, Suite 2300,
Seattle, Washington 98104-4096, Attention: Chief Financial Officer, or to the
Borrower at the address set forth below the Borrower's signature. Notice of
any change of either party's address shall be given by written notice in the
manner set forth in this paragraph.
IN WITNESS WHEREOF, the Borrower has executed this Note on the
date first above written.
BORROWER:
/s/ Michael J. Covey
- ---------------------------
(Signature of Borrower)
Michael J. Covey
- ---------------------------
(Print or Type Name)
- ---------------------------
(Address)
- ---------------------------
(City, State, Zip Code)
- ---------------------------
(Telephone Number)
Exhibit 18.1
March 1, 2000
Board of Directors
Plum Creek Timber Company, Inc.
999 Third Avenue, Suite 2300
Seattle, Washington 98104
Dear Directors:
We are providing this letter to you for inclusion as an exhibit to
your Form 10-K filing pursuant to Item 601 of Regulation S-K.
We have audited the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1999 and issued our report thereon dated January 25, 2000. Note 1 to
the financial statements describes a change in accounting principle
from expensing certain reforestation costs to capitalizing those
costs. It should be understood that the preferability of one
acceptable method of accounting over another for recognizing specific
reforestation costs, whether that is to expense upon occurrence or
capitalize until the sale of the timber, has not been addressed in
any authoritative accounting literature, and in expressing our
concurrence below we have relied on management's determination that
this change in accounting principle is preferable. Based on our
reading of management's stated reasons and justification for this
change in accounting principle in the Form 10-K, and our discussions
with management as to their judgment about the relevant business
planning factors relating to the change, we concur with management
that such change represents, in the Company's circumstances, the
adoption of a preferable accounting principle in conformity with
Accounting Principles Board Opinion No. 20.
Very truly yours,
PricewaterhouseCoopers LLP
Exhibit 21
Subsidiaries of the Registrant:
State of Organization
---------------------
Plum Creek Timberlands, L.P. Delaware
Plum Creek Timber I, L.L.C. Delaware
Plum Creek Timber II, L.L.C. Delaware
Plum Creek Manufacturing, L.P. Delaware
Plum Creek Maine Timberlands, L.L.C. Delaware
Plum Creek Southern Timber, L.L.C. Delaware
Unconsolidated Subsidiaries:
Plum Creek Manufacturing Holding Company, Inc. Delaware
Plum Creek Marketing, Inc. Delaware
Plum Creek Northwest Lumber, Inc. Delaware
Plum Creek Northwest Plywood, Inc. Delaware
Plum Creek MDF, Inc. Delaware
Plum Creek Southern Lumber, Inc. Delaware
Plum Creek Plywood, L.L.C. Delaware
Plum Creek Land Company Delaware
Plum Creek Maine Marketing, Inc. Delaware
Plum Creek Remanufacturing, Inc. Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Financial
Statements of Plum Creek Timber Company, Inc. for the year ended
December 31, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 115,389
<SECURITIES> 0
<RECEIVABLES> 828
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 133,316
<PP&E> 1,012,407
<DEPRECIATION> 680
<TOTAL-ASSETS> 1,250,756
<CURRENT-LIABILITIES> 74,204
<BONDS> 642,950
0
0
<COMMON> 686
<OTHER-SE> 532,361
<TOTAL-LIABILITY-AND-EQUITY> 1,250,756
<SALES> 460,620
<TOTAL-REVENUES> 460,620
<CGS> 285,822
<TOTAL-COSTS> 314,196
<OTHER-EXPENSES> 789
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,456
<INCOME-PRETAX> 82,805
<INCOME-TAX> (13,105)
<INCOME-CONTINUING> 113,432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 12,169
<NET-INCOME> 125,601
<EPS-BASIC> 1.94
<EPS-DILUTED> 0
</TABLE>
