| PLUM CREEK TIMBER CO INC ITEM 1A RISK FACTORS BUSINESS AND OPERATING RISKS The Cyclical Nature of Our Business Could Adversely Affect Our Results of Operations Our results of operations are affected by the cyclical nature of the forest products industry |
| Historical prices for logs and manufactured wood products have been volatile, and we, like other participants in the forest products industry, have limited direct influence over the time and extent of price changes for logs and wood products |
| The demand for logs and wood products is affected primarily by the level of new residential construction activity and, to a lesser extent, repair and remodeling activity and other industrial uses |
| The demand for logs is also affected by the demand for wood chips in the pulp and paper markets |
| These activities are, in turn, subject to fluctuations due to, among other factors: • changes in domestic and international economic conditions; • interest rates; • population growth and changing demographics; and • seasonal weather cycles (eg, dry summers, wet winters) |
| Decreases in the level of residential construction activity generally reduce demand for logs and wood products |
| This results in lower revenues, profits and cash flows |
| In addition, industry-wide increases in the supply of logs and wood ELEVEN _________________________________________________________________ [68]Table of Contents PART I/ITEM 1A products during favorable price environments can also lead to downward pressure on prices |
| Timber owners generally increase production volumes for logs and wood products during favorable price environments |
| Such increased production, however, when coupled with even modest declines in demand for these products in general, could lead to oversupply and lower prices |
| Our results of operations may also be subject to global economic changes as global supplies of wood fiber shift in response to changing economic conditions |
| Changes in global economic conditions that could affect our results of operations include, but are not limited to, new timber supply sources and changes in currency exchange rates, foreign and domestic interest rates and foreign and domestic trade policies |
| In addition, changes in our ability to sell or exchange non-strategic timberlands and timberland properties that have higher and better uses at attractive prices, or changes that adversely affect our ability to execute on certain real estate development activities conducted through our taxable REIT subsidiaries, could have a significant effect on our results of operations |
| The following factors, among others, may adversely affect the timing and amount of our income generated by our land sales or our real estate development activities: • general economic conditions; • availability of funding for governmental agencies, developers, conservation organizations, individuals and others to purchase our timberlands for conservation, recreation, residential or other purposes; • local real estate market conditions, such as oversupply of, or reduced demand for, properties sharing the same or similar characteristics as those in our portfolio; • competition from other sellers of land and real estate developers; • weather conditions or natural disasters having an adverse effect on our properties; • relative illiquidity of real estate investments; • changes in interest rates; • impact of federal, state and local land use and environmental protection laws; • changes in laws, regulations or the regulatory environment affecting tax, real estate and zoning; or • our ability to obtain all land use entitlements and other permits necessary for our development activities |
| The Forest Products Industry is Highly Competitive The forest products industry is highly competitive in terms of price and quality |
| Wood products are subject to increasing competition from a variety of substitute products, including non-wood and engineered wood products |
| For example, plywood markets are subject to competition from oriented strand board, and US lumber and log markets are subject to competition from other worldwide suppliers |
| Historically, Canada has been a significant source of lumber for the US market, particularly in the new home construction market |
| This source of lumber was constrained in April 1996 when a five-year lumber trade agreement between the US and Canada went into effect |
| The trade agreement was intended to limit the volume of Canadian lumber exported into the US through the assessment of an export tariff on annual lumber exports to the US in excess of certain levels from the four major producing Canadian provinces |
| The trade agreement expired in March 2001, and soon thereafter a US industry coalition, of which Plum Creek is a member, submitted anti-dumping and countervailing duty petitions to the International Trade Commission and the US Department of Commerce |
| In March 2002, the Department of Commerce rendered a final determination in favor of the US industry coalition and set a 19dtta3prca countervailing duty on Canadian lumber imports and an anti-dumping duty on all non-investigated Canadian exporters averaging 9dtta7prca (representing the weighted average of the anti-dumping rates imposed on the investigated Canadian exporters) |
| The Department of Commerce decreased these duties in April 2002 to 18dtta8prca and 8dtta4prca, respectively, and in December 2004, it decreased them again to 16dtta4prca and 3dtta8prca, respectively |
| In December 2005, the countervailing duty rate was reduced to 8dtta7prca and the anti-dumping duty was reduced to 2dtta1prca for a combined duty of 10dtta8prca |
| Due to strong demand for lumber in the US and favorable lumber prices, the duties have not thus far had the effect of decreasing Canadian lumber imports’ share of the US market |
| It is uncertain whether Canada’s share of the US market would be adversely affected by import duties in times of weaker domestic demand for lumber |
| TWELVE _________________________________________________________________ [69]Table of Contents PART I/ITEM 1A The future of the US-imposed import duties on Canadian lumber remains uncertain |
| While the WTO and NAFTA appeal boards have issued rulings on Canadian challenges to the duties that affirm the US position regarding a Canadian subsidy on stumpage, the rulings also included provisions for re-examining the calculation and level of the duties |
| In September 2005, the NAFTA panel remanded to the Department of Commerce its subsidy calculation upon which the duties are based with instructions to make a “de minimus” calculation |
| In response, the Department of Commerce issued a subsidy calculation of 0dtta8prca in November 2005, which could result in the elimination of the countervailing duty by as early as September 2006 |
| The US industry coalition has challenged the Department of Commerce subsidy calculation to a NAFTA panel |
| If the calculation is ultimately upheld, it is possible that the countervailing duty could be eliminated entirely |
| In addition, the NAFTA panel has ruled that the International Trade Commission’s determination of injury to US industry from Canadian lumber imports, which is the basis for imposing the duties, was not supported with substantial evidence |
| The commission unsuccessfully appealed this decision, and as a result, was directed to issue a “no injury” opinion |
| The NAFTA decision was then unsuccessfully appealed to an Extraordinary Challenge Committee under the NAFTA dispute resolution process |
| Presently, the US industry coalition has initiated a constitutional challenge to a portion of the NAFTA dispute resolution process |
| The ruling on this challenge could have a material impact on the outcome of this dispute |
| The US and representatives of the Canadian government continue, from time to time, to pursue a settlement agreement |
| However, there can be no assurance that an agreement will be reached, or that the terms of any such final agreement would be favorable to the US lumber industry’s interests |
| Likewise, there can be no assurance that the ultimate legal resolution of this dispute will be on terms favorable to the US industry’s interest |
| Therefore, other factors remaining unchanged, any downward pressure on domestic lumber and log prices caused by Canadian imports could continue or increase, particularly during periods of weak lumber demand |
| Our Cash Dividends are Not Guaranteed and May Fluctuate We have elected to be taxed as a REIT under sections 856-860 of the United States Internal Revenue Code of 1986, as amended |
| Generally, REITs are required to distribute 90prca of their taxable income |
| However, REITs are required to distribute only their ordinary taxable income and not their net capital gains income |
| Accordingly, we do not believe that we are required to distribute material amounts of cash given that substantially all our taxable income is treated as capital gains income |
| To the extent capital gains income is not distributed to shareholders, a REIT would be subject to a 35prca Federal corporate income tax, and applicable state income taxes, on the undistributed capital gain income |
| In addition, the shareholders would be required to report their share of the retained capital gains income on their respective income tax returns, but would receive a refundable tax credit for their share of the tax paid at the corporate level |
| Our Board of Directors, in its sole discretion, determines the amount of the quarterly dividends (including the determination of whether to retain net capital gains income) to be provided to our stockholders based on consideration of a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments, future acquisitions and divestitures, harvest levels, changes in the price and demand for our products and general market demand for timberlands including those timberland properties that have higher and better uses |
| Consequently, our dividend levels may fluctuate |
| We May Be Unsuccessful in Carrying Out Our Acquisition Strategy We intend to pursue acquisitions of strategic timberland properties |
| As with any investment, our future acquisitions, if any, may not perform in accordance with our expectations |
| In addition, we anticipate financing such acquisitions through cash from operations, borrowings under our unsecured credit facilities, proceeds from equity or debt offerings (including offerings of limited partnership units by our operating partnership) or proceeds from asset dispositions, or any combination thereof |
| Our inability to finance future acquisitions on favorable terms or the failure of any acquisitions to conform to our expectations, could adversely affect our results of operations |
| We Depend on External Sources of Capital for Future Growth Our ability to finance growth is dependent to a significant degree on external sources of capital |
| Our ability to access such capital on favorable terms could be hampered by a number of factors, many of which are outside of our control, including, without limitation, a decline in general market conditions, increases in interest rates, an unfavorable market perception of our growth potential, a decrease in our current or estimated future earnings or a decrease in the THIRTEEN _________________________________________________________________ [70]Table of Contents PART I/ITEM 1A market price of our common stock |
| In addition, our ability to access additional capital may also be limited by the terms of our existing indebtedness, which, among other things, restricts our incurrence of debt and the payment of dividends |
| Any of these factors, individually or in combination, could prevent us from being able to obtain the capital we require on terms that are acceptable to us, and the failure to obtain necessary capital could materially adversely affect our future growth |
| Our Ability to Harvest Timber May Be Subject to Limitations Which Could Adversely Affect Our Operations Weather conditions, timber growth cycles, access limitations, availability of contract loggers, and regulatory requirements associated with the protection of wildlife and water resources may restrict harvesting of timberlands as may other factors, including damage by fire, insect infestation, disease, prolonged drought and other natural disasters |
| Although damage from such natural causes usually is localized and affects only a limited percentage of the timber, there can be no assurance that any damage affecting our timberlands will in fact be so limited |
| As is common in the forest products industry, we do not maintain insurance coverage with respect to damage to our timberlands |
| Our revenues, net income and cash flow from our operations are dependent to a significant extent on the pricing of our products and our continued ability to harvest timber at adequate levels |
| In addition, the terms of our long-term debt agreements and line of credit limit our ability to fund dividends to stockholders by accelerating the harvest of significant amounts of timber |
| Our Timberlands and Manufacturing Facilities Are Subject to Federal and State Environmental Regulations We are subject to regulation under, among other laws, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Compensation and Liability Act of 1980, the National Environmental Policy Act, and the Endangered Species Act, as well as comparable state laws and regulations |
| Violations of various statutory and regulatory programs that apply to our operations could result in civil penalties, remediation expenses, potential injunctions, cease and desist orders and criminal penalties |
| We engage in the following activities that are subject to regulation: • forestry activities, including harvesting, planting and road building, use and maintenance; • the generation of air emissions; • the discharge of industrial wastewater and storm water; and • the generation and disposal of both hazardous and non-hazardous wastes |
| Laws and regulations protecting the environment have generally become more stringent in recent years and could become more stringent in the future |
| Some environmental statutes impose strict liability, rendering a person liable for environmental damage without regard to the person’s negligence or fault |
| These laws or future legislation or administrative or judicial action with respect to protection of the environment may adversely affect our business |
| A number of species on our timberlands have been and in the future may be protected under these laws |
| Protection of threatened and endangered species may include restrictions on timber harvesting, road building and other forest practices on private, federal and state land containing the affected species |
| STOCK OWNERSHIP Provisions in Our Certificate of Incorporation and Delaware Law May Prevent a Change in Control Some provisions of our certificate of incorporation may discourage a third party from seeking to gain control of us |
| For example, the ownership limitations described in our certificate of incorporation could have the effect of delaying, deferring, or limiting a change of control in which holders of our common stock might receive a premium for their shares over the then prevailing market price |
| The following is a summary of provisions of our certificate of incorporation that may have this effect |
| Ownership Limit |
| In order for us to maintain our qualification as a REIT, not more than 50prca of the value of our outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals, as defined in the Internal Revenue Code |
| For the purpose of preserving our REIT qualification, our certificate of incorporation prohibits ownership, either directly or under the applicable attribution rules of the Internal Revenue Code, of more than 5prca of the lesser of the total number of shares of our common stock outstanding or the value of the outstanding shares of our common stock by any stockholder other than by some designated persons agreed to by us or as set FOURTEEN _________________________________________________________________ [71]Table of Contents PART I/ITEM 1A forth in our certificate of incorporation (the “Ownership Limit”) |
| The Ownership Limit may have the effect of discouraging an acquisition of control of us without the approval of our Board of Directors |
| The Ownership Limit in our certificate of incorporation also restricts the transfer of our common stock |
| For example, any transfer of our equity is null and void if the transfer would: • result in any person owning, directly or indirectly, equity in excess of the Ownership Limit; • result in our equity being owned, directly or indirectly, by fewer than 100 persons; • result in us being “closely held” (as defined in the Internal Revenue Code); • result in us failing to qualify as a “domestically controlled REIT” (as defined in the Internal Revenue Code); or • otherwise cause us to fail to qualify as a REIT Preferred Stock |
| Our certificate of incorporation authorizes our Board of Directors to issue up to 75 million shares of preferred stock |
| Upon issuance, our Board of Directors will establish the preferences and rights for this preferred stock |
| These preferences and rights may include the right to elect additional directors |
| The issuance of preferred stock could have the effect of delaying or preventing a change in control of us even if a change in control were in our stockholders’ best interests |
| Section 203 of the Delaware General Corporation Law |
| Section 203 of the Delaware General Corporation Law generally prohibits us from engaging in business transactions with a person or entity that owns 15prca or more of our voting stock for a period of three years following the time such person or entity became an “interested stockholder” unless, prior to such time, our Board of Directors approved either the business combination or the transaction which resulted in such person or entity becoming an interested stockholder |
| A business transaction may include mergers, asset sales and other transactions resulting in financial benefit to the person or entity that owns 15prca or more of our voting stock |
| TAX RISKS If We Fail to Qualify as a REIT, We Would Be Subject to Tax at Corporate Rates and Would Not Be Able to Deduct Dividends to Stockholders When Computing Our Taxable Income If in any taxable year we fail to qualify as a REIT: • we would be subject to federal and state income tax on our taxable income at regular corporate rates; • we would not be allowed to deduct dividends to stockholders in computing our taxable income; and • unless we were entitled to relief under the Internal Revenue Code, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which we lost qualification |
| If we fail to qualify as a REIT, we might need to borrow funds or liquidate some investments in order to pay the additional tax liability |
| Accordingly, funds available for investment or dividends to our stockholders would be reduced for each of the years involved |
| Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code to our operations and the determination of various factual matters and circumstances not entirely within our control |
| There are only limited judicial or administrative interpretations of these provisions |
| Although we operate in a manner consistent with the REIT qualification rules, we cannot assure you that we are or will remain so qualified |
| In addition, federal and state tax laws are constantly under review by persons involved in the legislative process, the Internal Revenue Service, the United States Department of the Treasury, and state taxing authorities |
| Changes to the tax law could adversely affect our stockholders |
| We cannot predict with certainty whether, when, in what forms, or with what effective dates, the tax laws applicable to us or our stockholders may be changed |
| If We Failed to Distribute the Earnings and Profits of The Timber Company, We Would Be Subject to Adverse Tax Consequences In connection with The Timber Company’s October 6, 2001, merger with Plum Creek, we were required by January 31, 2002, to distribute the earnings and profits acquired from the six entities that comprised The Timber Company |
| We believe that the accelerated payment of our fourth quarter dividend for 2001, which we paid on December 28, 2001, was sufficient to distribute these earnings and profits |
| If we failed to distribute an amount equal to these earnings and profits, we might be subject to adverse tax consequences |
| We expect that, even if the earnings and profits were subsequently adjusted upward by the Internal Revenue Service, the amount we distributed exceeded FIFTEEN _________________________________________________________________ [72]Table of Contents PART I/ITEM 4 such earnings and profits |
| Nevertheless, such an adjustment may give rise to the imposition of the 4prca excise tax on the excess income required to be distributed over the amounts treated as distributed after application of the earnings and profits rule |
| Certain of Our Business Activities are Potentially Subject to Prohibited Transactions Tax or Corporate-Level Income Tax Under the Internal Revenue Code, REITs must generally engage in the ownership and management of income producing real estate |
| For Plum Creek, this generally includes owning and managing a timberland portfolio for the production and sale of standing timber |
| Accordingly, the manufacture and sale by us of wood products, the harvesting and sale of logs, and the development and/or sale of certain timberlands are conducted through one or more of our taxable REIT subsidiaries (“TRSs”) because such activities could generate non-qualifying REIT income and could constitute “prohibited transactions |
| ” Prohibited transactions are defined by the Internal Revenue Code to be sales or other dispositions of property to customers in the ordinary course of a trade or business |
| By conducting our business in this manner we believe that we satisfy the REIT requirements of the Internal Revenue Code and are not subject to the 100prca tax that could be imposed if a REIT were to conduct a prohibited transaction |
| We may not always be successful, however, in limiting such activities to our TRSs |
| Therefore, we could be subject to the 100prca prohibited transactions tax if such instances were to occur |
| The net income of our TRSs is subject to corporate-level income tax |