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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission File No.: 0-23259
U.S. TIMBERLANDS COMPANY, LP
(Exact name of registrant as specified in its charter)
DELAWARE 91-1842156
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
625 Madison Avenue, Suite 10-B, New York, NY 10022
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 212-755-1100
-----------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class: Name of Each Exchange on Which Registered:
Common Units Nasdaq National Market
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 then 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 requirement 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 is not contained herein, and will not be contained,
to be 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 the Form 10-K. [ ]
The aggregate market value of the Common Units held by non-affiliates
of the registrant, based on the last reported sale price of the Common Units on
the Nasdaq National Market on February 29, 2000, was approximately $81,262,764.
Documents incorporated by reference: None
U.S. TIMBERLANDS COMPANY, LP
TABLE OF CONTENTS
Page
PART I
Item 1. Business.....................................................................................................1
Item 2. Properties..................................................................................................10
Item 3. Legal Proceedings...........................................................................................11
Item 4. Submission of Matters to a Vote of Security Holders.........................................................11
PART II
Item 5. Market for Registrant's Common Units and Related Security Holder Matters....................................12
Item 6. Selected Financial Data.....................................................................................16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................................26
Item 8. Financial Statements........................................................................................26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................26
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant..............................27
Item 11. Executive Compensation......................................................................................31
Item 12. Security Ownership of Certain Beneficial Owners and Management..............................................38
Item 13. Certain Relationships and Related Transactions..............................................................39
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K.....................................................41
ii
PART I
Item 1. Business.
General
The business of U.S. Timberlands Company, LP, a Delaware limited
partnership formed in June 1997 (the "Company"), consists of growing trees and
the sale of logs and standing timber. The Company owns approximately 561,000 fee
acres of timberland and cutting rights on approximately 3,000 acres of
timberland (collectively the "Timberlands") containing total merchantable timber
volume estimated as of January 1, 2000 to be approximately 1.8 billion board
feet ("BBF") in Oregon east of the Cascade Range (the "Timberlands"). Logs
harvested from the Timberlands are sold to unaffiliated domestic conversion
facilities. These logs are processed for sale as lumber, plywood and other wood
products, primarily for use in new residential home construction, home
remodeling and repair and general industrial applications. The Company also owns
and operates its own seed orchard and produces approximately five million
conifer seedlings annually from its nursery, approximately half of which are
used for its own internal reforestation programs, with the balance sold to other
forest products companies. Except as the context otherwise requires, references
herein to, or descriptions of, assets and operations of the Company include the
assets and operations of the Operating Company (as defined below) and the
predecessors of the Company.
The Timberlands' merchantable timber consists of Ponderosa Pine
(approximately 47%) and Douglas fir (approximately 13%), species which have
historically commanded premium prices over other softwood species, with the
balance consisting of Lodgepole Pine, White Fir and other softwood species. The
Timberlands have stands of varying ages and are unique in the forests east of
the Cascade Range in Oregon in that approximately 149,000 acres are actively
managed tree farms (the "Plantations"). The Plantations were first established
by Weyerhaeuser Company ("Weyerhaeuser") in the early 1960s and acreage has been
planted each year since then. Currently, the Plantations contain age classes
ranging generally from one to 38 years old. Initial thinning or harvesting of
the Plantation stands is expected to begin within the next five years. Because
the timber on the Plantations is generally not yet considered merchantable,
volumes of timber on the Plantations are not included in the Company's estimated
merchantable timber volume. The balance of the Timberlands are composed of
natural stands. For a more complete description of the Company's properties, see
"Properties."
In August 1996, U.S. Timberlands Klamath Falls, LLC, a Delaware
limited liability company ("USTK") and U.S. Timberlands Management Company, LLC,
formerly known as U.S. Timberlands Services Company, LLC ("Old Services"),
acquired approximately 604,000 fee acres of timberland (the "Klamath Falls
Timberlands"), containing an estimated merchantable timber volume of
approximately 1.9 BBF and related assets from Weyerhaeuser (the "Weyerhaeuser
Acquisition"). In July 1997, USTK, which is now the Company's subsidiary
operating company (in such capacity, the "Operating Company"), acquired
approximately 42,000 fee acres of timberland and cutting rights on approximately
3,000 acres of timberland (the "Ochoco Timberlands"), containing an estimated
merchantable timber volume of approximately 280 million board feet ("MMBF") from
Ochoco Lumber Company ("Ochoco") (the "Ochoco Acquisition"). At the date of
acquisition, over 40% of the merchantable timber on the Ochoco Timberlands was
at least 80 years old. The Company believes that the age classes and species mix
of the Ochoco Timberlands fit well with the Klamath Falls Timberlands and
provide the Company flexibility in developing its harvest plans. In October
1999, the Company contributed primarily non-income producing, pre-merchantable
pine plantation timberlands for an investment in an affiliate (See Item 13
Certain Relationships and Related Transactions and Note 4 and 10 to the
Consolidated Financial Statements).
During the period from January 1, 1994 through the acquisition of the
Klamath Falls Timberlands by USTK, approximately 58% of the logs harvested from
the Klamath Falls Timberlands were delivered to a plywood mill owned by
Weyerhaeuser at Klamath Falls, Oregon. Similarly, prior to the Ochoco
Acquisition, substantially all of the timber harvested from the Ochoco
Timberlands was delivered to Ochoco's mills. The Company does not currently own
any conversion facilities nor does it presently intend to own any such
facilities on a long-term basis; consequently all of the Company's sales are
made to unaffiliated third parties.
1
Concurrent with USTK's acquisition of the Klamath Falls Timberlands, USTK
arranged for Collins Products LLC ("Collins"), a privately owned forest products
company located within the Klamath Falls Timberlands area, to purchase
Weyerhaeuser's Klamath Falls mill facilities. The Company entered into a 10-year
log supply agreement with Collins (the "Collins Supply Agreement") providing for
the purchase by the plywood mill and delivery by the Company of a minimum of 34
million board feet ("MMBF") of logs each year at market prices. The Collins
Supply Agreement is extendable by Collins for two additional five-year terms. In
addition to its sales under the Collins Supply Agreement, the Company sells logs
to conversion facilities located in the area surrounding the Timberlands. There
are currently more than 50 primary conversion facilities located within a 150
mile radius of the Company's Timberlands.
Formation of the Company
On November 19, 1997, the Company acquired substantially all of the
equity interests in USTK and the business and assets of Old Services (the
"Acquisition") and completed its initial public offering (the "Initial
Offering") of common units representing limited partner interests ("Common
Units"). Upon the closing of the Acquisition, Old Services contributed all of
its assets, including its timber operations, to U.S. Timberlands Services
Company, LLC, a newly formed Delaware limited liability company and the
Company's general partner (the "General Partner" or "New Services"), in exchange
for interests therein. Immediately thereafter, USTK assumed certain indebtedness
(the "Holdings Debt") of U.S. Timberlands Holdings, LLC, an affiliate of USTK
("Holdings"), and the General Partner contributed its timber operations to USTK
in exchange for a member interest in USTK. Then the General Partner contributed
all but a 1% member interest in USTK to the Company in exchange for a general
partner interest in the Company, the right to receive Incentive Distributions
(as defined herein) and 1,387,963 subordinated units representing limited
partner interests in the Company ("Subordinated Units"), and Holdings
contributed all of its interest in USTK to the Company in exchange for 2,894,157
Subordinated Units. The General Partner then distributed the Subordinated Units
to Old Services. Approximately 143,398 Subordinated Units were used by Old
Services to redeem interests in Old Services held by certain founding directors
of the General Partner (the "Founding Directors"). As a result of such
transactions, USTK became the Operating Company and the General Partner owns an
aggregate 2% interest in the Company and the Operating Company on a combined
basis, and the right to receive Incentive Distributions; Old Services owns
1,244,565 Subordinated Units; Holdings owns 2,894,157 Subordinated Units; and
the Founding Directors own an aggregate of 143,398 Subordinated Units. The
4,282,120 Subordinated Units owned by Old Services, Holdings and the Founding
Directors represent an aggregate 32.6% interest in the Company. The Common Units
and the Subordinated Units are referred to herein collectively as "Units" and
the holders of Units are referred to herein as "Unitholders."
Concurrent with the closing of the Initial Offering, the Operating
Company and its wholly-owned subsidiary, U.S. Timberlands Finance Corp.
("Finance Corp."), consummated the public offering (the "Public Note Offering")
of $225.0 million aggregate principal amount of unsecured senior notes (the
"Notes). See "Management's Discussion and Analysis Liquidity and Capital
Resources."
The purpose of the Company under the Partnership Agreement is limited
to serving as the non-managing member of the Operating Company and engaging in
any business activity that may be engaged in by the Operating Company. The
Operating Company Agreement provides that the Operating Company may, directly or
indirectly, engage in (i) any activity engaged in by USTK immediately prior to
the Initial Offering, (ii) any other activity approved by the General Partner
but only to the extent that the General Partner reasonably determines that, as
of the date of the acquisition or commencement of such activity, such activity
generates "qualifying income" (as such term is defined in Section 7704 of the
Code) or (iii) any activity that enhances the operations of an activity that is
described in (i) or (ii) above. Although the General Partner has the ability
under the Partnership Agreement to cause the Company and the Operating Company
to engage in activities other than the ownership or operation of
timber-producing real property, the General Partner has no current intention of
doing so. The General Partner is authorized in general to perform all acts
deemed necessary to carry out such purposes and to conduct the business of the
Company.
2
Company Structure and Management
The operations of the Company are conducted through, and the
operating assets are owned by, USTK, as the operating Company. The Company owns
a 98.9899% member interest in the Operating Company and the General Partner owns
a 1% general partner interest in the Company and a 1.0101% managing member
interest in the Operating Company. The General Partner therefore owns an
aggregate 2% interest in the Company and the Operating Company on a combined
basis.
The Company's business is managed by the General Partner. The General
Partner does not receive any management fee or other compensation in connection
with its management of the Company, but is reimbursed for all direct and
indirect expenses incurred on behalf of the Company (including wages and
salaries of employees, officers and directors of the General Partner) and all
other necessary or appropriate expenses allocable to the Company or otherwise
reasonably incurred by the General Partner in connection with the operation of
the Company's business.
Conflicts of interest may arise between the General Partner and its
affiliates, on the one hand, and the Company, the Operating Company and the
Unitholders, on the other, including conflicts relating to the compensation of
the directors, officers and employees of the General Partner and the
determination of fees and expenses that are allocable to the Company. The
General Partner has a conflicts committee (the "Conflicts Committee"),
consisting of two independent members of its Board of Directors, that is
available at the General Partners discretion to review matters involving
conflicts of interest.
The principal executive offices of the Company and the General
Partner are located at 625 Madison Avenue, Suite 10-B, New York, New York 10022.
The telephone number at such offices is (212) 755-1100.
The Timberlands
Timber Growth
Timber growth rates reflect timberland productivity and the rate of
return on a timber investment. Growth rate is an important factor in determining
when to harvest timber and the harvest potential of timberlands over the long
term. Merchantable timber is economically mature for harvesting when its current
growth rate falls below the desired rate of return on the investment in the
standing trees. The average growth rate from regeneration to economic maturity
measures the capacity of the land for timber production. The Company's older and
natural stands on the Timberlands that are expected to provide the near term
harvest have a current average growth rate of approximately 160 board feet per
acre per annum. The younger plantations, that presently have little merchantable
volume, are growing at a rate that is expected to average at least 315 board
feet per acre per annum to economic maturity in 50 to 60 years. This growth rate
is based on calculated volumes at the time of maturity. The Company has achieved
higher growth rates on the Plantations by planting high quality seedlings, by
eliminating competing non-timber growth from the Timberlands and by applying
modern forestry practices to assist the growth of the timber. Currently, nearly
all of the seedlings planted are grown from superior seed produced in the
Company's seed orchard. Management does take action to enhance the growth rate
in the natural stands as well. For example, selective harvesting in the slower
growing natural stands opens up the timber stand allowing for more vigorous
growth of the remaining trees. When it is no longer possible to maintain
acceptable growth rates in these stands they will be harvested entirely and
converted to faster growing plantations.
3
Harvest Plans
The Company strives to manage all of its Timberlands, including the
Plantations, in an economically prudent and environmentally sensitive manner in
order to maximize their value over time. Integral to this management process are
the Company's long-term harvest plans. The Company prepares its harvest plans
annually based on analyses of the size and age class distribution of the
Timberlands and the economic maturity of each harvest tract. The factors the
Company considers in determining its long-term harvest plans include, among
other things, current and expected market conditions, competition, customer
requirements, the age, size and species distribution of the Company's timber,
assumptions about timber growth rates which are improving over time as a result
of technological, biological and genetic advances that improve forest management
practices, expected acquisitions and dispositions, access to the Timberlands,
availability of contractors, sales contracts and environmental and regulatory
constraints. The Company's harvest plans reflect the Company's expectations for
each year's harvest, including the sites to be harvested, the manner of
harvesting such sites, the volume of each species to be harvested, the prices
expected to be received for the Company's timber, the amount of stumpage sales,
logging and other costs, thinning operations and other relevant information. The
Company has the flexibility to update its harvest plans during the year to take
into consideration changes in these factors. The Company harvested or committed
to harvest from log, stumpage and timber deed sales 187 million board feet
(MMBF) in 1999 and plans to harvest, or commit to harvest, approximately 160
MMBF in 2000. The Company also intends to sell approximately 29 MMBF through
property sales in 2000. Under the current harvest plans, the Company intends to
harvest its current Timberlands aggressively over approximately the next eight
to ten years after which time the harvest level is expected to decline to a
level which the Company considers to be more sustainable over the long term. The
Company believes these harvest plans can be achieved; however, since harvest
plans are based on certain assumptions, many of which are beyond the Company's
control, there can be no assurance that the Company will be able to harvest the
volumes projected in its harvest plans. While the Company's debt obligations
place certain limitations on the harvest plans, the Company believes that it has
sufficient flexibility to permit modifications in response to fluctuations in
the market for logs and lumber and the other factors described above. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." If the Company's current harvest plans are pursued unaltered for
the next ten years, if it consummates the land sales contemplated by its
strategic plan and if its other strategic assumptions prove to be accurate, the
Company expects that its timber inventory will decline through 2010 and
Ponderosa Pine volume will increase as a percentage of its total timber
inventory by such date. The Company expects that its inventory would remain
relatively stable thereafter. Long term harvest plans, growth rates and forest
inventory levels will be reviewed during 2000 and 2001. Such harvest plans, land
sales and other strategic assumptions do not take into account any acquisition
that the Company may consummate during such period.
Access
The Timberlands are accessible by a system of approximately 5,000
miles of Company-owned and established roadways or low-maintenance roads. The
Company uses third-party road crews to conduct construction and maintenance on
the Timberlands. The Company regularly enters into reciprocal road-use
agreements with the United States Department of Agriculture - Forest Service
("USFS") and the United States Department of Interior Bureau of Land Management
("BLM") and cooperates with such agencies in numerous cost-sharing arrangements
regarding jointly used roads.
Sales and Markets
The Company sells its timber through log sales, stumpage sales and deed
sales. Under a log sale, the Company identifies a block of timberland that is
ready to be harvested and solicits offers from its customers for delivery of
logs. After a price and volume have been agreed among the parties, the Company
contracts a third party to harvest the acreage and deliver to a roadside site on
the Timberlands, where a contracted trucking company picks up the logs and
delivers them to the customer. A stumpage sale is similar to a log sale in that
the Company solicits offers from its customers for timber on a block of
timberland that is ready to be harvested. However, under a stumpage contract,
the Company sells the customer the right to harvest the timber, or stumpage, and
the customer arranges to harvest and deliver the logs. Under a stumpage
contract, revenue recognition occurs as the timber is harvested by the customer,
as the Company retains the risk of loss until the timber is harvested. A timber
deed sale is similar to a stumpage sale, except revenue recognition occurs when
the contract is executed, as the Company passes the risk of loss to the customer
when the contract is executed.
4
The Company currently sells its sawlogs or stumpage to unaffiliated
wood products manufacturers and sells its chips to unaffiliated pulp mills or
hardboard plants. The percentage of logs which are sold as sawlogs/stumpage or
pulp logs is dependent upon, among other things, the species mix and quality of
the inventory harvested and the market dynamics affecting the region. Most of
the timber on the Timberlands is softwood which, due to its long fiber,
strength, flexibility and other characteristics, is generally preferred over
hardwood for construction lumber and plywood. Once processed, sawlogs are
suitable for use as structural grade lumber, appearance grade boards, plywood
and laminated veneer and can also be manufactured for such end uses as window
trim, molding and door jambs. During 1999, sawlogs, stumpage sales and timber
deed sales accounted for approximately 55.0%, 2.0% and 42.5%, respectively, of
the Company's revenue. Chips, which can be used to make hardboard or pulp,
accounted for approximately 0.1% of the Company's revenues in 1999. The market
price of chips has historically been volatile, rising and falling with the price
of pulp. Sales of seedlings accounted for the remaining 0.4% of the Company's
revenues in 1999.
The Company's customers include numerous unaffiliated operators of
conversion facilities. Since its acquisition of the Klamath Falls Timberlands in
August 1996, the Company has sold logs and chips from such timberlands to 25
different customers. Concurrent with the Weyerhaeuser Acquisition, USTK arranged
for Collins, a privately owned forest products company located within the
Klamath Falls Timberlands, to purchase Weyerhaeuser's Klamath Falls mill
facilities. At such time, the Company entered into the Collins Supply Agreement,
a 10-year log supply agreement with Collins providing for purchase by the
plywood mill and delivery by the Company of a minimum of 34 MMBF of logs each
year at market prices. The Collins Supply Agreement is extendable by Collins for
two additional five-year terms. In 1999, timber sales to Collins, Crown Pacific
Partners, Boise Cascade Corporation and Ochoco Lumber Company, combined,
accounted for approximately 64% of the Company's revenue. No other single
customer accounted for more than 10% of the Company's net revenues for 1999.
Collins made its purchases pursuant to the Collins Supply Agreement, while the
other purchases were made pursuant to short-term arrangements. Although the loss
of one or more of such customers or other significant customers could have a
material adverse effect on the Company's results of operations, the Company
believes that the capacity for processing wood fiber in the Company's markets
currently exceeds the supply and that, therefore, such customers could readily
be replaced. There are currently more than 50 primary conversion facilities
located within a 150-mile radius of the Company's Timberlands.
Seasonality
Log and stumpage sales volumes are generally at their lowest levels
in the first and second quarters of each year. Heavy snowfalls in higher
elevations prevent access to many areas of the Company's timberlands in the
first quarter. This limited access, along with spring break-up conditions in
March or April (when warming weather thaws and softens roadbeds), restricts
logging operations to lower elevations and areas with rockier soil types. The
result of these constraints is that sales volumes are typically at their lowest
in the first quarter, improving in the second quarter and at their high during
the third and fourth quarters. Most customers in the region react to this
seasonality by carrying high log inventories at the end of the calendar year at
a level that provides sufficient inventory to carry them to the second quarter
of the following year.
Contributing to this seasonality of log volumes is the market demand
for lumber and related products which is typically lower in the first or winter
quarter when activity in the construction industry is slow, but increasing
during the spring, summer and fall quarters. Log and stumpage prices generally
increase in the spring with this build up of construction activity matching the
timing of re-entry to all forested areas and increased logging activity.
5
Competition
Due to transportation costs, domestic conversion facilities in the
Pacific Northwest tend to purchase raw materials within relatively confined
geographic areas, generally within a 200-mile radius. It is generally recognized
that log suppliers such as the Company provide their market with a commodity
product. The Company and its competitors all benefit from the same competitive
advantages in the region--namely, excess of demand, close proximity to numerous
mills, and positive demographic trends of the Pacific Northwest and the West
Coast. Therefore, the Company and its competitors are currently able to sell all
the logs they are able to produce. Additional competitive factors within a
market area generally will include species and grade, quality, ability to supply
logs which consistently meet the customers' specifications and ability to meet
delivery requirements. The Company believes that it has a reputation as a stable
and consistent supplier of well merchandised, high-quality logs. The Company has
no conversion facilities and therefore does not compete with its customers for
logs. The Company believes that this gives it an advantage over certain of its
competitors that also own conversion facilities.
The Company competes with numerous private land and timber owners in
the northwestern United States and the state agencies of Oregon, as well as
immaterial amounts of foreign imports, primarily from Canada and New Zealand. In
addition, the Company competes with the USFS, the BLM and the Bureau of Indian
Affairs. Certain of the Company's competitors have significantly greater
financial resources than the Company.
The Company believes that it competes successfully in the timber
business for the following reasons: (i) the Company has substantial holdings of
timber properties which include approximately 1.8 BBF of merchantable, good
quality timber, approximately 149,000 acres of plantation timberland and a
full-scale seed orchard and nursery operation located in a region where
conversion facilities have been experiencing shortages in the supply of wood
fiber; (ii) the Company focuses on owning timberlands rather than operating
conversion facilities, which minimizes the Company's cost structure and capital
expenditures, allows the Company to seek the most favorable markets for its
timber rather than being committed to supply its own facilities, and ensures
that the Company will not compete with its customers; (iii) the Company's lean
operating structure allows it to efficiently manage its Timberlands, and should
enable it to acquire additional timberlands without commensurate increases in
overhead; and (iv) the Company's computerized geographic information system
("GIS") enables the Company to evaluate the optimal timing and patterns of the
harvest of its Timberlands and evaluate and integrate acquisitions of additional
timberlands.
Resource Management
Timber Resource Management
All of the silvicultural activities on the Timberlands and the
harvesting and delivery of logs are conducted by independent contractors. The
Company's operations involve intensive timber management and harvesting
operations, which include road construction and reforestation, as well as
wildlife and watershed management, all of which are carefully monitored using
the Company's GIS. See "Geographic Information System." The Company employs a
number of traditional and recently developed harvesting techniques on its lands
based on site-specific characteristics and other resource considerations. The
topography of the Timberlands allows over 95% of the Timberlands to be harvested
using lower-cost mechanical methods as opposed to higher-cost cable systems.
Harvesting on the Timberlands is conducted using both selective and
regeneration harvesting. In selective harvesting, a partial harvest provides
merchantable timber and opens up the stand for supplemental growth on the
remaining stand. Harvest entries are separated by approximately 5 to 15 years
and each entry is prescribed for volume to be removed, spacing to be provided,
and diameter limits to be harvested. In regeneration harvesting, which is used
to harvest approximately 40% of the Company's timber, all merchantable volume is
removed in a single harvest. After an area has been regeneration harvested, the
Company employs a reforestation contractor to plant two-year-old seedlings at an
optimal density of approximately 350 trees per acre. The Company also attempts
to protect and maintain the ecosystem within the Timberlands while providing for
a reasonable harvest. For example, the Company typically leaves a mix of green
and dead trees at the harvest site, including some large trees, snags and downed
logs to provide habitats for a variety of wildlife species while enriching the
soil for successive generations of trees.
6
Particular forestry practices vary by geographic region and depend
upon factors such as soil productivity, weather, terrain, tree size, age and
stocking. The climate, site and soil conditions on the east side of the Cascade
Range, for example, permit management to harvest on an optimal rotation, or
harvest cycle, of 50 to 60 years. Forest stands are thinned periodically to
improve growth and stand quality until harvested. The Company actively utilizes
commercial thinning as a timber management practice. Pre-commercial thinning,
which occurs only in the Plantation stands, is utilized when the timber
harvested is not merchantable. The Company believes that such thinning improves
the overall productivity of the Timberlands by enhancing the growth of the
remaining trees. Occasionally, revenues are generated from pre-merchantable
thinning due to strong markets for wood chips.
The Company's policy is to ensure that every acre harvested is
reforested in order to enhance the long-term value of its timberlands. Based on
the geographic and climatic conditions of a given harvest site, harvested areas
may be regenerated naturally, by leaving mature trees to reseed the area, or
replanted with seedlings. Natural regeneration methods are widely used on
approximately 60% of the Company's harvested land. Approximately 27% of the
Timberlands acreage currently consist of Plantations. The Company expects to
convert approximately 3,000 to 8,000 acres of natural stands to Plantations
annually. During 1999, the Company planted approximately 2.2 million seedlings.
Similar planting levels are expected for 2000. The Company uses seedlings from
its nursery (representing approximately 90% of seedlings planted) to grow trees
with desirable traits such as superior growth characteristics, good form and
disease resistance, resulting in greater wood volume over a rotation than that
generated by naturally regenerated seedlings. The seedlings are grown in the
Company's nursery, which uses seeds from the Company's seed orchard, which was
established by Weyerhauser in 1973. The seed orchard produces seed from trees
selected because they were the best genotype in their respective environments.
Geographic Information System ("GIS")
The GIS is a computer software program that the Company acquired from
Weyerhaeuser as part of the Klamath Falls Acquisition. The GIS data, which has
been compiled over a period of at least five years, includes detailed
topographical field maps for every stand within the Timberlands including data
for the Ochoco Timberlands, setting forth the characteristics, including age,
species, size and other characteristics for the timber growing on each stand.
Using the data in the GIS, the Company can use a computer model to "grow" the
timber over time, enabling it to generate long-term harvest plans and to update
its inventory annually. To maintain the integrity of the data in the GIS, the
Company performs a detailed ground survey of the remaining timber inventory on a
tract after each harvest and updates the data in the GIS for that tract. With
the aid of the GIS, the Company is able to actively manage the Timberlands,
track its inventory and develop site-specific harvest plans on multiple scales,
adding additional layers of detail, such as the location of roadways or wildlife
nesting areas, as required. The GIS also permits the Company to analyze the
impact that new legislation may have on its Timberlands by inputting the
proposed constraints imposed by such legislation in light of the particular
field characteristics of its Timberlands. The GIS has been be used to the
Company's advantage to evaluate potential acquisition opportunities.
Federal and State Regulation
Endangered Species
The Federal Endangered Species Act and counterpart state legislation
protect species threatened with possible extinction. Protection of endangered
species may include restrictions on timber harvesting, road building and other
silvicultural activities in areas containing the affected species. A number of
species indigenous to the Pacific Northwest have been protected under the
Endangered Species Act, including the northern spotted owl, marbled murrelet,
Columbian white-tail deer, mountain caribou, grizzly bear, bald eagle and
various anadromous fish species. Currently, the Company has identified several
spotted owl and bald eagle nesting areas affecting the Timberlands and the
presence of bull trout in certain of its streams, which may affect harvesting on
approximately 26,000 acres.
In 1990, the United States Fish and Wildlife Service (the "USFWS")
listed the northern spotted owl as a threatened species throughout its range in
Washington, Oregon and California. The Oregon Forest Practices Act and related
regulations also protect endangered species and has specific provisions
governing habitat protection for the spotted owl, the bald eagle and other
threatened species.
7
Based on the latest survey available to the Company, there were
approximately 68 bald eagle sites on the Klamath Falls Timberlands. The Company
observes harvesting restrictions around the eagle sites. Due in part to efforts
of the Company and its Predecessor, the bald eagle is expected to be removed
from the endangered species list in July, 2000.
In addition, the Company conducts surveys to determine the presence
of northern spotted owls. The surveys have been conducted every year in order to
(i) meet the regulatory requirements for timber harvest and other management
activities, (ii) monitor existing sites and determine the current status of such
sites, (iii) determine if areas identified as containing suitable habitat are
supporting owls and (iv) investigate other spotted owl or other species
sightings. The most recent of such surveys was completed in July 1999, and
identified approximately 28 northern spotted owl sites affecting the Klamath
Falls Timberlands, three of which are located on the Klamath Falls Timberlands.
The Company believes that it is managing its harvesting operations in
the areas affected by protected species in substantial compliance with
applicable federal and state regulations. Based on certain consultants' reports,
and on management's knowledge of the Timberlands, the Company does not believe
that there are any species protected under the Endangered Species Act or similar
state laws that, under current regulations and Court interpretation, would
materially adversely affect the Company's ability to harvest the Timberlands in
accordance with current harvest plans. There can be no assurance, however, that
species within the Timberlands may not subsequently receive protected status
under the Endangered Species Act or that currently protected species may not be
discovered in significant numbers within the Timberlands. Additionally, there
can be no assurance that future legislative, administrative or judicial
activities related to protected species will not adversely affect the Company or
its ability to continue its activities and operations as currently conducted.
Timberlands
The operation of the Timberlands is subject to specialized statutes
and regulations in the State of Oregon, which has enacted laws which regulate
forestry operations, including the Forest Practices Act, which addresses many
growing, harvesting and processing activities on forest lands. Among other
requirements, these laws restrict the size and spacing of regeneration harvest
units, and impose certain reforestation obligations on the owners of forest
lands. The State of Oregon requires a company to provide prior notification
before beginning harvesting activity. The Forest Practices Act and other state
laws and regulations control timber slash burning, operations during fire hazard
periods, logging activities affecting or utilizing water courses or in proximity
to certain ocean and inland shore lines, water anti-degradation and certain
grading and road construction activities. The Company believes it is in
substantial compliance with these regulations.
Environmental Laws and Superfund
The Company's operations are subject to federal, state and local
environmental laws and regulations relating to the protection of the
environment. Although the Company believes that it is in material compliance
with these requirements, there can be no assurance that significant costs, civil
and criminal penalties, and liabilities will not be incurred, including those
relating to claims for damages to property or natural resources resulting from
the Company's operations.
Environmental laws and regulations have changed substantially and
rapidly over the last 20 years, and the Company anticipates there will be
continuing changes. The trend in environmental regulations is to place more
restrictions and limitations on activities that may affect the environment, such
as emissions of pollutants and the generation and disposal of wastes.
Increasingly strict environmental restrictions and limitations have resulted in
increased operating costs for the Company and it is possible that the costs of
compliance with environmental laws and regulations will continue to increase.
8
Access to Timberlands May be Limited by Federal Regulation
A substantial portion of the Timberlands consists of sections of land
that are intermingled with or adjacent to sections of federal land managed by
the USFS and the BLM. Removal of trees from those portions of the Timberlands
requires transportation of the logs by truck across logging and general purpose
roads. In many cases, access is only, or most economically, achieved through a
road or roads built across adjacent federal land pursuant to a reciprocal
right-of-way ("RROW"). Removal of federal timber often requires similar access
across the Timberlands. Recent litigation (not involving the Company) before the
United States Court of Appeals for the Ninth Circuit held that the BLM was not
required to consult with the USFWS, which administers the Endangered Species
Act, prior to approving a private landowner's proposal to build an access road
across federal land pursuant to an existing RROW entered into prior to the
enactment of the Endangered Species Act wherein the BLM did not have discretion
to disapprove a road segment due to endangered species concerns. A reversal on
appeal or a rehearing of that case, or future federal law or regulation
requiring the BLM to consult with the USFWS in connection with an RROW, could
materially adversely affect the Company's ability to harvest the affected
portion of the Timberlands. Certain of the Company's RROW agreements contain
provisions that require compliance with state and federal environmental laws and
regulations. To the extent that the Company acquires new Timberlands that
require access through federal lands, the Company may enter into new RROW
agreements with the BLM or other federal agencies which would require
consultation with the USFWS. In addition, the BLM has published advance notice
of its intent to revise regulations governing RROW agreements entered into the
future to, among other things, expand the BLM's consideration of environmental
and cultural factors in granting, issuing or renewing rights-of-way, provide the
BLM with regulatory authority to object to the location of roads because of
potential effects on threatened or endangered species and allow for the
abandonment of rights-of-way under certain circumstances.
Safety and Health
The operations of the Timberlands are subject to the requirements of the Federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes
relating to the health and safety of employees. The Company believes that it is
in compliance with OSHA regulations, including general industry standards,
permissible exposure levels for toxic chemicals and record-keeping requirements.
9
Employees
As of March 15, 2000, the Company had 32 salaried employees,
including employees of the General Partner that manage the business of the
Company. The employees of the Timberlands are not unionized, and the Company
believes that its employee relations are good. All of the silvicultural
activities on the Timberlands and the harvesting and delivery of logs are
conducted by independent contractors who are not employees of the Company.
Item 2. Properties
Timber Inventory
The Company currently owns and manages approximately 561,000 fee
acres of timberland and cutting rights on approximately 3,000 acres of
timberland containing total merchantable timber volume estimated as of January
1, 2000 to be approximately 1.8 BBF in Oregon east of the Cascade Range. The
Timberlands include substantial holdings of merchantable, good-quality timber. A
merchantable tree is a tree of sufficient size that will produce a sound log 16
feet in length and at least 4.6 inches in diameter, inside bark, at the small
end. The Company's merchantable timber inventory consists of premium species of
softwood, consisting of Ponderosa Pine and Douglas fir, species which have
historically commanded premium prices over other softwood species, as well as
Lodgepole Pine, White Fir and other species. The Company believes that the
Timberlands are suitable and adequate for current operations.
The Timberlands have stands of varying sizes and ages and are unique
in the forests east of the Cascade Range in Oregon in that approximately 149,000
acres of the 561,000 acre total consist of actively managed pine Plantations
with stands ranging in age from one to 38 years. The Plantations are stocked
with high quality Ponderosa Pine (approximately 77%) and Lodgepole Pine
(approximately 23%). Because the timber on the Plantations is generally not yet
considered merchantable, volumes of timber on the Plantations are not included
in the Company's estimated merchantable timber volume. However, initial thinning
of the Plantation stands, including the thinning of commercial quantities of
merchantable timber, is expected to begin within the next five years.
See "The Timberlands--Harvest Plans."
Merchantable Timber Inventory by Species
The Company maintains data regarding the estimated merchantable
timber inventory by species within the Timberlands. All volumes are based on
information developed by Company personnel. As of January 1, 2000, the total
timber inventory amounted to 1.8 BBF. The Company's combined timber inventory by
MMBF and percentage is Ponderosa Pine (860.2 (47%)), Lodgepole Pine (317.7
(18%)), White Fir (349.5 (19%)), Douglas fir (238.7 (13%)) and other species
(54.3 (3%)). Other species include Cedar, Sugar Pine, Western Larch and Grand
Fir.
Size and Species Distribution of Merchantable Timber
The Company's Timberlands are diversified by species mix and, to a
lesser extent, by size distribution. Timber on the Timberlands generally reaches
merchantable size between 40 and 50 years in natural stands and between 25 and
35 years in the Plantations. The Company maintains data as to the estimated
volume distribution of merchantable timber on the Timberlands by species and by
diameter at breast-height ("DBH"). As of January 1, 2000, approximately 453
MMBF, or 25%, of the merchantable timber had a DBH of 16 or more inches.
10
Acreage Distribution by Age Class on Plantations
The Company also maintains data as to the acreage distribution of
timber on the Plantations by age class. As of January 1, 2000, the Plantations
totaled 149,000 acres. Of the total acreage, 57,000 acres range from 1 to 15
years of age, 82,000 acres range from 16 to 25 years of age, and 10,000 acres
are 26 years of age or older.
Item 3. Legal Proceedings
There is no pending litigation and, to the knowledge of the Company,
there is no threatened litigation, the unfavorable resolution of which could
have a material adverse effect on the business or financial condition of
Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the Company's
Unitholders during the fourth quarter of 1999.
11
PART II
Item 5. Market for Registrant's Common Units and Related Security Holder Matters
The Common Units are listed and traded on the Nasdaq National Market
("Nasdaq") under the symbol "TIMBZ." The Common Units began trading on November
14, 1997, at an initial public offering price of $21.00 per Common Unit. As of
December 31, 1999, there were approximately 9,300 record holders of the
Company's Common Units and four record holders of the Company's Subordinated
Units. There is no established public trading market for the Company's
Subordinated Units.
The following table sets forth the high and low sales prices for the
Common Units on Nasdaq:
Common Unit Price Range
------------------------------------
High Low
-------------------- ---------------
First Quarter 1998......................... $ 21.50 $ 20.31
Second Quarter 1998........................ 21.88 18.00
Third Quarter 1998......................... 19.50 14.88
Fourth Quarter 1998........................ 18.25 13.00
First Quarter 1999......................... 14.50 11.56
Second Quarter 1999........................ 14.69 11.50
Third Quarter 1999......................... 15.75 10.75
Fourth Quarter 1999........................ 13.38 9.81
First Quarter 2000 ........................ 11.38* 9.50*
- ---------------------------
* First Quarter 2000 high/low is through March 13, 2000.
The last reported sale price of the Common Units on Nasdaq on March
13, 2000 was $ 9.50 per Common Unit.
Cash Distributions
The Company made its first cash distribution on the Common Units and
the Subordinated Units on May 15, 1998, of $0.73, representing the sum of $0.50,
the Minimum Quarterly Distribution for the first quarter of 1998, plus $0.23,
the pro rata portion of the Minimum Quarterly Distribution for the period from
November 19, 1997 through December 31, 1997. The Company made the Minimum
Quarterly Distributions of $0.50 per Unit for the second, third and fourth
quarters of 1998 on August 14, 1998, November 13, 1998 and February 12, 1999,
respectively. During 1999, the Company also made the Minimum Quarterly
Distributions of $0.50 per Unit for the first, second, third and fourth quarters
on February 12, 1999, August 13, 1999, November 15, 1999, and February 14, 2000,
respectively.
Cash Distribution Policy
General
The Company currently expects to distribute 98% of its Available Cash
(defined below) within 45 days after the end of each quarter to Unitholders of
record and 2% to the General Partner. During a specified period that will not
end earlier than December 31, 2002 (the "Subordination Period"), distributions
of Available Cash on Subordinated Units are subordinated to the rights of
holders of the Common Units to receive $0.50 per Common Unit per quarter, plus
any arrearages in the Minimum Quarterly Distribution.
Available Cash as defined in the Partnership Agreement generally
means, with respect to any quarter of the Company, all cash on hand at the end
of such quarter less the amount of cash reserves that is necessary or
appropriate in the reasonable discretion of the General Partner to (i) provide
for the proper conduct of the Company's business, (ii) comply with applicable
law or any Company debt instrument or other agreement, or (iii) provide funds
for distributions to Unitholders and the General Partner in respect of any one
or more of the next four quarters.
12
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to Unitholders relative to the General Partner, and under certain
circumstances it determines whether holders of Subordinated Units receive any
distributions.
Operating Surplus, as defined in the Partnership Agreement, refers
generally to (i) the cash balance of the Company on the date the Company
commences operations, plus $15.0 million, plus all cash receipts of the Company
from its operations since the closing of the Transactions, less (ii) all Company
operating expenses, debt service payments (including reserves therefor but not
including payments required in connection with the sale of assets or any
refinancing with the proceeds of new indebtedness or an equity offering) and
reserves established for future Company operations, in each case since the
closing of the Transactions.
Capital Surplus as also defined in the Partnership Agreement will
generally be generated only by borrowings (other than for working capital
purposes), sales of debt and equity securities and sales or other dispositions
of assets for cash (other than inventory, accounts receivable and other assets
all as disposed of in the ordinary course of business and up to $50.0 million of
land sales).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Company is from Operating Surplus or from Capital Surplus,
all Available Cash distributed by the Company from any source will be treated as
distributed from Operating Surplus until the sum of all Available Cash
distributed since the commencement of the Company equals the Operating Surplus
as of the end of the quarter prior to such distribution. Any Available Cash in
excess of such amount (irrespective of its source) will be deemed to be from
Capital Surplus and distributed accordingly.
If Available Cash from Capital Surplus is distributed in respect of
each Common Unit in an aggregate amount per Common Unit equal to $21.00 (the
"Initial Unit Price"), plus any Common Unit Arrearages, the distinction between
Operating Surplus and Capital Surplus will cease, and all distributions of
Available Cash will be treated as if they were from Operating Surplus. The
Company does not anticipate that there will be significant distributions from
Capital Surplus.
The Subordinated Units are a separate class of interests in the
Company, and the rights of holders of such interests to participate in
distributions to partners differ from the rights of the holders of Common Units.
For any given quarter, any Available Cash will be distributed to the General
Partner and to the holders of Common Units, and may also be distributed to the
holders of Subordinated Units depending upon the amount of Available Cash for
the quarter, the amount of Common Unit Arrearages, if any, and other factors
discussed below.
The Incentive Distributions are nonvoting limited partner interests
that represent the right to receive an increasing percentage of quarterly
distributions of Available Cash from Operating Surplus after the Target
Distribution Levels have been achieved. The Target Distribution Levels are based
on the amounts of Available Cash from Operating Surplus distributed in excess of
the payments made with respect to the Minimum Quarterly Distribution and Common
Unit Arrearages, if any, and the related 2% distribution to the General Partner.
Distributions from Operating Surplus during Subordination Period
The Subordination Period will generally continue until the first day
of any quarter beginning after December 31, 2002 in respect of which (i)
distributions of Available Cash from Operating Surplus on the Common Units and
the Subordinated Units with respect to each of the three consecutive
four-quarter periods immediately preceding such date equaled or exceeded the sum
of the Minimum Quarterly Distribution on all of the Common Units and
Subordinated Units during such periods, (ii) the Adjusted Operating Surplus
generated during each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units that
were outstanding during such period on a fully-diluted basis and the related
distribution on the general partner interest in the Company and the managing
member interest in the Operating Company, and (iii) there are no outstanding
Common Unit Arrearages.
Prior to the end of the Subordination Period, a portion of the
Subordinated Units will convert into Common Units on a one-for-one basis on the
first day after the record date established for the distribution in respect of
any quarter ending on or after (a) December 31, 2000 with respect to one-quarter
of the Subordinated Units (1,070,530 Subordinated Units), and (b) December 31,
2001 with respect to one-quarter of the Subordinated Units (1,070,530
Subordinated Units), in respect of which (i) distributions of Available Cash
from Operating Surplus on the Common Units and the Subordinated Units with
respect to each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding
13
Common Units and Subordinated Units during such periods, (ii) the Adjusted
Operating Surplus generated during each of the two consecutive four-quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the Common Units and Subordinated Units
that were outstanding during such period on a fully diluted basis and the
related distribution on the general partner interest in the Company and the
managing member interest in the Operating Company, and (iii) there are no
outstanding Common Unit Arrearages; provided, however, that the early conversion
of the second one-quarter of Subordinated Units may not occur until at least one
year following the early conversion of the first one-quarter of Subordinated
Units.
Upon expiration of the Subordination Period, all remaining
Subordinated Units will convert into Common Units on a one-for-one basis and
will thereafter participate, pro rata, with the other Common Units in
distributions of Available Cash. In addition, if the General Partner is removed
as the general partner of the Company under circumstances where Cause does not
exist and Units held by the General Partner and its affiliates are not voted in
favor of such removal, (i) the Subordination Period will end and all outstanding
Subordinated Units will immediately convert into Common Units on a one-for-one
basis, (ii) any existing Common Unit Arrearages will be extinguished and (iii)
the General Partner will have the right to convert its general partner interest
(and its right to receive Incentive Distributions) into Common Units or to
receive cash in exchange for such interests.
"Adjusted Operating Surplus" for any period generally means Operating
Surplus generated during such period, less (a) any net increase in working
capital borrowings during such period and (b) any net reduction in cash reserves
for Operating Expenditures during such period not relating to an Operating
Expenditure made during such period; and plus (x) any net decrease in working
capital borrowings during such period and (y) any net increase in cash reserves
for Operating Expenditures during such period required by any debt instrument
for the repayment of principal, interest or premium. Operating Surplus generated
during a period is equal to the difference between (i) the Operating Surplus
determined at the end of such period and (ii) the Operating Surplus determined
at the beginning of such period.
Distributions by the Company of Available Cash from Operating Surplus
with respect to any quarter during the Subordination Period will be made in the
following manner:
first, 98% to the Common Unitholders, pro rata, and 2% to the
General Partner, until there has been distributed in respect of each
outstanding Common Unit an amount equal to the Minimum Quarterly
Distribution for such quarter;
second, 98% to the Common Unitholders, pro rata, and 2% to the
General Partner, until there has been distributed in respect of each
outstanding Common Unit an amount equal to any Common Unit Arrearages
accrued and unpaid with respect to any prior quarters during the
Subordination Period;
third, 98% to the Subordinated Unitholders, pro rata, and 2% to
the General Partner, until there has been distributed in respect of
each outstanding Subordinated Unit an amount equal to the Minimum
Quarterly Distribution for such quarter; and
thereafter, in the manner described in "--Incentive
Distributions" below.
Notwithstanding the foregoing, no distributions may be made on the
Subordinated Units with respect to any quarter if the Consolidated Fixed Charge
Coverage Ratio (as defined in the Partnership Agreement) for the four-quarter
period ended with such quarter is equal to or less than 1.75 to 1.00.
Incentive Distributions
For any quarter for which Available Cash from Operating Surplus is
distributed to the Common and Subordinated Unitholders in an amount equal to the
Minimum Quarterly Distribution on all Units and to the Common Unitholders in an
amount equal to any unpaid Common Unit Arrearages, then any additional Available
Cash from Operating Surplus in respect of such quarter will be distributed among
the Unitholders and the General Partner in the following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General
Partner, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit
Arrearages) a total of $0.550 for such quarter in respect of each
outstanding Unit (the "First Target Distribution");
second, 85% to all Unitholders, pro rata, and 15% to the General
Partner, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit
14
Arrearages) a total of $0.633 for such quarter in respect of each
outstanding Unit (the "Second Target Distribution");
third, 75% to all Unitholders, pro rata, and 25% to the General
Partner, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit
Arrearages) a total of $0.822 for such quarter in respect of each
outstanding Unit (the "Third Target Distribution"); and
thereafter, 50% to all Unitholders, pro rata, and 50% to the
General Partner.
The distributions to the General Partner set forth above that are in
excess of its aggregate 2% general partner interest represent the Incentive
Distributions. The right to receive Incentive Distributions is not part of the
general partner interest and may be transferred separately from such interest in
certain limited circumstances. See "--The Partnership Agreement--Transfer of
General Partner's Interests and Incentive Distribution Rights."
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels
In addition to reductions of the Minimum Quarterly Distribution and
Target Distribution Levels made upon a distribution of Available Cash from
Capital Surplus, the Minimum Quarterly Distribution, the Target Distribution
Levels, the Unrecovered Capital, the number of additional Common Units issuable
during the Subordination Period without a Unitholder vote, the number of Common
Units issuable upon conversion of the Subordinated Units and other amounts
calculated on a per Unit basis will be proportionately adjusted upward or
downward, as appropriate, in the event of any combination or subdivision of
Common Units (whether effected by a distribution payable in Common Units or
otherwise), but not by reason of the issuance of additional Common Units for
cash or property. For example, in the event of a two-for-one split of the Common
Units (assuming no prior adjustments), the Minimum Quarterly Distribution, each
of the Target Distribution Levels and the Unrecovered Capital of the Common
Units would each be reduced to 50% of its initial level.
The Minimum Quarterly Distribution and the Target Distribution Levels
may also be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Company to become taxable as a corporation or otherwise subjects the Company to
taxation as an entity for federal, state or local income tax purposes. In such
event, the Minimum Quarterly Distribution and the Target Distribution Levels
would be reduced to an amount equal to the product of (i) the Minimum Quarterly
Distribution and each of the Target Distribution Levels, respectively,
multiplied by (ii) one minus the sum of (x) the maximum effective federal income
tax rate to which the Company is then subject as an entity plus (y) any increase
that results from such legislation in the effective overall state and local
income tax rate to which the Company is subject as an entity for the taxable
year in which such event occurs (after taking into account the benefit of any
deduction allowable for federal income tax purposes with respect to the payment
of state and local income taxes). For example, assuming the Company was not
previously subject to state and local income tax, if the Company were to become
taxable as an entity for federal income tax purposes and the Company became
subject to a maximum marginal federal, and effective state and local, income tax
rate of 38%, then the Minimum Quarterly Distribution and the Target Distribution
Levels would each be reduced to 62% of the amount thereof immediately prior to
such adjustment.
15
Item 6. Selected Financial Data
U.S. Timberlands (1) Predecessor (1)
- ------------------------------------------------------------------------------------------------------------------------------------
August 30, 1996 January 1,
through through
December 31, August 29,
1999 1998 1997 1996 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS AND OTHER DATA (IN MILLIONS):
Modified EBITDDA (7)..................... $ 50.6 $ 44.2 $ 53.3 $ (1.4) $ 3.6 $ 12.5
Additions to timber and timberlands (3) 1.0 0.6 111.6 283.6 0.5 1.0
Cash flow from (used in) operating
activities ........................... 25.5 18.5 26.3 (3.0) 5.5 11.8
Cash flow from (used in) investing
activities............................ (1.3) (0.6) (101.6) (291.5) (0.5) (1.9)
Cash flow from (used in) financing
activities............................ (26.2) (23.7) 69.3 311.0 (5.1) (10.0)
OPERATING STATEMENT DATA (IN MILLIONS
EXCEPT PER UNIT AMOUNTS)
Revenues (2)(3).......................... 77.0 71.3 77.3 14.0 15.6 31.7
Depreciation, depletion and road
amortization (2)(3).................. 23.3 21.9 17.3 3.3 0.9 1.5
Cost of timber and property sales (2)(3) -- 5.9 8.7 -- -- --
Operating income (loss) (2)(3)........... 27.2 16.3 27.3 (4.8) 2.7 11.1
Income (loss) before extraordinary
items (4) ............................ 6.4 (6.4) (1.4) (13.0) 2.7 11.6
Extraordinary items, losses on
extinguishment of debt (5) ........... -- -- 9.3 -- -- --
Income (loss) before general partner
and minority interest................. 6.4 (6.4) (10.7) (13.0) 2.7 11.6
PER UNIT DATA (6):
Basic income (loss) before
Extraordinary items per unit:
Common................................ 0.48 (0.49) 3.05 -- -- --
Subordinated ......................... 0.48 (0.49) (1.01) (3.04) -- --
Diluted income (loss) before
extraordinary
items per unit .......................... 0.48 (0.49) (0.28) (3.04) -- --
Basic net income (loss) per unit:
Common ............................... 0.48 (0.49) (0.86) -- -- --
Subordinated ......................... 0.48 (0.49) (2.30) (3.04) -- --
Diluted net income (loss) per unit ...... 0.48 (0.49) (2.04) (3.04) -- --
BALANCE SHEET DATA (AT
PERIOD END, IN MILLIONS):
Working capital ......................... 2.4 1.4 1.8 21.5 0.5 1.3
Total assets (3) ........................ 327.7 350.7 385.2 310.2 27.8 30.9
Long-term debt (8)....................... 225.0 225.0 225.0 305.0 -- --
Equity (deficit) (9) .................... 97.2 116.9 145.6 (2.9) 27.8 29.2
OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
volumes (MMBF) (2)(3)................. 187.3 144.5 138.9 30.2 32.8 63.8
Property sales volumes (MMBF) (2)........ -- 26.6 41.5 -- -- --
16
(1) Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial
and operating data after August 30, 1996 are not comparable to
financial and operating data of the Predecessor. In 1996, USTK and
Old Services were formed and subsequently entered into the agreement
to consummate the Weyerhaeuser Acquisition. As legal entities, USTK
and Old Services were not consolidated. However, due to common
ownership and management, the financial statements of USTK and Old
Services prior to the Transactions have been presented on a combined
basis.
(2) Revenues in 1999 consist of $76.6 million of log, stumpage and deed
sales and $0.4 million of by-products and other sales. Revenues in
1998 consist of $63.6 million of log and stumpage sales, $6.3 million
of timber and property sales and $1.4 million of by-products and
other sales. Revenues in 1997 consist of $60.4 million of log and
stumpage sales, $15.2 million of timber and property sales and $1.7
million of by-products and other sales. Revenues prior to 1997
consist primarily of log sales. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) See acquisition of Ochoco Timberlands in July 1997 in Note 2 of the
Notes to Consolidated Financial Statements. In August 1996, the
Company acquired the Klamath Falls Timberlands for $283.5 million
from Weyerhaeuser.
(4) See effect of interest expense and amortization of deferred financing
fees and debt guarantee fees in "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(5) See effect of debt extinguishment in Note 8 of the Notes to
Consolidated Financial Statements.
(6) No per unit information is presented for periods ended August 29,
1996 and December 31, 1995 as the Predecessor had a different
ownership structure and any per unit information would not be
relevant or meaningful to the user of the selected financial data.
See discussion of per unit information in Note 1 of the Notes to
Consolidated Financial Statements.
(7) Modified EBITDDA is defined as operating income plus depreciation,
depletion, and road amortization and cost of timber and property
sales. Modified EBITDDA should not be considered as an alternative to
net income, operating income, cash flows from operating activities or
any other measure of financial performance presented in accordance
with generally accepted accounting principles. Modified EBITDDA is
not intended to represent cash flow and does not represent the
measure of cash available for distribution, but provides additional
information for evaluating the Company's ability to make the Minimum
Quarterly Distribution. In addition, Modified EBITDDA does not
necessarily represent funds available for management's discretionary
use as it is calculated prior to debt service obligations and capital
expenditures. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(8) See discussion of long-term debt at Note 8 of the Notes to
Consolidated Financial Statements.
(9) The Weyerhaeuser Acquisition in August of 1996 was accounted for as a
purchase. Therefore, the financial statements as of and for the
periods ending prior to the date of the Weyerhaeuser Acquisition are
accounted for under the pre-Weyerhaeuser Acquisition basis of
accounting. Because the Klamath Timberlands did not legally exist as
a stand-alone entity, there are no separate meaningful equity
accounts of the Predecessor prior to the Weyerhaeuser Acquisition.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Certain information contained in this report may constitute
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Forward-looking information is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected. Such risks, trends and
uncertainties include the highly cyclical nature of the forest products
industry, general economic conditions, competition, price conditions or trends
for the Company's products, the possibility that timber supply could increase if
governmental, environmental or endangered species policies change, and
limitations on the Company's ability to harvest its timber due to adverse
natural conditions or increased governmental restrictions. The results of the
Company's operations and its ability to pay quarterly distributions to its
Unitholders depend upon a number of factors, many of which are beyond its
control. These factors include general economic and industry conditions,
domestic and export prices, supply and demand for logs, seasonality, government
regulations affecting the manner in which timber may be harvested, and
competition from other supplying regions and substitute products. These and
other risks are described in the Company's other reports and registration
statements, which are available from the United States Securities and Exchange
Commission.
17
General
The Company's primary business is the growing and harvesting of
timber (see Item 1. Business).
The Company's results of operations are affected by various factors,
many of which are beyond its control, including general industry conditions,
domestic and international prices and supply and demand for logs, lumber and
other wood products, seasonality and competition from other domestic and
international supplying regions and substitute products.
Supply and Demand Factors
Supply
The supply of logs available for purchase has been most affected in
recent years by significant reductions in timber harvested from public
timberlands, principally as a result of efforts to preserve the habitat of
certain endangered species, as well as a change in the emphasis of government
policy toward habitat preservation, conservation and recreation and away from
timber management. Since the early 1970s, environmental and other similar
concerns and governmental policies have substantially reduced the volume of
timber under contract to be harvested from public lands. The pace of regulatory
activity accelerated in the late 1980s. The resulting supply decrease caused
prices for logs to increase significantly, reaching peak levels during 1993.
Although prices have declined from these record levels, current prices still
exceed pre-1993 levels. The low supply of timber from public lands, which is
expected to continue for the foreseeable future, has benefited private timber
holders such as the Company through higher stumpage and log prices.
Industry participants do not expect environmental restrictions to
ease materially within any reasonable planning horizon. Consequently, many
producers of lumber and wood products are attempting to adapt to the new supply
environment by increasing their emphasis on raw material yields, entering into
long term timber supply arrangements and value added manufacturing, and
accessing previously untapped supplies (such as private wood lot owners, timber
with difficult access, alternative species and imports). These factors have
tended to restrict prices from even greater increases. While raw material supply
is expected to be an ongoing challenge for the lumber and wood products
industry, such conditions are likely to cause the favorable operating
environment for timber owners such as the Company to continue for the
foreseeable future.
In response to an increase in timber prices in the early 1990s,
imports of logs and lumber from abroad (from countries such as Canada and New
Zealand) increased. These imports, however, only partially offset the lost
volume of timber from public timberlands and did not replace the mature,
high-quality timber found in greater quantities on public timberlands. Since
1993, log imports have decreased and their current impact on timber prices is
minimal. However, pine lumber imports almost doubled in the same period.
Demand
Changes in general economic and demographic factors, including the
strength of the economy and interest rates for home mortgages and construction
loans, have historically caused fluctuations in housing starts and, in turn,
demand and prices for lumber and commodity wood products. United States housing
starts for 1999 were at the highest level since 1986. Because of the growth of
the home center distribution business, the repair and remodeling markets have
become a significant factor in terms of the demand for lumber and commodity wood
products and have dampened the wide fluctuations that occurred when new housing
starts were the primary factor. A large portion of the Company's property
consists of Pine species, which are used in the finishing market, for molding
trim, doors and windows. This market is more affected by repair and remodeling
than new housing construction. Prices for these species, primarily Ponderosa
Pine, reached a peak in the spring of 1993 and as a result attracted imports of
Radiata Pine from New Zealand and Chile. Domestic markets have absorbed the
increasing quantities of imported Radiata pine lumber, and the result has been
relatively stable pricing for Ponderosa pine lumber. The demand for logs in the
United States is also affected by the level of lumber imports. In response to
increasing lumber imports from Canada, the United States and Canada signed an
agreement in 1996 which restricts the availability of Canadian softwood lumber
in the United States.
18
The Company believes that this agreement has not had a material impact on the
price or demand for logs in the United States although its long-term effect is
uncertain.
Due to transportation costs, domestic conversion facilities in the
Pacific Northwest tend to purchase raw materials within relatively confined
geographic areas, generally within a 200-mile radius. The conversion facilities
in the vicinity of the Timberlands need more wood supply to run at capacity than
can be produced by nearby timberlands. As a result, the demand from this region
is relatively steady, although prices fluctuate with market conditions.
Current Market Conditions
Log prices in the Northwest generally improved in 1999 as compared to
1998 due to the robust United States economy and supply and demand factors.
In 1999 the United States economy continued to enjoy economic
expansion. Low mortgage interest rates created favorable conditions for new home
construction, home repair and remodeling, and industrial and other construction,
which strengthened the demand for finished lumber and plywood products,
resulting in increased demand for the Company's logs and timber.
The supply of logs in the Pacific Northwest continued to tighten in
1999 due to increased export activity due to a gradual recovery of Asian
markets; the reduction of Canadian deliveries due to an agreement between the
United States and Canada signed in 1996 restricting the availability of Canadian
softwood lumber in the United States; weather conditions and continued legal and
governmental pressures on the availability of timber on public timberlands. The
gradual recovery of Asian markets has led to an increased level of log exports,
reducing the supply of logs available to domestic markets. Dry weather
conditions during 1999 created extreme fire conditions, resulting in reduced
wood deliveries for most of the summer. In late 1999, a U.S. District Court
judge issued an injunction against the U.S. Forest Service (USFS), requiring the
USFS to put on hold planned timber sales totaling 217 million board feet. The
supply from public timberlands was further threatened in the fall of 1999 when
the Clinton administration presented an initiative that would more than double
the approximately 35 million acres of federal lands that are already protected
as wilderness.
Strong economic factors combined with increasing demand and decreasing
supply resulted in strong prices for finished wood products. Composite indices
for commodity lumber and plywood prices were 15% - 25% higher in 1999 as
compared to 1998.
The combination of the declining log supply and increased demand for
finished wood products, generally pushed log prices higher in 1999 as compared
to 1998. During 1999, the Company's average delivered log price for Ponderosa
Pine was consistent with 1998. The Company's average delivered log prices for
Lodgepole Pine, Douglas Fir, and White Fir, however, were higher in 1999 than in
1998 by 7%, 4% and 6%, respectively.
19
Results of Operations
The following table sets forth sales volume for each of 1999, 1998
and 1997 from the sale of logs, stumpage and timber deeds by thousand board feet
("MBF") and price per thousand board feet and the sales of property.
Sales Volume (MBF) Price Realization ($ Per MBF)
---------------------------------------- ------------------------------------
Timberland
Period Logs Stumpage Timber Deeds Logs Stumpage Timber Deeds Sales ($000)
- ------ ---- -------- ------ ---- -------- ------ ------------
1999
Year ended 12/31 97,170 3,645 86,463 $ 436 $ 419 $ 379 --
- ----------------
4th Quarter 30,790 980 16,209 $ 432 $ 391 $ 351 --
3rd Quarter 39,008 744 25,597 $ 444 $ 404 $ 334 --
2nd Quarter 15,376 -- 26,898 $ 455 -- $ 484 --
1st Quarter 11,996 1,921 17,759 $ 395 $ 440 $ 308 --
1998
Year ended 12/31 93,557 50,894 -- $ 420 $ 479 -- $ 6,276
- ----------------
4th Quarter 24,299 23,787 -- $ 396 $ 441 -- --
3rd Quarter 29,017 22,617 -- $ 431 $ 511 -- --
2nd Quarter 23,832 2,506 -- $ 432 $ 570 -- $ 6,276
1st Quarter 16,409 1,984 -- $ 418 $ 447 -- --
1997
Year ended 12/31 97,749 30,189 11,045 $ 446 $ 556 $ 315 $ 11,760
- ----------------
4th Quarter 27,415 17,830 -- $ 487 $ 576 -- $ 11,760
3rd Quarter 25,867 10,056 -- $ 436 $ 569 -- --
2nd Quarter 23,094 2,303 -- $ 441 $ 350 -- --
1st Quarter 21,373 -- 11,045 $ 413 -- $315 --
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. Revenues increased $5.7 million, or 8.0%, from $71.3
million in 1998 to $77.0 million in 1999. The increase is primarily attributable
to an increase in timber deed sales of $32.8 million and a $3.0 million increase
in log sales, partially offset by a $22.8 million reduction in stumpage sales, a
$1.0 million decrease in by-products and other revenues and the fact that the
Company had no land sales in 1999 compared to approximately $6.3 million in land
sales in 1998. To meet its working capital requirements, the Company harvested
and sold logs and stumpage in 1999 at rates in excess of both 1998 levels and
the estimated current annual board footage growth on the timberlands.
Timber deed sales for 1999 were $32.8 million on volumes of 86,463
MBF, compared to no timber deed revenue for 1998.
Log sales for 1999 were $42.3 million on volumes of 97,170 MBF,
compared to log sales of $39.3 million on volumes of 93,557 MBF in 1998. The
average log sales price per MBF for 1999 was $436 compared to an average log
sales price per MBF of $420 for 1998, a 3.8% increase, reflecting stronger
markets, primarily for White Fir and Douglas Fir logs.
Stumpage sales for 1999 were $1.5 million on volumes of 3,645 MBF,
compared with stumpage sales of $24.4 million on volumes on 50,894 MBF in 1998.
The average stumpage sales price per MBF for 1999 was $419 compared to an
average stumpage sales price per MBF of $479 for 1998, a 12.5% reduction. The
decrease in average stumpage sales prices from 1998 to 1999 was primarily due to
a reduction in the grade of timber harvestedfrom the Ochoco Timberlands. The
overall reduction in stumpage sales volume is due to the increased use of timber
deed sales in 1999.
20
The Company had no revenue from timber and property sales during 1999
as compared to approximately $6.3 million in planned timber and property sales
during 1998.
Gross Profit. Gross profit increased by $9.8 million from $26.8
million in 1998 to $36.6 million in 1999 and gross margin increased from 37.6%
in 1998 to 47.6% in 1999. The increase in gross margin was primarily from three
factors. First, the Company's normal annual review of its standing timber
inventory and depletion rate during the first quarter of 1999 resulted in a
reduction of the Company's depletion rate, and a savings of approximately $4.9
million in 1999. Also, the Company did not have any land sales during 1999,
which have typically resulted in lower margins than log, stumpage and deed
sales. In addition to the above items, the Company benefited from an overall
increase in log prices during 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $2.0 million from $10.5 million in 1998 to
$8.5 million in 1999. This expense also decreased as a percentage of net sales
from 14.7% in 1998 to 11.0% in 1999. The decrease was primarily attributable to
one-time expenses of $1.7 million related to severance costs and the repurchase
of member interests in the General Partner that were incurred during the first
and fourth quarters of 1998, combined with the provision in 1998 for the closure
of the Seattle office.
Interest Expense. Interest expense for 1999 was $21.9 million as
compared to $22.2 million for 1998, representing a $0.3 million or 1.4%
reduction. Interest expense for both 1999 and 1998 was incurred primarily on the
$225.0 million of Notes issued in the November 1997 Public Note Offering. The
slight decrease in interest expense in 1999 can be attributed to a reduced level
of borrowing against the available revolving credit facilities during 1999 as
compared to 1998.
Interest Income. Interest income for 1999 was $0.6 million, an
increase of $0.1 million or 20.0% from interest income for 1998 of $0.5 million.
The increase is primarily attributable to imputed interest from deed sales with
a term of more than one year. Imputed interest income from deed sales was
approximately $0.3 million in 1999. The increase in interest from timber deed
sales was partially offset by a reduction in the cash and cash equivalents
available in 1999 compared to 1998.
Other Income (Expense), net. Other income, net, was $1.1 million for
1999 compared to other expense, net, of $0.3 million for 1998, representing an
increase to income of $1.4 million. The increase is primarily attributable to a
mark-to-market gain on an interest rate collar of approximately $1.0 million
during 1999. In addition, revenues from land use management operations such as
grazing permits increased in 1999.
Cash Flow From Operations. During 1999, cash flow from operations
increased $7.0 million or 37.8% primarily as a result of increased gross margins
and a reduction of selling, general and administrative expenses, offset
partially by decreased proceeds from timber and property sales, increase in
balance of notes receivable and a decrease in accrued liabilities.
Partners' Capital
During 1999 the limited partner interest in the Company declined
$19.5 million from $115.7 million to $96.2 million. This decline was the result
of distributions to Unitholders of $25.7 million during 1999 partially offset by
the limited partner's share of the Company's net income of $6.2 in 1999. The
General Partner interest in the Company also declined during 1999 reflecting its
share of the Company's distributions and net income for 1999. The Company
currently expects to continue making distributions to Unitholders. As a result,
the Company anticipates that partners' capital will continue to decline.
21
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Revenues were $71.3 million in 1998, a decrease of $6.0
million or 7.8% from revenues of $77.3 million in 1997. This decrease was
primarily attributable to a $9.0 million reduction in timber and property sales,
a $4.3 million reduction in log sales and a $0.2 million reduction in
by-products and other revenues, partially offset by a $7.6 million increase in
revenues from stumpage sales. To meet its working capital requirements, the
Company harvested and sold logs and stumpage in 1998 at rates in excess of both
1997 levels and the estimated current annual board footage growth on the
timberlands.
Revenue from planned timber and property sales decreased to $6.2
million in 1998 from $15.2 million during 1997, representing a $9.0 million or
59.2% reduction. The significant reduction was due to a decrease in the volume
contained in the 1998 timber and property sales of 26,600 MBF as compared to
52,600 MBF in 1997.
Log sales for 1998 were $39.3 million on volumes of 93,557 MBF,
compared to log sales of $43.6 million on volumes of 97,749 MBF in 1997. The
average log sales price per MBF for 1998 was $420 compared to an average log
sales price per MBF of $446 for 1997, a 5.8% reduction, reflecting weaker
markets, primarily for Ponderosa Pine logs.
Stumpage sales for 1998 were $24.4 million on volumes of 50,894 MBF,
compared with stumpage sales of $16.8 million on volumes of 30,189 MBF in 1997.
The average stumpage sales price per MBF for 1998 was $479 compared to an
average stumpage sales price per MBF of $556 for 1997, a 13.8% reduction. The
decrease in average stumpage sales prices from 1997 to 1998 was primarily due to
a reduction in the grade of timber harvested from the Ochoco Timberlands.
In addition, the Company entered into six stumpage contracts in 1998
for an aggregate estimated revenue of $5.5 million and 16,700 MBF. The revenue
from these six contracts was recognized in 1999.
Gross profit. Gross profit decreased by $6.7 million from $33.5 million
in 1997 to $26.8 million in 1998 and the gross margin decreased from 43.3% in
1997 to 37.6% in 1998. The decrease is primarily attributable to a lower margin
on timber and property sales in 1998 of 5.7% compared to 42.6% in 1997 combined
with an increase in depletion, depreciation and amortization expense during 1998
of $4.6 million from 1997.
Depletion, depreciation and amortization expense was $21.9 million in
1998, a $4.6 million or 26.6% increase over $17.3 million in 1997. This increase
was primarily attributable to a net increase in log and stumpage sales volumes
and an increase in the Company's depletion rate per MBF, which resulted from the
Ochoco Timberlands acquisition in July 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $10.5 million for 1998, an increase of $4.2 million
or 66.7% over comparable expenses of $6.3 million in 1997. The increase in
selling, general and administrative expenses was primarily attributable to
one-time expenses of $1.7 million related to severance costs and the repurchase
of member interests in the General Partner that were incurred in the first and
fourth quarters of 1998, combined with increased costs associated with operating
as a publicly traded company, and implementing the Company's strategy to pursue
accretive acquisitions of timberland.
Interest Expense. Interest expense for 1998 was $22.2 million as
compared to $25.3 million for 1997, representing a $3.1 million or 12.3%
reduction. 1998 interest expense was incurred primarily on the $225.0 million of
Notes issued in the November 1997 Public Note Offering. 1997 interest expense
related primarily to $215.0 million of term debt and $90.0 million of revolving
debt incurred in connection with the Weyerhaeuser Acquisition on August 30, 1996
and $110.0 million of incremental debt incurred in connection with the Ochoco
Acquisition on July 15, 1997. The reduction in interest expense is primarily
attributable to the use of a substantial portion of the proceeds from the
Company's Initial Offering completed on November 19, 1997, to retire outstanding
debt.
Amortization of Deferred Financing Fees and Debt Guarantee Fees. The
company deferred $6.7 million of fees incurred in connection with the issuance
of the Notes. These fees will be amortized over the term of the Notes, which are
due in November 2007.
22
The amortization of these fees during 1998 was $0.7 million. During 1997 the
Company recognized $4.2 million of expense related to debt guarantee fees and
amortization of deferred financing fees.
Interest Income. Interest income for 1998 was $0.5 million, a
decrease of $1.0 million or 66.7% from interest income for 1997 of $1.5 million.
The reduction in interest income is primarily attributable to the reduction in
the cash and cash equivalents available in 1998 compared to 1997.
Other expense, net. Other expense, net was $0.3 million for 1998
compared to $0.6 million for 1997, representing a reduction of $0.3 million or
50.0%.
Extraordinary Items. During 1997 the Company refinanced certain
long-term borrowings resulting in extraordinary losses on extinguishment of debt
of $9.3 million due to the write-off of existing unamortized deferred financing
fees and other related fees.
Cash Flow From Operations. During 1998, cash flow from operations
decreased $7.7 million or 29.3% primarily as a result of decreased proceeds from
timber and property sales, an increase in selling, general and administrative
expenses and a decrease of advance payments on stumpage sales contracts.
Partners' Capital
During 1998 the limited partner interest in the Company declined
$28.5 million from $144.2 million to $115.7 million. This decline is the result
of the limited partner's share of the Company's net loss and distributions to
Unitholders during 1998, which were $6.3 million and $22.2 million,
respectively. The General Partner interest in the Company also declined during
1998 reflecting its share of the Company's net loss and distributions for 1998.
The Company currently expects to continue to incur operating losses and make
distributions to its Unitholders. As a result, the Company anticipates that
partners' capital will continue to decline.
Liquidity and Capital Resources
Effective November 19, 1997, the Company completed its Initial
Offering of 8,577,487 Common Units (including Common Units issued upon the
exercise by the underwriter's of their over-allotment option in December 1997).
Net proceeds from the Initial Offering were $163.2 million. In addition, the
Operating Company issued $225.0 million of Notes in the Public Notes Offering.
The proceeds from the Initial Offering and the Public Notes Offering were
primarily utilized to retire all outstanding borrowings under the revolving
credit facility and $330.0 million of term debt. For purposes of this
discussion, these transactions are hereafter referred to as the "Transactions."
As of December 31, 1999, the Company had a cash balance of $2.8 million and $2.4
million of working capital.
Operating Activities. Cash flows provided by operating activities in
1999 were $25.5 million, as compared to cash flows provided by operating
activities of $18.5 million in 1998. The $7.0 million increase in cash flows
provided by operating activities was primarily due to a $12.6 million increase
in net income offset by a $3.5 million increase in notes receivable related to
timber deed sales and the addback of non-cash operating items.
Investing Activities. Cash flows used by investing activities were
$1.3 million in 1999, as compared to cash flows used by investing activities of
$0.6 million during 1998. The increase is primarily attributable to a $0.3
million increase in the amount invested in timber and road additions during 1999
compared to 1998 as well as a $0.3 million investment in affiliate that was made
during 1999.
Financing Activities. Cash flows used in financing activities were
$26.2 million in 1999, as compared to cash flows used by financing activities of
$23.7 million during 1998. During 1999, the Company paid $26.2 million in
distributions to Unitholders and minority interest. During 1998, the Company
paid $22.7 million to Unitholders and minority interest and paid $1.0 million to
an affiliate for redemption of a certain member's interest.
23
Notes
On November 14, 1997, the Operating Company issued $225.0 million
aggregate principal amount of Notes (the "Notes") representing unsecured general
obligations of the Operating Company which bear interest at 9 5/8% per annum,
payable semiannually in arrears on May 15 and November 15. The Notes mature on
November 15, 2007 unless previously redeemed. The Notes will not require any
mandatory redemption or sinking fund payments prior to maturity and are
redeemable at the option of the Operating Company in whole or in part, on or
after November 15, 2002 at predetermined redemption prices plus accrued interest
to the redemption date. In addition, at any time on or prior to November 15,
2000, the Operating Company, at its option, may redeem the Notes with the net
cash proceeds of a Common Units offering or other equity interests of the
Company, at 109.625% of the principal amount thereof, plus accrued and unpaid
interest thereon to the redemption date, provided that at least 65% of the
principal amount of the Notes originally issued remain outstanding immediately
following such redemption. Upon the occurrence of certain events constituting a
"change of control" (as defined in the Indenture), the Company must offer to
purchase the Notes, at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of purchase.
The indenture governing the Notes (the "Indenture") contains various
affirmative and restrictive covenants applicable to the Operating Company and
its subsidiaries, including limitations on the ability of the Operating Company
and its subsidiaries to, among other things, (i) incur additional indebtedness
(other than certain permitted indebtedness) unless the Operating Company's
Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is
greater than 2.25 to 1.00, and (ii) make distributions to the Company, make
investments (other than permitted investments) in any person, create liens,
engage in transactions with affiliates, suffer to exist any restrictions on the
ability of a subsidiary to make distributions or repay indebtedness to the
Company, engage in sale and leaseback transactions, enter into a merger,
consolidation or sale of all or substantially all of its assets, sell assets or
harvest timber in excess of certain limitations or engage in a different line of
business. Under the Indenture, the Operating Company will be permitted to make
cash distributions to the Company so long as no default or event of default
exists or would exist upon making such distribution (a) if the Operating
Company's Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture)
is greater than 1.75 to 1.00, in an amount, in any quarter, equal to Available
Cash (as defined in the Indenture) for the immediately preceding fiscal quarter
or (b) if the Operating Company's Consolidated Fixed Charge Coverage Ratio is
equal to or less than 1.75 to 1.00, in an aggregate amount after the closing of
this offering not to exceed (i) $7.5 million less the aggregate of all
restricted payments made under this clause (b)(i) during the immediately
preceding 16 fiscal quarters (or shorter period, if applicable, beginning on the
issue date of the Notes), plus (ii) the net proceeds of certain capital
contributions (including the sale of Units) received by the Company. The Company
was in compliance with these covenants at December 31, 1999 and 1998.
24
Affiliate Credit Facility
During the second quarter of 1999, the Company replaced an existing
bank credit facility through a credit agreement with an affiliate of the General
Partner ("Affiliate Credit Facility"). The Affiliate Credit Facility allows the
Company to borrow up to $12.0 million under certain terms and covenants. The
covenants include restrictions on the Company's ability to make cash
distributions, incur certain additional indebtedness or incur certain liens. In
addition, the Company is required to maintain certain financial ratios. The
Affiliate Credit Facility will expire on June 30, 2000. At that time, amounts
borrowed will be due and payable. As of December 31, 1999 there were no
outstanding borrowings under the Affiliate Credit Facility. The Company's intent
is to replace the Affiliate Credit Facility with a bank facility sometime during
the first half of 2000. The Company also has the ability to generate cash flow
through the acceleration of planned log and timber deed sales. In addition, the
Company's plan is to use investment and commercial banks to raise funds for
acquisitions.
Under the Affiliate Credit Facility, so long as no Event of Default
(as defined in the Affiliate Credit Facility) exists or would result, the
Operating Company will be permitted to make quarterly cash distributions to the
Company in an amount not to exceed Available Cash (as defined in the Affiliate
Credit Facility) in the preceding quarterly period.
Capital Expenditures/Cash Distributions
Capital expenditures in 1999 totaled $1.0 million. Capital
expenditures incurred were mainly in the nature of land management/silvicultural
expenses, miscellaneous equipment and computer hardware and software. Capital
expenditures were financed through cash flow generated by operations. As the
Company does not currently own and does not plan to own manufacturing
facilities, and all logging is subcontracted to third parties, it is anticipated
that capital expenditures in the future will not be significant and will consist
mainly of land management/silvicultural expenditures. It is currently
anticipated that the Company will not maintain significant log inventories,
although small log inventories may be maintained for a short period of time, or
incur material capital expenditures for machinery and equipment. The Company
anticipates that capital expenditures will be approximately $1.7 million in
2000. Capital expenditures will consist primarily of capitalized silvicultural
costs and miscellaneous equipment purchases.
Cash required to meet the Company's debt service and quarterly cash
distributions will be significant. To meet its working capital requirements, the
Company has been selling logs and making timber sales at a rate in excess of the
General Partner's estimate of the current annual board footage growth on the
Company's timberlands. The General Partner expects that the debt service and
quarterly cash distributions will be funded from operations and borrowings.
Given projected volumes for sales of logs and timber, estimated current board
footage growth on the timberlands and the harvest restrictions in the Notes,
unless prices improve, costs are reduced, new markets are developed or the
Company makes accretive acquisitions, the Company's ability in the future to
make distributions at current levels may be adversely affected. The Company
continues to evaluate means to improve cash flows, including the factors
mentioned above. However, there can be no assurance that prices will improve or
that the Company will be able to take any of these actions.
Effects of Inflation
Prices for the Company's stumpage and logs may be subject to sharp
cyclical fluctuations due to market or other economic conditions, including the
level of construction activity but generally do not directly follow inflationary
trends. Costs of forest operations and general and administrative expenses
generally reflect inflationary trends.
25
Year 2000 Compliance
The Company has completed its Year 2000 readiness work and did not
experience disruption in its business related to the Year 2000 Issue. In
addition to internally assessing its systems and business for Year 2000, the
Company contacted all major external third parties that provide products and
services to the Company to assess their readiness for Year 2000. The Company
made certain investments in systems, applications and products to address the
Year 2000 Issues. The Company did not, however, track internal resources
dedicated to the resolution of the Year 2000 Issue and therefore, is unable to
quantify internal costs incurred to date that are associated with the Year 2000
Issue. The Company believes that direct and indirect expenditures to address the
Year 2000 Issue were immaterial to the Company's operations. To date, the
Company has not experienced any significant, known Year 2000 issues and has been
informed by material third parties that they have also not experienced material
Year 2000 issues. The Company will continue to monitor any on-going Year 2000
issues.
SFAS No. 133
In June of 1998, the financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting for
derivative instruments and hedging activities. The statement was to be effective
for all fiscal quarters of fiscal years beginning after June 15, 1999 but has
been delayed by SFAS 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 No. 137 delays the effective date of SFAS
No. 133 to all fiscal quarters of fiscal years beginning after June 15, 2000.
Consistent with SFAS No. 137, the Company will adopt SFAS No. 133 as of January
1, 2001. The Company believes that the adoption of this statement will not have
a material impact on its financial statements; however, its effect, if any, will
depend on the Company's exposure to derivative instruments at the time of
adoption and thereafter.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements
The information required hereunder is included in this report as set
forth in the "Index to Financial Statements" on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On December 1, 1998, Arthur Andersen, LLP (the "Former Accountant")
resigned as the Company's independent accountant. On January 4, 1999, the
Registrant engaged Richard A. Eisner & Company, LLP ("Eisner") to audit its
financial statements for the year ended December 31, 1998. The Company did not
consult with Eisner during the Registrant's two most recent fiscal years and any
subsequent interim period on any matter of the type described in Item 304(a)(2)
of Regulation S-K.
The Former Accountant's report on the Company's financial statements
for either of the past two years did not contain any adverse opinion or
disclaimer of opinion and was not qualified as to uncertainty, audit scope or
accounting principles.
In connection with the Former Accountant's audit of the Company's
financial statements for its fiscal year ended December 31, 1996, a period prior
to the time that the Company was a Reporting Company, the Former Accountant
advised the Company of certain material weaknesses in the Company's system of
internal controls over cash. As a result of such weaknesses, the Former
Accountant expanded the scope of its audit procedures related to the Company's
cash disbursements in order to issue an opinion on the Company's year end 1996
Financial Statements. The control weaknesses were addressed to the Former
Accountant's satisfaction.
26
In addition, in connection with the audit of the Company's Financial
Statements for its fiscal year ended December 31, 1996, there was an accounting
principle disagreement regarding the classification of a payment to a related
party prior to year end and the repayment of such amount after year end and an
audit scope disagreement regarding the need to confirm with the Company's lender
if the payment and repayment would result in a loan being classified as current.
Each of the foregoing disagreements were resolved to the Former Accountant's
satisfaction.
Each of the matters described above was communicated to the Company's
audit committee on May 30, 1997.
The Company has authorized the Former Accountant to respond fully to
the inquiries of any successor accountant concerning the subject matter of each
of the matters described in the two preceding paragraphs.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons of the
Registrant
The General Partner manages and operates the activities of the
Company. As is commonly the case with publicly traded limited partnerships, the
Company does not directly employ any of the persons responsible for managing or
operating the Company. In general, the management of the General Partner manages
and operates the Company's business as officers and employees of the General
Partner and its affiliates. The Unitholders do not directly or indirectly
participate in the management or operation of the Company.
In January 1999, the General Partner appointed William A. Wyman and
Alan B. Abramson, two members of the General Partner's Board of Directors who
are neither officers, employees or security holders of the General Partner nor
directors, officers, or employees of any affiliate of the General Partner, to
serve on the General Partner's Conflicts Committee. The Conflicts Committee has
the authority to review specific matters as to which the Board of Directors
believes there may be a conflict of interest in order to determine if the
resolution of such conflict proposed by the General Partner is fair and
reasonable to the Company. Any matters approved by the Conflicts Committee will
be conclusively deemed to be fair and reasonable to the Company, approved by all
partners of the Company and not a breach by the General Partner or its Board of
Directors of any duties they may owe the Company or the Unitholders. The Board
of Directors also has an audit committee (the "Audit Committee") composed of the
two independent directors as well as George R. Hornig, which reviews the
external financial reporting of the Company, recommends engagement of the
Company's independent public accountants and reviews the Company's procedures
for internal auditing and the adequacy of the Company's internal accounting
controls. The Board of Directors also has a compensation committee (the
"Compensation Committee"), consisting of five directors, including the two
independent directors, which determines the compensation of the officers of the
General Partner and administers its employee benefit plans. In addition, the
Board of Directors has a Long-Term Incentive Plan Committee (the "LTIP
Committee"), which consists of four directors, including the two independent
directors, which acts with respect to the Company's Long-Term Incentive Plan.
27
Directors, Executive Officers and Key Employees of the General Partner
The following table sets forth certain information with respect to
the members of the Board of Directors of the General Partner, its executive
officers and certain key employees. Executive officers and directors are elected
for one-year terms.
Name Age Position with General Partner
---- --- -----------------------------
John M. Rudey 56 Chairman, Chief Executive Officer, President and Director (1)
Aubrey L. Cole 76 Director (2)
George R. Hornig 45 Director (3)
William A. Wyman 61 Director (4)
Alan B. Abramson 54 Director (5)
Robert F. Wright 74 Director (6)
Greg G. Byrne 39 Vice President and Chief Financial Officer
Martin Lugus 59 Vice President, Timberland Operations
Toby A. Luther 26 Corporate Controller, Western Operations
Walter L. Barnes 57 Assistant Vice President, Harvesting
Robert A. Broadhead 48 Assistant Vice President, Marketing
Kurt A. Muller 41 Assistant Vice President, Planning
Christopher J. Sokol 50 Assistant Vice President, Forestry
- --------------------
(1) Member of the Executive (Chairman), Nominating (Chairman), Finance and Compensation Committees.
(2) Member of the Compensation and LTIP Committees.
(3) Member of the Executive, Audit, Finance (Chairman) and Compensation Committees.
(4) Member of the Audit (Chairman), Conflicts (Chairman), Compensation and LTIP Committees.
(5) Member of the Audit, Conflicts, Compensation (Chairman) and LTIP Committees.
(6) Member of the Nominating, Finance and LTIP (Chairman) Committees.
John M. Rudey serves as Chairman, Chief Executive Officer, President
and as a Director of the General Partner. Since 1992, Mr. Rudey has served as
Chief Executive Officer of Garrin Properties Holdings, Inc., a private
investment company that manages and advises investment portfolios principally
concentrated in the timber and forest products industries and in real estate.
Aubrey L. Cole serves as a Director of the General Partner. Since
1989 Mr. Cole has been a consultant for Aubrey Cole Associates, a sole
proprietorship which provides management consulting services and makes
investments. From 1986 to 1989, Mr. Cole was the Vice Chairman of the Board and
Director of Champion International Corporation (a publicly traded forest
products company) and from 1983 to 1993, Mr. Cole was the Chairman of Champion
Realty Corporation (a land sales subsidiary of Champion International).
George R. Hornig serves as a Director of the General Partner. Since
1999, Mr. Hornig has been Managing Director of Credit Suisse First Boston's
Private Equity Division. From 1993 to 1999, Mr. Hornig was an Executive Vice
President of Deutsche Bank Americas Holdings, Inc. (the United States arm of
Deutsche Bank, a German banking concern) and affiliated predecessor entities.
From 1991 to 1993, Mr. Hornig was the President and Chief Operating Officer of
Dubin & Swieca Holdings, Inc., an investment management business. From 1988 to
28
1991, Mr. Hornig was a co-founder, Managing Director and Chief Operating Officer
of Wasserstein Perella & Co., Inc. (a mergers and acquisitions investment bank).
From 1983 to 1988, Mr. Hornig was an investment banker in the Mergers and
Acquisitions Group of The First Boston Corporation. Prior to 1983, Mr. Hornig
was an attorney with Skadden, Arps, Slate, Meagher & Flom. Mr. Hornig is also a
director of SL Industries, Inc. and Forrester Research, Inc.
William A. Wyman serves as a Director of the General Partner, having
been elected to the Board in January, 1999. Mr. Wyman is a former President of
the Management Consulting Group of Booz, Allen & Hamilton. Mr. Wyman joined Booz
Allen in 1965, where, until 1984, he counseled a variety of service, natural
resources and manufacturing companies on projects concerning strategic profit
improvement and management organization. Mr. Wyman has served as a director of
Donaldson, Lufkin & Jenrette, Belvedere Reinsurance, and SS&C Technologies. Alan
B. Abramson serves as a Director of the General Partner, having been elected to
the Board in January, 1999. Mr. Abramson is the President of Abramson Brothers
Incorporated, a real-estate management and investment firm, where he has been
employed since 1972. He serves as a Director of Datascope, Inc., a medical
technology company.
Robert F. Wright serves as a Director of the General Partner. Since
1988, Mr. Wright has served as President and Chief Executive Officer of Robert
F. Wright Associates, Inc., a firm making strategic investments and providing
business consulting services. Previously, Mr. Wright spent 40 years, 28 years as
a partner, at Arthur Andersen & Co. Mr. Wright is a director of the following
companies: Hanover Direct Inc. (a catalog marketer), Reliance Standard Life
Insurance Co. and affiliates (life insurance companies), The Navigators Group
Inc. (a property insurance company), Deotexas Inc. (a development stage
company), Universal American Financial Corp. (an insurance company), Quadlogic
Controls Corp. (a meter manufacturer) and G.V.A. Williams Real Estate Co., Inc.
(a real estate company).
Greg G. Byrne became Vice President and Chief Financial Officer of
the General Partner in January, 1999. From 1996 to 1999, Mr. Byrne was Chief
Financial Officer of P&M Cedar Products, a California-based producer of
specialty wood products. From 1993 to 1996, Mr. Byrne was Vice President of
Finance and Strategic Planning for the Fibreboard Wood Products Company. Prior
to 1996, Mr. Byrne was an Audit Manager with Coopers & Lybrand.
Martin Lugus serves as Vice President - Timberland Operations of the
General Partner, responsible for all land management and operations on fee
lands. Mr. Lugus was employed by Weyerhaeuser for 28 years, during which time he
served as Forestry Manager from 1981 to 1991 and Timberlands Manager from 1991
to 1996.
Toby A. Luther serves as the Corporate Controller - Western
Operations of the General Partner, responsible for all accounting functions.
Prior to joining the General Partner in 1999, Mr. Luther was an accountant with
PricewaterhouseCoopers.
29
Key Employees
Walter L. Barnes serves as Assistant Vice President - Harvesting of
the General Partner, responsible for all solid wood logging and fiber
operations. From 1993-1996, prior to joining the General Partner, Mr. Barnes
acted as the Operations Harvest Manager for Weyerhaeuser. Mr. Barnes was
employed by Weyerhaeuser for 28 years and has extensive experience managing
different harvesting systems on both the East and West sides of the Cascade
Range.
Robert A. Broadhead serves as Assistant Vice President - Marketing of
the General Partner, responsible for all log and stumpage sales transactions.
Mr. Broadhead was employed by Weyerhaeuser for 20 years and gained additional
experience in investing and planning while serving as Planning Manager from 1981
to 1994.
Kurt A. Muller serves as Assistant Vice President - Planning of the
General Partner, responsible for all harvest planning, as well as operating and
developing the inventory and GIS systems. From 1982 to 1989, Mr. Muller was
President of Woodland Consulting Services, Inc., during which time he gained
additional experience in contracting forestry operations and forestland
management as District Forester. Mr. Muller was employed by Weyerhaeuser for
eight years.
Christopher J. Sokol serves as Assistant Vice President - Forestry of
the General Partner, responsible for forestry operations, environmental
relationships, harvest prescriptions and nursery/orchard operations. Prior to
joining the General Partner in 1996, Mr. Sokol was employed by Weyerhaeuser for
22 years and gained additional experience in forest regeneration and timber
sales while serving as District Forester from 1982 to 1991 and as Forestry
Manager thereafter.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the General Partner's officers and directors, and persons who own more
than 10% of a registered class of equity securities of the Company, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the Nasdaq National Market. Officers, directors and greater than
ten percent securityholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based on its review of the copies of such forms received by it, or
written representations regarding ownership of the Company's securities, the
Company believes that during the fiscal year 1999, all filings required were
properly made.
30
Item 11. Executive Compensation
The Company and the General Partner were formed in June 1997. Under
the terms of the Partnership Agreement, the Company is required to reimburse the
General Partner for expenses relating to the operation of the Company, including
salaries and bonuses of employees employed on behalf of the Company, as well as
the costs of providing benefits to such persons under employee benefit plans and
for the costs of health and life insurance.
The following table sets forth annual salary, bonus and all other
compensation awards and payouts earned by the General Partner's Chief Executive
Officer and the four most highly compensated executive officers who earned in
excess of $100,000 (the "Named Executive Officers") for services rendered during
the fiscal year ended December 31, 1999:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
Awards
Fiscal Securities Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Other($) Options/SARs(#) Compensation
- --------------------------- ---- --------- -------- -------- --------------- ------------
John M. Rudey 1999 450,000 225,000 -- 50,000 --
Chairman and 1998 300,000 150,000 -- -- --
Chief Executive Officer 1997 450,000 -- -- 107,218(2) --
Glenn A. Zane (1) 1999 267,738(1) 70,000(1) -- -- --
Acting Senior Vice President & 1998 -- -- -- -- --
Acting Director of Operations 1997 -- -- -- -- --
Greg G. Byrne 1999 150,000 90,000 9,901 50,000 --
Vice President and 1998 -- -- -- -- --
Chief Financial Officer 1997 -- -- -- -- --
Martin Lugus 1999 120,000 35,000 4,437 -- --
Vice President - Timberland 1998 101,521 24,625 3,767 -- --
1997 88,500 3,000 3,638 64,331(2) --
Walter L. Barnes 1999 95,000 23,750 1,664 -- --
Assistant Vice President 1998 80,000 20,150 1,220 -- --
- Harvesting 1997 74,000 3,000 1,156 34,310(2) --
- ----------------------
(1) Represents amounts paid to Mason, Bruce, & Girard for Mr. Zane's
services under a consulting agreement between the Company and Mason,
Bruce & Girard. Subsequent to year-end, Mr. Zane resigned as an
acting officer, but he continues to serve the Company as a
consultant.
(2) Options granted in 1997 were repriced on December 14, 1998.
31
Long-Term Incentive Plan
The General Partner has adopted the U.S. Timberlands Company, LP
Amended and Restated 1997 Long-Term Incentive Plan (the "Long-Term Incentive
Plan") for key employees and directors of the General Partner and its
affiliates. The summary of the Long-Term Incentive Plan contained herein does
not purport to be complete and is qualified in its entirety by reference to the
Long-Term Incentive Plan, which is filed as an exhibit to the Company's Form S-1
Registration Statement. The Long-Term Incentive Plan consists of two components,
a unit option plan (the "Unit Option Plan") and a restricted unit plan (the
"Restricted Unit Plan"). The Long-Term Incentive Plan currently permits the
grant of Unit Options and Restricted Units covering an aggregate of 857,748
Common Units.
Unit Option Plan. The Unit Option Plan currently permits the grant
of options ("Unit Options") covering 857,748 Common Units. Unit Options granted
during the Subordination Period will become exercisable automatically upon, and
in the same proportions as, the conversion of the Subordinated Units to Common
Units. If a grantee's employment is terminated by reason of his death,
disability or retirement, the grantee's Unit Options will become immediately
exercisable. In addition, a grantee's Unit Options will become immediately
exercisable in the event of a "change of control" of the Company (as defined in
the Long-Term Incentive Plan).
Upon exercise of a Unit Option, the General Partner will acquire
Common Units in the open market at a price equal to the then-prevailing price on
the principal national securities exchange upon which the Common Units are then
traded, or directly from the Company or any other person, or use Common Units
already owned by the General Partner, or any combination of the foregoing. The
General Partner will be entitled to reimbursement by the Company for the
difference between the cost incurred by the General Partner in acquiring such
Common Units and the proceeds received by the General Partner from an optionee
at the time of exercise. Thus, the cost of the Unit Options will be borne by the
Company. If the Company issues new Common Units upon exercise of the Unit
Options, the total number of Units outstanding will increase and the General
Partner will remit the proceeds received from the optionee to the Company.
The Unit Option Plan has been designed to furnish additional
compensation to key executives and key directors and to increase their
proprietary interest in the future performance of the Company measured in terms
of growth in the market value of Common Units.
32
The following table sets forth certain information with respect to
Unit Options granted to the named executive officers during the fiscal year
1999:
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
-----------------------------------------------------
Performance or Other Period Until
Maturation
Name Number of Unit Options or Payout (1)
--------------------------------------------- ----------------------- ---------------------
John M. Rudey ........................................ 50,000 1 year
Greg G. Byrne ........................................ 50,000 1 year
(1) The Unit Options become exercisable automatically upon, and in
the same proportion as, the conversion of the Subordinated
Units to Common Units, which date shall be no earlier than
December 31, 2000.
The following table sets forth certain information with respect to
option grants to the named executive officers during fiscal 1999:
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value
at Assumed Annual Rates
Number of of Stock Appreciation
Securities % of Total for Option Term (2)
Underlying Options/SARs Granted Exercise or
Options/SARs to Employees Base Price Expiration
Name Granted during Fiscal Year ($/Sh) (1) Date 5% 10%
- ---- ------- ------------------ ------ ---- --- ---
John M. Rudey ............ 50,000 14.6% $13.375 01/01/09 $475,039 $1,239,272
Greg G. Byrne ............ 50,000 14.6% $14.000 02/01/09 $497,238 $1,297,182
(1) The Unit Options become exercisable automatically upon, and in the
same proportion as, the conversion of the Subordinated Units to
Common Units, which date shall be no earlier than December 31, 2000.
(2) A ten year period (the maximum length of the Unit Option term) was
used for compounding purposes in the above calculations.
33
The following table sets forth certain information with respect to
the aggregate number and value of options at the fiscal year-end 1999:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR ENDED OPTION/SAR VALUES
Number of Securities
Underlying/Unexercised Value of Unexercised
Option/SARs at In-the-Money Options/SARs at
December 31, 1999 December 31, 1999
----------------- -----------------
Shares Acquired
on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
----------- -------------- ----------- ------------- ----------- -------------
John M. Rudey --- $--- --- 157,218 $--- N/A(1)
Glenn A. Zane (2) --- $--- --- --- $--- N/A
Greg G. Byrne --- $--- --- 50,000 $--- N/A(1)
Martin Lugus --- $--- --- 64,331 $--- N/A(1)
Walter L. Barnes --- $--- ---- 34,310 $--- N/A(1)
- -----
(1) At the close of trading on December 31, 1999, the market value of the
Common Units was $9.875 per common unit. Since the Unit Options, once
exercisable, would be exercisable at a range of $13.375 to $14.750 per
unit, the in-the-money computation is inapplicable.
(2) Subsequent to year-end, Mr. Zane resigned as an acting officer, but he
continues to serve the Company as a consultant.
Restricted Unit Plan. A Restricted Unit is a "phantom" unit that
entitles the grantee to receive a Common Unit upon the vesting of the phantom
unit. No grants have been made under the Restricted Unit Plan. The LTIP
Committee may, in the future, determine to make grants under such plan to key
employees and directors containing such terms as the Committee shall determine.
Restricted Units granted during the Subordination Period will vest automatically
upon, and in the same proportions as, the conversion of the Subordinated Units
to Common Units. Common Units to be delivered upon the "vesting" of rights may
be Common Units acquired by the General Partner in the open market, Common Units
already owned by the General Partner, Common Units acquired by the General
Partner directly from the Company or any other person, or any combination of the
foregoing. The General Partner will be entitled to reimbursement by the Company
for the cost incurred in acquiring such Common Units. If the Company issues new
Common Units, the total number of Units outstanding will increase and the
Company will receive no remuneration.
The issuance of the Common Units pursuant to the Restricted Unit Plan
is intended to serve as a means of incentive compensation for performance and
not primarily as an opportunity to participate in the equity appreciation in
respect of the Common Units. Therefore, no consideration will be payable by the
plan participants upon vesting and issuance of the Common Units.
The General Partner's Board of Directors in its discretion may
terminate the Long-Term Incentive Plan at any time with respect to any Common
Units or Unit Options for which a grant has not theretofore been made. The
General Partner's Board of Directors will also have the right to alter or amend
the Long-Term Incentive Plan or any part thereof from time to time; provided,
however, that no change in any outstanding grant may be made that would impair
the rights of the participant without the consent of such participant.
34
Compensation of Directors
Compensation for Directors of the General Partner covers services
rendered for both the Company and the Operating Company. No additional
remuneration will be paid to employees who also serve as directors. Each
independent director receives $50,000 annually, for which they each agree to
participate in four regular meetings of the Board of Directors and four
Audit/Conflicts Committee meetings. Each other non-employee director receives
$50,000 annually (to be paid in cash or Subordinated Units, as determined by
each director), for which they each agree to participate in four regular
meetings of the Board of Directors. Each non-employee director will receive
$1,250 for each additional meeting in which he participates. In addition, each
non-employee director will be reimbursed for his out-of-pocket expenses in
connection with attending meetings of the Board of Directors or committees
thereof. Each director will be fully indemnified by the Company for his actions
associated with being a director to the extent permitted under Delaware law.
The General Partner has entered into consulting agreements with each
of Aubrey Cole Associates (a consulting firm affiliated with Mr. Cole), Robert
F. Wright Associates, Inc. (a consulting firm affiliated with Mr. Wright) and
Mr. Hornig pursuant to which each such person or firm provides consulting
services to the General Partner. Each such agreement provides for an annual
retainer of $25,000, plus $150 per hour (with a maximum per diem of $1,200) for
services rendered at the request of the General Partner. In addition, the
General Partner entered into a consulting agreement with Mr. Wyman that provides
for an annual retainer of $50,000 for services rendered at the request of the
General Partner. Each consulting agreement will be reviewed annually by a
majority of the directors who do not have consulting agreements.
Employment Agreements
The General Partner has entered into an employment agreement with Mr.
Rudey (the "Executive"). The agreement has a term expiring on December 31, 2002,
and includes confidentiality and non-compete provisions.
The agreement provides for an annual base salary of $450,000, subject
to such increases as the Board of Directors of the General Partner may authorize
from time to time. In addition, the Executive is eligible to receive an annual
cash bonus to be determined by the Compensation Committee not to exceed 100% of
his base salary. The Executive will be entitled to participate in such other
benefit plans and programs as the General Partner may provide for its employees
in general.
The agreement provides that in the event the Executive's employment
is terminated without "Cause" (as defined in the Employment Agreements) or if
the Executive terminates his employment for "Good Reason" (as defined below),
such individual will be entitled to receive a severance payment in an amount
equal to his base salary for the remainder of the employment term under the
Employment Agreement or 12 months, whichever is less, plus a prorated bonus for
the year of such termination calculated based on the bonus being equal to 100%
of base salary. In the event of termination due to death or disability, the
Executive will be entitled to accrued salary and benefits up to the date of the
termination. In the event the individual's employment is terminated for "Cause,"
he will receive accrued salary and benefits up to the date of termination.
Good Reason is defined in the agreement generally as: (i) failure of
the General Partner's members to elect or re-elect the Executive to the Board of
Directors, (ii) failure of the General Partner to vest in the Executive the
position, duties and responsibilities contemplated by his Employment Agreement,
(iii) failure of the General Partner to pay any portion of the Executive's
compensation, (iv) any material breach by the General Partner of any material
provision of the Employment Agreement and (v) a material reduction in the
individual's duties, responsibilities or status upon a "change of control" as
defined in the Employment Agreement. "Cause" is defined generally as: (i) any
felony conviction, (ii) any material breach by the Executive of a material
written agreement between the Executive and the Company, (iii) any breach caused
by the Executive of the Partnership Agreement, (iv) any willful misconduct by
the Executive materially injurious to the Company, (v) any willful failure by
the Executive to comply with any material policies, procedures or directives of
the Board of Directors of the General Partner or (vi) any fraud,
misappropriation of funds, embezzlement or other similar acts of misconduct with
respect to the Company.
35
Committee Interlocks and Insider Participation in Compensation Decisions
The Compensation Committee of the General Partner is composed of
Messrs. Rudey, Abramson, Wyman, Hornig and Cole. Mr. Rudey also serves as
Chairman of the General Partner.
The duties of the Compensation Committee are to (i) determine the
annual salary, bonus and benefits, direct and indirect, of all executive
officers, (ii) review and recommend to the full Board any and all matters
related to benefit plans covering the foregoing officers and any other employees
and (iii) serve as the Option Committee for the Company's Unit Option Plan.
When setting executive officer compensation levels, the Compensation
Committee considers a variety of quantitative and qualitative criteria tied to
the strategic goals of the Company, such as maintaining the Minimum Quarterly
Distribution, an executive's acceptance of additional responsibility and
acquisition activity. The above factors were applied by the Compensation
Committee in determining the salary and bonus amounts for all executives,
including the CEO.
36
Performance Table
The table below compares the total return of the Common Units of the
Company (TIMBZ) from November 1997 through December 1999 with the Wilshire 5000
Index (WFKX) and a portfolio (TIMBER) consisting of Boise Cascade Corporation,
Plum Creek Timber Co., LP and Crown Pacific Partners, LP.
TIMBZ WFKX TIMBER
Nov-97 100.0000 100.0000 100.0000
Dec-97 100.0000 101.7040 94.7896
Jan-98 102.1080 102.1700 103.0213
Feb-98 101.5060 109.4510 105.7293
Mar-98 102.4100 114.7910 106.6437
Apr-98 102.4100 116.0480 110.3357
May-98 99.9036 112.8170 103.2819
Jun-98 94.5963 116.6350 102.2340
Jul-98 93.6597 113.9770 93.3651
Aug-98 78.2635 96.0982 83.0294
Sep-98 89.8106 102.2350 91.1188
Oct-98 93.6596 109.7320 95.9207
Nov-98 78.4894 116.4920 96.2398
Dec-98 70.5745 123.7920 93.2971
Jan-99 76.5107 128.2460 94.4472
Feb-99 71.7288 123.4470 93.9306
Mar-99 65.5806 128.0590 98.6318
Apr-99 74.4613 134.0930 109.4997
May-99 72.3339 131.0020 110.3187
Jun-99 79.4254 137.6400 116.7763
Jul-99 89.3536 133.3330 112.8773
Aug-99 75.1705 132.0170 106.2294
Sep-99 63.3790 128.1260 109.7563
Oct-99 72.9596 133.4120 105.1845
Nov-99 65.2796 133.4120 99.5907
Dec-99 60.6716 133.4120 102.8240
37
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of Units held
by beneficial owners of five percent or more of the Units, by directors and
executive officers of the General Partner and by all directors and executive
officers of the General Partner as a group as of February 28, 2000.
Percentage of
Percentage of Subordinated Subordinated Percentage of
Common Units Common Units Units Units Total Units
Beneficially Beneficially Beneficially Beneficially Beneficially
Name of Beneficial Owners Owned Owned Owned Owned Owned
------------------------- ----- ----- ----- ----- -----
Rudey Timber Company, LLC (1) 306,550 3.6% 2,894,157 67.6% 24.9%
U.S. Timberlands Management Company, ---- ---- 1,244,565 29.1 9.7%
LLC (2)
U.S. Timberlands Holdings, LLC (3) ---- ---- 2,894,157 67.6 22.5%
John M. Rudey (4) 551,535 6.4% 4,138,722 96.7 36.5%
Greg Byrne (5) ---- ---- ---- ---- ----
George R. Hornig (6)(11) ---- ---- 48,160 1.1 *
Robert F. Wright (7)(11) ---- ---- ---- ---- -----
Aubrey L. Cole (8)(11) ---- ---- ---- ---- ----
Alan B. Abramson (9) ---- ---- ---- ---- ----
William Wyman (10) ---- ---- ---- ---- ----
All Directors and Executive Officers 551,535 6.4% 4,186,882 97.8 36.8%
as a Group (7 Persons)
- -----------------------------
* Less than 1% of class.
(1) Current address is 625 Madison Avenue, Suite 10-B, New
York, NY 10022. Includes all 2,894,157 of the Subordinated
Units owned by Holdings. Rudey Timber Company, LLC has a
99% member interest in Holdings.
(2) Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.
(3) Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.
(4) Current address is 625 Madison Avenue, Suite 10-B, New
York, NY 10022. Includes 1,244,565 Subordinated Units
beneficially owned by Old Services and 2,894,157
Subordinated Units beneficially owned by Holdings. Mr.
Rudey is attributed 100% beneficial ownership of all
Subordinated Units owned by Old Services and Holdings
through his interests therein and in Rudey Timber Company,
LLC. Includes an aggregate of 541,450 Common Units owned by
Rudey Timber Company, John Rudey's minor children, Garrin
Properties Group and U.S. Timberlands Service Company, LLC,
respectively. In addition Mr. Rudey owns a 78.75% interest
in U.S. Timberlands Service Company, LLC, the Partnership's
General Partner.
(5) Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.
(6) Current address is 1220 Park Avenue, New York, NY 10128.
(7) Current address is 57 West 57th Street, Suite 704, New York, NY 10019.
(8) Current address is 16825 Northchase Drive, Suite 800, Houston, TX 77060.
(9) Current address is 501 Fifth Avenue, New York, NY 10017
(10) Current address is 4 North Balch Street, Hanover, NH 03755.
(11) None of the Units owned by U.S. Timberlands Services, LLC,
in which Messrs. Hornig, Wright and Cole owned 16.25%, 2.5%
and 2.5%, respectively, are reported as beneficially owned
by such person.
38
All of the outstanding member interests in the General Partner are
owned by management, directors and related persons and entities. The members of
the General Partner are parties to an operating agreement, which, among other
things, provides that the member interests of management and directors who
retire, resign or otherwise terminate their relationship with the General
Partner will be repurchased by the General Partner. In addition, each member
other than affiliates of Mr. Rudey is provided certain "tag along" and "bring
along" rights with respect to sales of member interests in the General Partner
by Mr. Rudey's affiliates. See "Certain Relationships and Related
Transactions--Repurchase of Certain Member Interests; Severance Payments."
Item 13. Certain Relationships and Related Transactions
The Company is managed by the General Partner pursuant to the
Partnership Agreement. Under the Partnership Agreement the General Partner is
entitled to reimbursement of certain costs of managing the Company. These costs
included compensation and benefits payable to officers and employees of the
General Partner, payroll taxes, general and administrative expenses and legal
and professional fees.
Consulting Agreements
The General Partner has entered into consulting agreements with each
of Aubrey Cole Associates (a consulting firm affiliated with Mr. Cole), Robert
F. Wright Associates, Inc. (a consulting firm affiliated with Mr. Wright) and
Mr. Hornig pursuant to which each such person or firm provides consulting
services to the General Partner. Each such agreement provides for an annual
retainer of $25,000, plus $150 per hour (with a maximum per diem of $1,200) for
services rendered at the request of the General Partner. Each consulting
agreement will be reviewed annually by a majority of the directors who do not
have consulting agreements. In addition, the General Partner entered into a
consulting agreement with Mr. Wyman that provides for an annual retainer of
$50,000 for services rendered at the request of the General Partner.
Related Party Transactions
During January 1999, Glenn A. Zane, a principal of Mason Bruce &
Girard, was appointed Acting Senior Vice President and Acting Director of
Operations for the Company. Subsequent to year-end, Mr. Zane resigned as an
acting officer, but he continues to serve the Company as a consultant.
Throughout 1999, the Company paid approximately $695,000, excluding payments for
Mr. Zane's services, to Mason, Bruce & Girard.
Investment in Affiliate
In October 1999, the Company made an investment in U.S. Timberlands
Yakima, LLC (USTY), an unconsolidated affiliate. USTY, a newly formed entity
organized to acquire timber properties located in Central Washington and Central
Oregon, is engaged in the growing of trees and sale of logs and standing timber
to third party wood processors. The Company contributed to USTY $294,000 of cash
for 49% of USTY's common interests (the "Common LLC Interests"). The remaining
Common LLC Interests were acquired for $306,000 in cash by U.S. Timberlands
Holding Group, LLC, a Delaware limited liability company in which John Rudey and
George Hornig, respectively, the Chairman of the Board and a director of the
Company's General Partner, hold a controlling interest. The Company also
acquired all of the senior preferred interests in USTY (the "Senior or Preferred
LLC Interests") for its contribution to USTY of timberlands consisting primarily
of non-income producing, pre-merchantable pine plantations having an agreed upon
value of $22.0 million. The Company recorded its investment in the Senior LLC
interest at its $18.9 million cost basis for the contributed timberlands. Terms
of the Preferred LLC Interests include a cumulative annual guaranteed return of
5% of the $22.0 million agreed upon value of the contributed timberlands. The
Preferred LLC Interests are redeemable at the Company's option on December 31,
2004 or at USTY's option at any time prior thereto, for a redemption price equal
to the agreed upon value of the Preferred LLC Interests plus any portion of the
guaranteed return not received by the Company prior to the redemption date.
Generally, USTY's net income or losses are allocated to the Common LLC Interest.
However, net losses exceeding the account balances of the Common LLC Interest
are allocated to the Preferred LLC Interest. The Company accounts for the
Preferred LLC Interest at cost, reduced by losses in excess of the Common LLC
Interests. The Company accounts for its Common LLC Interest by the equity
method. The General Partner of the Company provides management services to USTY
for a fee equal to 2% of USTY's earnings before interest, taxes, depreciation
and amortization. The Company granted U.S. Timberlands Holding Group, LLC an
irrevocable proxy to vote its Common and Preferred Interests. During 1999,
concurrently with and in order to facilitate USTY's acquisition of the
Washington timberlands referred to above, an entity controlled by John M. Rudey
agreed to acquire in the future a portion of the property and any related
liabilities that the Company and USTY were unwilling to acquire, the sale of
which was a condition of the seller to the USTY acquisition. Such entity was
paid $2.7 million by the seller for its agreement to acquire such property and
any related liabilities. The General Partner's Conflicts Committee reviewed and
approved the structure of the Company's investment in the affiliate.
39
Repurchase of Certain Member Interests; Severance Payments
On January 5, 1998, the General Partner made certain changes in
senior management. In connection therewith, Edward J. Kobacker, the former
Executive Vice President and Chief Operating Officer and a former Director of
the General Partner, became entitled to receive approximately $700,000 in
severance payments pursuant to his employment agreement. In addition, pursuant
to the terms of the General Partner's operating agreement, the member interests
of each of Mr. Stephens, Mr. Kobacker and John H. Beuter, a former Director of
the General Partner, were subject to repurchase at an aggregate price of
$385,000 payable in three annual installments commencing February 1, 1998. The
Company has reimbursed the General Partner for such repurchase payments.
During January 1999, the Company paid $260,000, $175,000 and $145,000
to Messrs. Symington, Michie and McDowell, respectively, as severance under
their employment agreements with the Company. In July 1999, under the terms of a
settlement the Company reached with Messrs. Symington, Michie, and McDowell, the
Company committed to pay an additional sum of $675,000 to Messrs. Symington,
Michie, and McDowell.
40
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
(a)(1) and (2) Financial Statements
See "Index to Financial Statements" set forth on page F-1.
(a)(3) Exhibits
+3.1 -- Amended and Restated Agreement of Limited Partnership of U.S. Timberlands Company, LP
-- Second Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, LLC
+3.2
-- Indenture among U.S. Timberlands Klamath Falls, LLC, U.S. Timberlands Finance Corp. and State Street
+10.2 Bank and Trust Company, as trustee
+10.3 -- Contribution, Conveyance and Assumption Agreement among U.S. Timberlands Company, LP and certain other
parties
*10.4 -- Form of U.S. Timberlands Company, LP 1997 Long-Term Incentive Plan
*10.5 -- Employment Agreement for Mr. Rudey
*10.9 -- Supply Agreement between U.S. Timberlands Klamath Falls, LLC and Collins Products LLC
**16 -- Letter from Arthur Andersen, LLP dated December 8, 1998.
*21.1 -- List of Subsidiaries
23.1 -- Consent of Richard A. Eisner & Company, LLP dated April 14, 2000.
23.2 -- Consent of Arthur Andersen LLP dated April 11, 2000.
27.1 -- Financial Data Schedule
* Incorporated by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-1 filed November 13, 1997.
+ Incorporated by reference to the same numbered Exhibit to the Registrant's
Current Report on Form 8-K filed January 15, 1998.
** Incorporated by reference to Exhibit 1 to the Registrant's Form 8-K filed
on December 8, 1998.
41
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 on this 30th day of
March, 2000.
U.S. TIMBERLANDS COMPANY, LP
By: U.S. Timberlands Services Company, LLC
Its General Partner
By: /s/ John M. Rudey
-----------------
John M. Rudey, Chairman,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
/s/ John M. Rudey Chairman, Chief Executive Officer, President and March 30, 2000
- ---------------------------------------------- Director (Principal Executive Officer)
John M. Rudey
/s/ Greg G. Byrne Chief Financial Officer March 30, 2000
- ----------------------------------------------
Greg G. Byrne
/s/ Toby A. Luther Corporate Controller - March 30, 2000
- ---------------------------------------------- Western Operations
Toby A. Luther (Principal Accounting Officer)
/s/ Aubrey L. Cole Director March 30, 2000
- ----------------------------------------------
Aubrey L. Cole
/s/ George R. Hornig Director March 30, 2000
- ----------------------------------------------
George R. Hornig
/s/ Alan B. Abramson Director March 30, 2000
- ----------------------------------------------
Alan B. Abramson
/s/ William A. Wyman Director March 30, 2000
- ----------------------------------------------
William A. Wyman
/s/ Robert F. Wright Director March 30, 2000
- ----------------------------------------------
Robert F. Wright
42
EXHIBIT INDEX
23.1 Consent of Richard A. Eisner & Company, LLP dated April 14, 2000.
23.2 Consent of Arthur Andersen LLP dated April 11, 2000.
27.1 Financial Data Schedule
43
CONSOLIDATED FINANCIAL STATEMENTS
Contents Page
Independent auditors' report (Richard A. Eisner, LLP) F-2
Report of independent public accountants (Arthur Andersen LLP) F-3
Consolidated balance sheets as of December 31, 1999 and 1998 F-4
Consolidated statements of operations for the years ended December 31, 1999, 1998, and 1997 F-5
Consolidated statements of changes in partners' capital and members' deficit for the years ended
December 31, 1999, 1998 and 1997 F-6
Consolidated statements of cash flows for the years ended December 31, 1999, 1998 and 1997 F-7
Notes to consolidated financial statements F-8
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Partners of
U.S. Timberlands Company, LP
We have audited the accompanying consolidated balance sheets of U.S. Timberlands
Company, LP and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in partners' capital and cash
flows for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the financial position of U.S. Timberlands
Company, LP and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
January 21, 2000
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Report of Independent Public Accountants
To the Board of Directors of
U.S. Timberlands Company, LP:
We have audited the accompanying consolidated statements of operations, changes
in partners' capital and members' deficit, and cash flows of U.S. Timberlands
Company, LP for the year ended December 31, 1997. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of U.S.
Timberlands for the year ended December 31, 1997 in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen, LLP
Portland, Oregon
January 23, 1998
F-3
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except unit information)
December 31,
------------
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 2,798 $ 4,824
Accounts receivable, net of allowance for doubtful accounts of $200 672 1,527
Other receivables 124 1,113
Notes receivable 2,344 1,179
Prepaid expenses and other current assets 981 426
-------- --------
Total current assets 6,919 9,069
Timber and timberlands, net 293,828 334,476
Investment in affiliate 18,243 -
Property, plant and equipment, net 1,038 1,154
Notes receivable, less current portion 2,304 -
Deferred financing fees, less accumulated amortization of $1,427 and $752, respectively 5,323 5,998
-------- --------
Total assets $327,655 $350,697
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 346 $ 733
Accrued liabilities 3,286 4,405
Deferred revenue 39 1,614
Payable to general partner 840 914
-------- --------
Total current liabilities 4,511 7,666
-------- --------
Long-term debt 225,000 225,000
-------- --------
Commitments and contingencies
Minority interest 981 1,180
-------- --------
Partners' capital:
General partner interest 981 1,180
Limited partner interest (12,859,607 units issued and outstanding as of
December 31, 1999 and 1998) 96,182 115,671
-------- --------
97,163 116,851
Total liabilities and partners' capital $327,655 $350,697
======== ========
F-4
See notes to consolidated financials
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per unit amounts)
Year Ended
December 31,
------------------------------------------------
1999 1998 1997
--------------- -------------- -----------------
Revenues:
Log and stumpage sales $ 76,594 $ 63,636 $ 60,445
Timber and property sales - 6,275 15,244
By-products and other 400 1,413 1,656
------------- -------------- --------------
76,994 71,324 77,345
------------ ------------- -------------
Cost of products sold:
Costs of timber harvested 17,056 16,683 17,778
Cost of timber and property sales - 5,917 8,746
Depletion, depreciation and road amortization 23,318 21,938 17,303
------------ ------------- -------------
40,374 44,538 43,827
------------ ------------- -------------
Gross profit 36,620 26,786 33,518
------------ ------------- -------------
Selling, general and administrative expenses 8,477 10,462 6,250
Equity in net loss of affiliate 901 - -
------------ ------------- -------------
Operating income 27,242 16,324 27,268
Interest expense 21,937 22,183 25,321
Amortization of deferred financing fees and debt guarantee
fees 675 675 4,193
Interest income (565) (460) (1,452)
Other (income) expense, net (1,162) 309 574
------------ ------------- -------------
Income (loss) before extraordinary items 6,357 (6,383) (1,368)
Extraordinary items, losses on extinguishment of debt - - (9,337)
------------ ------------- -------------
Income (loss) before general partner and minority interest 6,357 (6,383) (10,705)
Minority interest 64 (64) -
------------ ------------- -------------
Net income (loss) 6,293 (6,319) (10,705)
General partner interest 64 (64) 107
------------ ------------- -------------
Net income (loss) applicable to common and subordinated
units $ 6,229 $ (6,255) $ (10,598)
============ ============ ============
Basic income (loss) per unit: Income (loss) before extraordinary items:
Common $ .48 $(.49) $ 3.05
===== ===== ======
Subordinated $ .48 $(.49) $(1.01)
===== ===== ======
Extraordinary item:
Common $ $ $(3.92)
====== ====== ======
Subordinated $ $ $(1.29)
====== ====== ======
Net income (loss):
Common $ .48 $(.49) $ (.86)
===== ===== ======
Subordinated $ .48 $(.49) $(2.30)
===== ===== ======
Diluted income (loss) per unit:
Income (loss) before extraordinary items $ .48 $(.49) $ (.28)
Extraordinary items (1.76)
- - -
----- ---- ------
Net income (loss) $ .48 $(.49) $(2.04)
===== ===== ======
See notes to consolidated financial statements
F-5
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Consolidated Statements of Changes in Partners' Capital and Members' Deficit
(in thousands)
U.S.
Timberlands U.S.
Management Timberlands
Company, Klamath U.S. Timberlands
LLC Falls, L.L.C Company, LP
--------- ----------- ------------------------------------
Partners' Partners'
Capital - Capital - Members'
General Limited Deficit and
Members' Member's Partner Partner Partners'
Deficit Deficit Interest Interest Capital
------- ------- -------- -------- -------
Balance, January 1, 1997 $ (1,127) $ (1,809) $ (2,936)
Members' distribution (1,191) - (1,191)
Initial partner contribution - - $ 1 1
Net loss January 1, 1997 through
November 18, 1997 (2,009) (7,424) (9,433)
Redemption of members' interest (1,000) (1,000)
Assumption of Old Services and USTK's net
liabilities by the MLP 5,327 9,233 $ (148) (14,521) (109)
Issuance of partner interests - - 1,801 176,525 178,326
Equity issuance costs - - (169) (16,584) (16,753)
Net loss November 19, 1997 through
December 31, 1997 - - (13) (1,246) (1,259)
------------ ----------- ---- ------ ------
Balance, December 31, 1997 $ - $ - 1,471 144,175 145,646
Distributions to unitholders ============ ============ (227) (22,249) (22,476)
Net loss
(64) (6,255) (6,319)
---- ------- -------
Balance, December 31, 1998 1,180 115,671 116,851
Distributions to unitholders (263) (25,718) (25,981)
Net income 64 6,229 6,293
-- ----- -----
Balance, December 31, 1999 $ 981 $ 96,182 $ 97,163
================ ========== ==========
F-6
See notes to consolidated financials.
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year Ended
December 31,
------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 6,293 $ (6,319) $ (10,705)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation, depletion, amortization and cost of timber and
property sold 23,318 27,855 26,775
Loss on disposal of assets 66 - -
Write-off and amortization of deferred financing fees 675 675 9,148
Equity in net loss of affiliate 901 - -
Other noncash items - 361 630
Minority interest 64 (64) -
Changes in assets and liabilities:
Accounts receivable 855 999 (1,006)
Interest receivable from affiliate - - 121
Inventories - - 78
Other receivables 989 (939) -
Notes receivable (3,469) 1,065 (2,244)
Prepaid expenses and other current assets (555) 108 146
Accounts payable (387) (671) 515
Accrued liabilities (1,119) (653) (3,171)
Deferred revenue (1,575) (4,130) 5,744
Payable to general partner (553) 257 252
------- ------- ------
Net cash provided by operating activities 25,503 18,544 26,283
====== ====== ======
Cash flows from investing activities:
Receivable from affiliate - - 10,000
Purchase of property, plant and equipment (44) (32) (319)
Proceeds from sale of assets 8 - 400
Acquisition of Ochoco Timberlands - - (110,873)
Timber and road additions (955) (610) (774)
Investment in affiliate (294) - -
------- ------- ------
Net cash used in investing activities (1,285) (642) (101,566)
------- ------- ------
Cash flows from financing activities:
Partner contributions - - 1
Member's distribution - - (1,191)
Distributions to unitholders (25,981) (22,476)
Distributions to minority interest (263) (227) -
Deferred financing fees - - (12,720)
Long-term borrowings - - 510,000
Repayment of long-term borrowings - - (590,000)
Common units offering costs - - (16,922)
Common units offering proceeds 180,127
Payment to affiliate - (1,000) -
------- ------- ------
Net cash (used in) provided by financing activities (26,244) (23,703) 69,295
------- ------- ------
Net decrease in cash and cash equivalents (2,026) (5,801) (5,988)
Cash and cash equivalents, beginning of period 4,824 10,625 16,613
------- ------- ------
Cash and cash equivalents, end of period $ 2,798 $ 4,824 $ 10,625
======= ======= ========
Supplemental cash flow information:
Cash paid for interest $ 21,746 $ 21,418 $ 28,083
Noncash activities:
Contribution of timberlands for investment in affiliate $ 18,850 $ - $ -
Redemption of member's interest in Old Services $ - $ - $ 1,000
F-7
See notes to consolidated financials.
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
1. Business and Significant Accounting Policies:
Business
U.S. Timberlands Company, LP (the "MLP"), a Delaware limited partnership, was
formed in 1997 to acquire and own 99% of the equity interests in U.S.
Timberlands Klamath Falls, LLC ("USTK and the "Operating Company") and through
the Operating Company to acquire and own the business and assets of U.S.
Timberlands Management Company, LLC, formerly known as U.S. Timberlands Services
Company, LLC ("Old Services"). As used herein, "Company" refers to the
consolidated entities of the MLP and the Operating Company.
The primary activity of the Company is the growing of trees and the sale of logs
and standing timber to third party wood processors. The Company's timber is
located in Oregon, east of the Cascade Range. Logs harvested from the
timberlands are sold to unaffiliated domestic conversion facilities. These logs
are processed for sale as lumber, plywood and other wood products, primarily for
use in new residential home construction, home remodeling and repair and general
industrial applications.
U.S. Timberlands Services Company, LLC (the "General Partner" and "New
Services") manages the businesses of the MLP and the Operating Partnership. The
General Partner owns a 1% general partner interest in the MLP and a 1% general
partner interest in the Operating Company. All management decisions related to
the Partnership are made by the General Partner.
Consolidation
The accompanying consolidated financial statements include the accounts of the
MLP and its subsidiary, the Operating Company. All material intercompany
transactions and balances have been eliminated. An investment in an affiliate is
accounted for by the equity method (See Note 4).
Initial Public Offering and Related Transactions
On November 19, 1997, the MLP completed an initial public offering (the "Common
Units Offering") of 8,577,487 common units (including the 1,118,803 common units
issued upon exercise of the underwriters' overallotment option in December 1997)
representing limited partner interests ("Common Units"). In addition, the
Operating Company issued $225,000 of senior unsecured notes in a public offering
(the "Notes"). Concurrent with the Common Units Offering, Old Services
contributed all of its assets to the General Partner in exchange for interests
therein. Immediately thereafter, USTK assumed certain indebtedness of U.S.
Timberlands Holdings, LLC ("Holdings"), an affiliate of USTK, and the General
Partner contributed its timber operations to USTK in exchange for a member's
interest in USTK. The General Partner then contributed all but a 1% member
interest in USTK to the MLP in exchange for a general partner interest,
1,387,963 subordinated units representing limited partner interests
("Subordinated Units") and the right to receive certain incentive distributions.
The General Partner distributed the 1,387,963 Subordinated Units to Old Services
and Old Services used a portion of such Subordinated Units to redeem interests
in Old Services. Holdings also contributed all of its member interest in USTK to
the Company in exchange for 2,894,157 Subordinated Units. (This series of
transactions is hereafter referred to as the "Transactions"). Since the
controlling owner of Old Services and USTK prior to the Transactions now
controls the General Partner, the Transactions were recorded as a reorganization
under common control and therefore remain at their historical costs.
In addition, the accompanying 1997 financial statements include the results of
operations and cash flows of Old Services and USTK prior to the Transactions,
after the elimination of intercompany transactions.
F-8
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
1. Business and Significant Accounting Policies (Continued):
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent 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.
Revenue Recognition
Revenue on delivered log sales are recognized upon delivery to the customer.
Revenue on timber deeds and timber and property sales are generally recognized
upon closing. Revenue from timber sold under stumpage contracts (i.e., the
customer arranges to harvest and deliver the logs) is recognized when the timber
is harvested. Deferred revenue as of December 31, 1999 and 1998, represents cash
received in advance of logs harvested under stumpage contracts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts and notes receivable. The
majority of the Company's trade accounts and notes receivable are derived from
sales to third party wood processors. The Company's four largest customers
accounted for approximately 18%, 17%, 15%, and 14% of the Company's aggregate
net revenues from log, stumpage, and timber deed sales for the year ended
December 31, 1999. In 1998, these customers represented approximately 19%, 27%,
18%, and 10%, respectively, of aggregate net revenues from log, stumpage and
deed sales. In 1997, these four customers accounted for approximately 16%, 24%,
16%, and 12% of aggregate net revenues from log, stumpage and deed sales. No
other single customer accounted for more than 10% of aggregate net revenues from
log, stumpage, and timber deed sales in those years. Credit risk on trade
receivables is mitigated by control procedures to monitor the credit worthiness
of customers. The Company mitigates credit risk related to notes receivable by
obtaining asset lien rights or performing credit worthiness procedures or both.
The Company's four largest customers accounted for 90% of the Company's accounts
receivable at December 31, 1998 and none of the Company's accounts receivable at
December 31, 1999.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with maturities
at date of purchase of 90 days or less.
Timber and Timberlands
Timber and timberlands is comprised of timber, timberlands, logging roads, and
seed stock and nursery stock.
Timber, timberlands and roads
Timber, timberlands and roads are stated at cost less depletion and amortization
for timber previously harvested. The cost of the timber harvested (including
logging roads) is determined based on the volume of timber harvested in relation
to the amount of estimated net merchantable volume, utilizing a single composite
pool. The Company estimates its timber inventory using statistical information
and data obtained from physical measurements, site maps, photo-types and other
information gathering techniques. These estimates are updated annually and may
result in adjustments of timber volumes and depletion rates, which are
recognized prospectively. Changes in these estimates have no effect on the
Company's cash flow.
F-9
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
1. Business and Significant Accounting Policies (Continued):
Seed orchard and nursery stock
The Company operates and maintains a seed orchard and nursery. Costs incurred by
the orchard and nursery to produce seed and seedlings utilized in the
reforestation of the Company's timberlands are capitalized to seed orchard and
nursery stock in the accompanying balance sheets. A certain amount of seed and
seedling stock is sold to unaffiliated customers and is reflected as a component
of by-products and other revenues in the accompanying statements of operations.
Property, Plant and Equipment
Property, plant and equipment, including significant improvements thereto, are
stated at cost less accumulated depreciation and amortization. Cost includes
expenditures for major improvements and replacements. Maintenance and repairs
are charged to expense as incurred. When assets are sold, retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in income.
The cost of property, plant and equipment is depreciated using the straight-line
method over the estimated useful lives of the related assets. Buildings and
improvements are generally depreciated over 40 years and equipment is
depreciated over 3 to 5 years. Leasehold improvements are amortized under the
straight-line method based on the shorter of the lease periods or the estimated
useful lives of the improvements.
Deferred Financing Fees
Deferred financing fees consist of fees incurred in connection with obtaining
the related debt financing. The Company amortizes deferred financing fees over
the terms of the related debt.
Minority Interest
The General Partner holds a 1% minority interest ownership in the Operating
Company (the "Minority Interest"). A pro rata share of the Operating Company's
net equity at the completion of the Transactions and the Operating Company's
results of operations since the date of the Transactions have been allocated to
the Minority Interest in the accompanying financial statements. The portion of
the Operating Company's net loss attributable to the Minority Interest in 1997
was insignificant.
Income Taxes
The MLP is a master limited partnership. USTK and Old Services are both limited
liability companies ("LLC's"). Accordingly, the MLP and respective LLC's are not
liable for federal or state income taxes since the MLP's and the respective
LLC's income or loss is reported on the separate tax returns of the individual
unitholders or members. Accordingly, no provision for current or deferred income
taxes has been reflected in the accompanying financial statements.
F-10
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
1. Business and Significant Accounting Policies (Continued):
Per Unit Information
The Company accounts for income (loss) per unit in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, ("SFAS 128") "Earnings Per
Share." Under SFAS No. 128, the Company is required to present basic income
(loss) per Common and Subordinated Unit, and diluted loss per unit information.
Weighted average units outstanding used in calculating per unit information
presented on the face of the statements of operations follows:
Basic (a)
-----------------------------
Common Subordinated Diluted (b)
------ ------------ -----------
1999
Weighted average units outstanding 8,577,487 4,282,120 12,859,607
1998
Weighted average units outstanding 8,577,487 4,282,120 12,859,607
1997
Weighted average units outstanding 943,064 4,282,120 5,225,184
(a) Basic income (loss) per Common and Subordinated Unit is calculated by
dividing the net income (loss) allocable to Common and Subordinated
Units by the weighted average number of Common and Subordinated Units
outstanding. Net income for the year ended December 31, 1999, net
loss for the year ended December 31, 1998 and net loss for the period
from November 19, 1997 through December 31, 1997 is allocated to
Common and Subordinated Units utilizing the book liquidation method
which allocates income (loss) in accordance with liquidation
preferences, as set forth in the Company's partnership agreement, of
the Common and Subordinated Unitholders' partners' capital accounts.
For the purpose of the basic income (loss) per unit calculations,
losses for the period January 1, 1997 through November 18, 1997 are
allocated to the Subordinated Units.
(b) Diluted net income (loss) per unit is calculated by dividing net
income (loss) allocable to the units by the weighted average
aggregate number of Common and Subordinated Units outstanding. Unit
options have not been included in the calculation. Unit options will
be included in calculating diluted earnings per unit, assuming the
result would be dilutive, upon achievement of performance criteria
which, if maintained for the required periods, will result in the
options becoming exercisable (see Notes 9 and 11).
Unit-Based Compensation Plans
The Company accounts for unit-based compensation plans under the provisions of
the Accounting Principles Board's Opinion No. 25, "Accounting for Stock Issued
to Employees". The Company has adopted the disclosure only provisions of the
Financial Accounting Standards Board Statement No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" (see Note 11).
F-11
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
1. Business and Significant Accounting Policies (Continued):
New Accounting Standard
In June of 1998, the financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting for derivative
instruments and hedging activities. The statement was to be effective for all
fiscal quarters of fiscal years beginning after June 15, 1999 but has been
delayed by SFAS 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 No. 137 delays the effective date of SFAS
No. 133 to all fiscal quarters of fiscal years beginning after June 15, 2000.
Consistent with SFAS No. 137, the Company will adopt SFAS No. 133 as of January
1, 2001. The Company believes that the adoption of this statement will not have
a material impact on its financial statements; however, its effect, if any, will
depend on the Company's exposure to derivative instruments at the time of
adoption and thereafter.
Reclassifications:
Certain amounts in prior years have been reclassified for comparability purposes
and have no impact on net income.
2. Timberland Acquisition:
On July 15, 1997, the Company acquired approximately 42,000 acres of timber and
timberlands and approximately 3,000 acres of timber cutting rights from Ochoco
Lumber Company LP for $110,873 (the "Ochoco Timberlands"). Substantially all of
the purchase price was allocated to timber, timberlands and logging roads. The
acquisition was principally financed through $110,000 of debt financing. Because
the Company's acquisition of the Ochoco Timberlands did not represent an
acquisition of an existing business, the pro forma impact on 1997 operations as
if the acquisition had occurred on January 1, 1997 has not been disclosed.
3. Timber and Timberlands:
Timber and Timberlands consisted of the following at December 31:
1999 1998
Timber and logging roads $317,856 332,047
Timberlands 39,338 43,118
Seed orchard and nursery stock 1,277 1,159
-------- --------
358,471 376,324
Less accumulated depletion and amortization 64,643 41,848
--------- --------
$293,828 $334,476
========== =========
F-12
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
4. Investment in Affiliate:
Following is summarized financial information for U.S. Timberlands Yakima, LLC,
the Company's equity basis affiliate (See Note 10), as of and for the year ended
December 31, 1999.
1999
----
Current assets $9,129
Noncurrent assets, principally timber and timberlands 74,726
Current liabilities 5,611
Noncurrent liabilities - long-term debt 60,000
Redeemable preferred member interest (owned by the
Company) 18,243
Net sales 560
Gross profit 342
Net loss (1,207)
5. Property, Plant and Equipment:
Property, plant and equipment consisted of the following at December 31:
1999 1998
---- ----
Equipment $ 674 $ 637
Buildings and improvements 843 843
-------------- ---------------
1,517 1,480
Less accumulated depreciation and amortization 479 326
-------------- ---------------
$ 1,038 $ 1,154
============== ==============
6. Accrued Liabilities:
Accrued liabilities consisted of the following at December 31:
1999 1998
---- ----
Interest $ 2,729 $ 2,729
Severance and harvest tax 242 224
Employee compensation - 300
Mark-to-market loss on interest rate collar - 991
Other 315 161
----------- ---------------
$ 3,286 $ 4,405
============ =============
F-13
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
7. Short-Term Debt:
In 1999, the Company established a credit facility with an affiliate of the
General Partner (the "Affiliate Credit Facility") which allows the Company to
borrow up to $12.0 million. The Company's obligations under the Affiliate Credit
Facility represent unsecured general obligations. Borrowings under the Affiliate
Credit Facility bear interest at the prime lending rate as published in the Wall
Street Journal plus applicable margin (1.25% at December 31, 1999), which is
based on the Company's leverage ratio. The prime lending rate was 8.50% at
December 31, 1999. The Affiliate Credit Facility expires on June 30, 2000 and
all amounts borrowed thereunder shall then be due and payable. There were no
outstanding borrowings under the Affiliate Credit Facility at December 31, 1999.
Peak borrowings were $3,000 under the Affiliate Credit Facility during 1999. A
commitment fee of 0.5% is payable quarterly on the unused available portion of
the Affiliate Credit Facility. Total interest and fees paid to the affiliate in
1999 were $25 and $29, respectively. Average borrowings under a bank working
capital facility which was terminated as of June 30, 1999, amounted to $259 and
$14,512 in 1998 and 1997, respectively.
The Affiliate Credit Facility contains certain restrictive covenants, including
limits on the ability of the Company to make cash distributions, incur certain
additional indebtedness or incur certain liens. The Affiliate Credit Facility
also contains financial ratio covenants as to EBITDDA (earnings before interest,
taxes, depreciation, depletion, and amortization), interest coverage ratio, and
leverage ratio. The Company was in compliance with these covenants at December
31, 1999.
8. Long-Term Debt:
Senior Notes
The $225,000 of Notes, which were issued concurrent with the Transactions, were
issued jointly and severally by the Operating Company and U.S. Timberlands
Finance Corp. ("Finance Corp."), a wholly owned subsidiary of the Operating
Company (collectively, the "Issuers"). The Issuers serve as co-obligators of the
Notes. The Notes represent unsecured general obligations of the Company and bear
interest at 9-5/8% payable semiannually in arrears on May 15 and November 15,
and mature on November 15, 2007 unless previously redeemed. The Notes are
redeemable at the option of the Issuers in whole or in part, on or after
November 15, 2002 at predetermined redemption prices plus accrued interest to
the redemption date.
In addition, at any time on or prior to November 15, 2000, the Issuers, at their
option, may redeem the Notes with the net cash proceeds of a common units
offering or other equity interests of the Company, at 106.625% of the principal
amount thereof, plus accrued and unpaid interest thereon to the redemption date,
provided that at least 65% of the principal amount of the Notes originally
issued remain outstanding immediately following such redemption. The Notes
contain certain restrictive covenants, including limiting the ability of the
Operating Company and its subsidiaries to make cash distributions, incur
additional indebtedness, sell assets or harvest timber in excess of certain
limitations.
In conjunction with the Notes issuance, the Company retired all existing debt
under certain pre-existing long-term financing arrangements. This resulted in an
extraordinary loss on extinguishment of debt of $5,766 in 1997 due principally
to the write-off of existing unamortized deferred financing fees.
USTK Debt Prior to the Transaction
On July 14, 1997, USTK entered into a long-term financing arrangement with
certain banks to finance the Ochoco Acquisition discussed in Note 2 and to
refinance certain borrowings under USTK's then existing revolving credit
facility term loan. The retirement of debt under credit facilities existing as
of July 14, 1997 resulted in an extraordinary loss on extinguishment of debt of
$3,571 due principally to the write-off of unamortized deferred financing fees.
F-14
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
9. Partners' Capital:
Partnership Equity
On November 19, 1997, the Company issued 7,458,684 Common Units in an initial
public offering. Proceeds from such offering were $141,266, net of underwriter
fees and other related costs of $15,367. Concurrent with such offering,
4,282,120 Subordinated Units were issued in exchange for all members' interests
in USTK and Old Services. On December 12, 1997, the underwriters exercised their
overallotment option and the Company issued an additional 1,118,803 Common
Units. Proceeds from the exercise of the overallotment option were $21,940, net
of $1,555 of underwriters' fees. As of December 31, 1999 and 1998, the Company
has 8,577,487 Common Units and 4,282,120 Subordinated Units outstanding.
Partnership Income (loss)
As provided in the MLP Agreement and the Operating Company's Operating
Agreement, income and losses are allocated 98% to the holders of outstanding
Common Units (the Common Unitholders) and Subordinated Units (the Subordinated
Unitholders), 1% to the General Partner's general partner interest in the MLP
and 1% to the General Partner's minority interest in the Operating Company.
Cash Distributions
The Company is required to make quarterly cash distributions from Available
Cash, as defined in the MLP Agreement. Generally, cash distributions are paid in
order of preferences: first, the minimum quarterly distribution of $.50 per unit
(the "MQD") to Common Unitholders and the General Partner, and second, to the
extent cash remains available, to Subordinated Unitholders.
The MLP Agreement sets forth certain cash distribution target rates for the
Company to meet in order for the General Partner's share of Available Cash to
increase (such increases referred to as "Incentive Distributions"). To the
extent that the quarterly distributions exceed $.550 per Common and Subordinated
Unit, the General Partner receives 15% of the excess Available Cash rather than
the base amount of 2%. To the extent that the quarterly distributions exceed
$.633 per Common and Subordinated Unit, the General Partner receives 25% of the
excess Available Cash and to the extent that the quarterly distributions exceed
$.822 per Common and Subordinated Unit, the General Partner receives 50% of the
excess Available Cash. Since the quarterly distributions did not exceed the
minimum quarterly distributions for 1999 or 1998, the General Partner did not
receive any such Incentive Distributions for those years.
Subordinated Units
The Subordinated Units are subordinated in right of distributions to the right
of Common Unitholders to receive the MQD. Provided that the MQD has been paid to
Common and Subordinated Unitholders for three consecutive four-quarter periods
and that such distributions are equal to or less than the Company's Adjusted
Operating Surplus, as that term is defined in the MLP Agreement, for two
consecutive four-quarter periods, 25% of the Subordinated Units will convert to
Common Units as early as 2001, 25% as early as 2002 and the remaining 50% may
convert to Common Units as early as 2003.
Liquidation Preference
During the subordination period, Common Unitholders will generally be entitled
to receive more per unit in liquidating distributions than Subordinated
Unitholders. Following conversion of the Subordinated Units into Common Units,
all units will receive the same liquidation treatment.
F-15
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
10. Certain Relationships and Related Party Transactions:
The General Partner has the ability to control management of the Company and has
all voting rights of the Company except for certain matters set forth in the MLP
Agreement, as amended ("MLP Agreement"). The ownership of Subordinated and
Common Units by certain affiliates of the General Partner effectively gives the
General Partner the ability to prevent its removal.
The General Partner does not receive any management fee or other compensation in
connection with its management of the Company. The General Partner and its
affiliates perform services for the Company and are reimbursed for all expenses
incurred on behalf of the Company, including the costs of employee, officer and
director compensation properly allocable to the Company, and all other expenses
necessary or appropriate to the conduct of the business of, and allocable to,
the Company. The MLP Agreement provides that the General Partner will determine
the expenses that are allocable to the Company in any reasonable manner
determined by the General Partner in its sole discretion. Related noninterest
bearing receivables and payables between the General Partner and the Company are
settled in the ordinary course of business. As of December 31, 1999 and 1998,
the Company had a payable to the General Partner of $840 and $914, respectively.
During 1999, 1998, and 1997 expenses allocated to and reimbursed by the Company
totaled $8,347, $9,058, and $310 respectively.
Certain conflicts of interest could arise as a result of the relationships
described above. The Board of Directors and management of the General Partner
have a duty to manage the Company in the best interests of the Unitholders and,
consequently, must exercise good faith and integrity in handling the assets and
affairs of the Company.
Consulting Agreements
As of December 31, 1999, the General Partner has consulting agreements with
certain affiliated parties pursuant to which each such person or firm has
provided and/or will provide consulting services to the General Partner. The
agreements provide for an annual retainer of $25 to $50, plus an hourly rate for
services rendered at the request of the General Partner. Payments by the General
Partner related to consulting agreements in 1999, 1998, and 1997 were not
significant.
Investment in Affiliate
In October 1999, the Company made an investment in U.S. Timberlands Yakima, LLC
(USTY), an unconsolidated affiliate. USTY, a newly formed entity organized to
acquire timber properties located in Central Washington and Central Oregon, is
engaged in the growing of trees and sale of logs and standing timber to third
party wood processors. The Company contributed to USTY $294 of cash for 49% of
USTY's common interests (the "Common LLC Interests"). The remaining Common LLC
Interests were acquired for $306 in cash by U.S. Timberlands Holding Group, LLC,
a Delaware limited liability company in which John Rudey and George Hornig,
respectively, the Chairman of the Board and a director of the Company's General
Partner, hold a controlling interest. The Company also acquired all of the
senior preferred interests in USTY (the "Senior or Preferred LLC Interests") for
its contribution to USTY of timberlands consisting primarily of non-income
producing, pre-merchantable pine plantations having an agreed upon value of
$22,000. The Company recorded its investment in the Senior LLC interest at its
$18,850 cost basis for the contributed timberlands. Terms of the Preferred LLC
Interests include a cumulative annual guaranteed return of 5% of the $22,000
agreed upon value of the contributed timberlands. The Preferred LLC Interests
are redeemable at the Company's option on December 31, 2004 or at USTY's option
at any time prior thereto, for a redemption price equal to the agreed upon value
of the Preferred LLC Interests plus any portion of the guaranteed return not
received by the Company prior to the redemption date. Generally, USTY's net
income or losses are allocated to the Common LLC Interests. However, net losses
exceeding the account balances of the Common LLC Interests are allocated to the
Preferred LLC Interest. The Company accounts for its Preferred LLC Interest at
cost, reduced by losses in excess of the Common LLC Interests. The Company
accounts for its Common LLC Interest by the equity method. The General Partner
of the Company provides management services to USTY for a fee equal to 2% of
USTY's earnings before interest, taxes, depreciation and amortization. The
Company granted U.S. Timberlands Holding Group, LLC an irrevocable proxy to vote
its Common and Preferred Interests. During 1999, concurrently with and in order
to facilitate USTY's acquisition of the Washington timberlands referred to
above, an entity controlled by John M. Rudey agreed to acquire in the future a
portion of the property and any related liabilities that the Company and
F-16
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
10. Certain Relationships and Related Party Transactions (Continued):
USTY were unwilling to acquire, the sale of which was a condition of the seller
to the USTY acquisition. Such entity was paid $2,700 by the seller for its
agreement to acquire such property and any related liabilities. The General
Partner's Conflicts Committee reviewed and approved the structure of the
Company's investment in the affiliate.
Payments to Affiliate
In connection with the Transactions, the member interest of John J. Stephens in
Old Services was redeemed for $1,000 and certain subordinated units. The Company
paid the $1,000 to Old Services in January 1998. The above transaction has been
reflected as a direct reduction of equity in the accompanying financial
statements.
See Note 7 regarding interest and commitment fees paid to an affiliate of the
General Partner under the Affiliate Credit Facility.
Severance and Settlement
Selling, general and administrative expenses in 1999 included $675 related to
settlement with former employees of the Company. In 1998, selling, general and
administrative expenses included approximately $1,280 in severance to former
employees. In addition, pursuant to the terms of the General Partner's operating
agreement, the member interests of three former employees were subject to
repurchase at an aggregate price of $385 payable in three annual installments
commencing February 1, 1998. The aggregate repurchase of the member interests
was included in selling, general and administrative expenses in 1998 and the
Company has reimbursed the General Partner for such repurchase payments.
Other Related Party Transactions
During 1999, Glenn A. Zane was appointed Acting Senior Vice President and Acting
Director of Operations for the Company. Subsequent to year-end, Mr. Zane
resigned as an acting officer, but he continues to serve the Company as a
consultant. Throughout 1999, the Company paid approximately $695 ($183 in 1998),
excluding Mr. Zane's compensation, to Mason, Bruce & Girard, of which Mr. Zane
is a partner, for consulting services.
F-17
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
11. Management Incentive Plans:
Unit Option Plans
The Company has a Unit Option Plan, which permits the grant of options (the
"Unit Options") covering 857,749 Common Units. Unit Options granted under the
Company's Unit Option Plan are determined by the Long-Term Incentive Plan
Committee of the Board of Directors (the "LTIP Committee") and are granted at
fair market value at the date of the grant. Concurrent with the consummation of
the Transactions, 604,153 Unit Options were granted to key employees and
directors of the General Partner. An additional 90,622 Unit Options were granted
to key employees and directors on December 12, 1997, in connection with the
closing of the sale of 1,118,803 Common Units pursuant to the exercise by the
underwriters of their overallotment option and, in 1998, 100,000 Unit Options
were granted to directors and 240,170 options were granted to employees. In
1999, 200,000 Unit Options were granted to directors and 142,620 options were
granted to employees. The Unit Options granted expire ten years from the date of
grant and become exercisable automatically upon and in the same proportion as
the conversion of Subordinated Units to Common Units. See further explanation of
subordinated units and related performance criteria in Note 9. Once the
performance criteria are achieved, the Company will record compensation expense
for the difference between the exercise price and fair value of the Common
Units, with a corresponding increase to partnership capital. As of December 31,
1997, none of the performance criteria had been achieved. Although the
performance criteria were met for the years ended December 31, 1999 and 1998, no
compensation expense was recorded during such years, as the market price of the
units was less than the exercise price during the years.
Weighted
Average
Number Exercise
of Shares Price
--------- -----
Outstanding, December 31, 1996 - -
Unit options granted 694,775 14.75 (a)
Unit options exercised - -
Unit options cancelled - -
-----------------
Outstanding, December 31, 1997 694,775 14.75
Unit options granted 340,170 14.75
Unit options exercised - -
Unit options cancelled (584,628) 14.75
-----------------
Outstanding, December 31, 1998 450,317 14.75
Unit options granted 342,620 13.16
Unit options exercised - -
Unit options cancelled (35,310) 14.71
-----------------
Outstanding, December 31, 1999 757,627 14.02
=================
(a) Options were originally granted with exercise prices ranging from $21.00 to
$21.44 per unit. During December 1998, the exercise price was reduced to
$14.75 per unit by the Board of Directors.
As of December 31, 1999 exercise prices for options outstanding were between
$11.75 and $14.75 with a weighted average exercise price of $14.02 per unit. The
weighted average remaining contractual life on the options was 8.5 years. There
were no unit options exercisable at December 31, 1999, 1998 or 1997.
F-18
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
11. Management Incentive Plans (Continued):
The Company has computed, for pro forma disclosure purposes as required by SFAS
123, the value of the Unit Options granted under the Unit Option Plan. These
computations were made using the Black-Scholes option-pricing model, as
prescribed by SFAS 123, with the following weighted average assumptions for
1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Risk-free interest rate 4.88% 5.50% 6.00%
Expected dividend yield 9.52% 9.52% 9.52%
Expected life of the Unit Options 5 Years 5 years 5 years
Expected volatility 49.65% 25.50% 20.32%
The weighted-average fair value of unit options was $2.87, $2.02, and $1.50 for
options granted in 1999, 1998 and 1997, respectively.
If the Company had adopted the expensing provisions of SFAS 123, the impact on
1999, 1998 and 1997's net income (loss) and net income (loss) per unit would
have been as follows:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Net income (loss) - as reported $ 6,293 $ (6,319) $ (10,705)
Net income (loss) - pro forma 5,846 (6,565) (10,732)
Diluted income (loss) per unit - as reported .48 (.49) (2.04)
Diluted income (loss) per unit - pro forma .45 (.51) (2.05)
For purposes of the pro forma disclosures, the estimated fair value of the unit
options is amortized to expense over their estimated exercise period, which
corresponds to the assumed subordinated units conversion period (see Note 9).
Restricted Unit Plan:
Effective with the closing of the Transactions, the Company authorized the
establishment of a restricted unit plan (the "Restricted Unit Plan") which
allows the Company to grant units (the "Restricted Units") to employees at the
discretion of the LTIP Committee. No consideration will be payable by the plan
participants upon vesting and issuance of the Restricted Units. Restricted Units
granted during the subordination period would vest automatically upon and in the
same proportion as the conversion of Subordinated Units to Common Units.
Restricted Units granted subsequent to the subordination period are the
equivalent of Common Units. No Restricted Units have been granted as of December
31, 1999.
F-19
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
11. Management Incentive Plans (Continued):
Income Interests of the General Partner:
In connection with the Common Units offering and the related formation of the
General Partner, the General Partner issued income interests to certain officers
and directors of the General Partner at no cost. Such income interests
participate pro rata in cash distributions from USTK and the Company. Under
certain circumstances, the General Partner is required to repurchase the income
interests from officers and directors upon termination of their employment at
fair market value as determined by independent appraisal (see Note 10, severance
and settlement).
12. Fair Value of Financial Instruments:
A summary of the fair value of the Company's significant financial instruments
and the methods and significant assumptions used to estimate those values is as
follows:
(a) Short-term financial instruments - The fair value of short-term
financial instruments, including cash and cash equivalents, trade and
other receivables, notes receivable, trade accounts payable and
certain accrued liabilities, approximates their carrying amounts in
the financial statements due to the short maturities of such items.
(b) Long-term debt - The estimated fair value of the Company's long-term
debt was approximately $207,000 and $225,000 at December 31, 1999 and
1998, respectively, based on published market quotations.
(c) Interest rate collar agreement - The Company entered into interest
rate collar agreements to manage interest rate risk. Contemplated
variable rate borrowings did not occur, and accordingly, these
agreements are marked to market. The fair value of these agreements
is the estimated amount that the Company would receive or pay upon
termination of the agreements at the balance sheet date or other
specific point in time. The Company terminated the interest rate
collar agreements effective in October 1999. Unrealized losses on
these agreements were estimated to be $991 and $630 at December 31,
1998 and 1997, respectively. Income or losses on these agreements is
reflected in other income (expense) in the accompanying statements of
operations in the amount of $991 in 1999, ($361) in 1998 and ($630)
in 1997.
F-20
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
13. Quarterly Results (Unaudited):
QUARTER ENDED
-----------------------------------------------------------------------
December 31 September 30 June 30 March 31 Total Year
(a)
----------- ----------- ----------- ----------- -----------
1999
Revenues $19,394 $26,175 $20,296 $11,129 $76,994
Gross profit (b) 7,853 11,389 12,254 5,124 36,620
Net income (loss) (346) 3,941 4,413 (1,715) 6,293
Basic net income (loss) Per unit (c):
Common (.03) .30 .34 (.13) .48
Subordinated (.03) .30 .34 (.13) .48
Diluted net income (loss) per
unit (c) (.03) .30 .34 (.13) .48
1998
Revenues $20,417 $ 24,528 $ 18,622 $ 7,757 $ 71,324
Gross profit (b) 8,409 11,531 4,503 2,343 26,786
Net income (loss) 642 2,545 (2,857) (6,649) (6,319)
Basic net income (loss) Per unit (c):
Common .05 .20 (.22) (.51) (.49)
Subordinated .05 .20 (.22) (.51) (.49)
Diluted net income (loss) per
unit (c) .05 .20 (.22) (.51) (.49)
(a) The quarter ended June 30, 1998 includes revenues of $6,275 and related costs of $5,917 from a property sale.
(b) Gross profit is calculated as revenues less cost of products sold, cost of timber and property sales and depreciation,
depletion and road amortization.
(c) See discussion of per unit information in Note 1 of the notes to consolidated financial statements.
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U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)
14. 401(K) Defined Contribution Plan:
The Company sponsors a 401(k) defined contribution plan which covers
substantially all full-time employees. Company contributions to the plan totaled
$34 in 1999, $26 in 1998 and $20 in 1997.
15. Commitments and Contingencies:
Log Supply Agreement
On August 30, 1996, the Company entered into a wood supply agreement with
Collins Products, LLC to supply a volume of approximately 34 million board feet
of merchantable timber annually to Collins at market prices. The term of the
agreement is ten years and is renewable for two additional terms of five years,
each at the option of Collins.
Litigation
The Company is involved in legal proceedings and claims arising in the normal
course of business. In the opinion of management, the outcome of such legal
proceedings and claims will not have a material adverse effect on the Company's
results of operations and financial position.
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