Back to GetFilings.com
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.: 1-13573-01
1-13573
U.S. TIMBERLANDS KLAMATH FALLS, LLC
U.S. TIMBERLANDS FINANCE CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 93-1217136
DELAWARE 91-1851612
(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:
9-5/8% Senior Notes New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during 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 co-Registrants have not issued any common equity held by
non-affiliates of the co-Registrants.
Documents incorporated by reference: None
U.S. TIMBERLANDS KLAMATH FALLS, LLC
U.S. TIMBERLANDS FINANCE CORP.
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.................................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..............................................23
Item 8. Financial Statements....................................................................................23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................23
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant..........................24
Item 11. Executive Compensation..................................................................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................................33
Item 13. Certain Relationships and Related Transactions..........................................................33
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K.................................................35
ii
PART I
Item 1. Business
General
The business of U.S. Timberlands Klamath Falls, LLC, a Delaware
limited liability formed in 1996 (the "Company"), consists of the growing of
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 U.S. Timberlands Company, LP (the "Master Partnership")
and the predecessors of the Company and the Master Partnership.
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, the Company and U.S. Timberlands Management Company,
L.L.C., 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, the Company, which is now the Master Partnership's
subsidiary 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 the Company, 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. Concurrent with Company's acquisition of the
Klamath Falls Timberlands, the Company 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.
1
Formation of the Company
On November 19, 1997, the Master Partnership acquired substantially
all of the equity interests in the Company and the business and assets of Old
Services (the "Acquisition") and completed its initial public offering (the "MLP
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 manager (the "Manager" or "New Services"), in exchange for interests
therein. Immediately thereafter, Company assumed certain indebtedness (the
"Holdings Debt") of U.S. Timberlands Holdings, LLC, an affiliate of the Company
("Holdings"), and the Manager contributed its timber operations to the Company
in exchange for a member interest in the Company. Then the Manager contributed
all but a 1% member interest in the Company to the Master Partnership exchange
for a general partner interest in the Master Partnership, the right to receive
Incentive Distributions (as defined in the Glossary of Certain Terms) and
1,387,963 subordinated units representing limited partner interests in the
Master Partnership ("Subordinated Units"), and Holdings contributed all of its
interest in Company to the Master Partnership in exchange for 2,894,157
Subordinated Units. The Manager 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
Manager (the "Founding Directors"). As a result of such transactions, the
Company became the Operating Company and the Manager owns an aggregate 2%
interest in the Master Partnership and the 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 Master Partnership. 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 Master Partnership's MLP offering, the 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."
Finance Corp., a Delaware corporation, was formed on August 18, 1997,
and is a wholly-owned subsidiary of the Company. Finance Corp. serves as
co-obligor for the Notes. It has nominal assets and does not conduct any
operations. Accordingly, a discussion of the results of operations, liquidity
and capital resources of Finance Corp. is not presented.
2
Company Structure and Management
The operations of the Master Partnership are conducted through, and
the operating assets are owned by, the Company, as the Master Partnership's
operating subsidiary. The Master Partnership owns a 98.9899% member interest in
the Company and the Manager owns a 1% general partner interest in the Master
Partnership and a 1.0101% managing member interest in the Company. The Manager
therefore owns an aggregate 2% interest in the Master Partnership and the
Company on a combined basis.
The Company's business is managed by the Manager. The Manager 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 Manager) and all other necessary or
appropriate expenses allocable to the Company or otherwise reasonably incurred
by the Manager in connection with the operation of the Company's business.
Conflicts of interest may arise between the Manager and its
affiliates, on the one hand, and the Master Partnership, the Company and the
Unitholders, on the other, including conflicts relating to the compensation of
the directors, officers and employees of the Manager and the determination of
fees and expenses that are allocable to the Company. The Manager has a conflicts
committee (the "Conflicts Committee"), consisting of two independent members of
its Board of Directors, that is available at the Manager's discretion to review
matters involving conflicts of interest.
The principal executive offices of the Company and the Manager 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, Company
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, 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
6
logs to provide habitats for a variety of wildlife species while enriching the
soil for successive generations of trees.
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.
7
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.
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.
Employees
As of March 15, 2000, the Company had 32 salaried employees,
including employees of the Manager 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.
9
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.
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.
10
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 members or
the Master Partnership's Unitholders during the fourth quarter of 1999.
11
PART II
Item 5. Market for Registrant's Common Units and Related Security Holder
Matters
In connection with the consummation of the Transactions, a 98.9899%
member interest in the Company was issued to the Master Partnership and 1.0101%
member interest was issued to the Manager. There is no public trading market for
the Company's equity securities. The Company distributes all of its Available
Cash on a quarterly basis.
The Company made its first cash distribution to the Master
Partnership for distribution to holders of the Common Units and the Subordinated
Units on May 15, 1998, of $0.73, representing the sum of $0.50, the Minimum
Quarterly Distribution (as defined in the Master Partnership Agreement) 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 distributions to the Master Partnership for 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.
12
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 (6)..................... $ 50.9 $ 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)
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)........... 27.5 16.3 27.3 (4.8) 2.7 11.1
Income (loss) before extraordinary
items (4) ............................ 6.7 (6.4) (1.4) (13.0) 2.7 11.6
Extraordinary items, losses on
extinguishment of debt (5) ........... -- -- 9.3 -- -- --
Net income (loss)........................ 6.7 (6.4) (10.7) (13.0) 2.7 11.6
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) ........................ 327.9 350.7 385.2 310.2 27.8 30.9
Long-term debt (7)....................... 225.0 225.0 225.0 305.0 -- --
Equity (deficit) (8)..................... 98.4 118.0 147.1 (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 -- -- --
13
(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, the Company
and Old Services were formed and subsequently entered into the
agreement to consummate the Weyerhaeuser Acquisition. As legal
entities, the Company and Old Services were not consolidated.
However, due to common ownership and management, the financial
statements of the Company 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 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 Financial
Statements.
(6) 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."
(7) See discussion of long-term debt at Note 8 of the Notes to Financial
Statements.
(8) 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 the
Master Partnership 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.
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.
14
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. 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.
15
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.
16
Results of Operations
The following table sets fourth 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)
------------------------------------ --------------------------------
Timber Timber Timberland
Period Logs Stumpage Deeds Logs Stumpage 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 harvested from the Ochoco Timberlands. The
overall reduction in stumpage sales volume is due to the increased use of timber
deed sales in 1999.
17
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 Manager 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.
18
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 Manager 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.
19
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. 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.
Liquidity and Capital Resources
Effective November 19, 1997, the Master Partnership completed its MLP
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 MLP Offering were $163.2 million. In addition, the Company
issued $225.0 million of Notes in the Public Notes Offering. The proceeds from
the MLP 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 $12.9 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 the Master Partnership for distributions to the unitholders and
minority interest. During 1998, the Company paid $22.7 million to the Master
Partnership for distributions to the unitholders and minority interest and paid
$1.0 million to an affiliate for redemption of a certain member's interest.
Notes
On November 14, 1997, the Company issued $225.0 million aggregate
principal amount of Notes (the "Notes") representing unsecured general
obligations of the Company which bear interest at 9 5/8% per annum,
20
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 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 Company, at its option, may redeem the Notes with the net cash proceeds of a
Common Units offering or other equity interests of the Master Partnership, 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 Company and its
subsidiaries, including limitations on the ability of the Company and its
subsidiaries to, among other things, (i) incur additional indebtedness (other
than certain permitted indebtedness) unless the 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 Master Partnership, 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 Master
Partnership, 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 Company will be permitted to make cash
distributions to the Master Partnership so long as no default or event of
default exists or would exist upon making such distribution (a) if the 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 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 Master Partnership. The Company
was in compliance with these covenants at December 31, 1999 and 1998.
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 Manager
("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
Company will be permitted to make quarterly cash distributions to the Master
Partnership 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
21
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 Master
Partnership's 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 Manager's estimate of the current annual
board footage growth on the Company's timberlands. The Manager 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.
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 Issue. The Company did not, however, track internal resources
dedicated to the resolution of the Year 2000 Issue and therefor, 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 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.
22
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.
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.
23
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons of the
Registrant
The Manager 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 January 1999, the Manager appointed William A. Wyman and Alan B.
Abramson, two members of the Manager's Board of Directors who are neither
officers, employees or security holders of the Manager nor directors, officers,
or employees of any affiliate of the Manager, to serve on the Manager'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 Manager 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 Manager 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 Manager 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.
24
Directors, Executive Officers and Key Employees of the Manager
The following table sets forth certain information with respect to
the members of the Board of Directors of the Manager, its executive officers and
certain key employees. Executive officers and directors are elected for one-year
terms.
Name Age Position with Manager
---- --- ---------------------
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 Manager. 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 Manager. 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 Manager. 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
25
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 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 Manager, 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 Manager, 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 Manager. 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 Manager 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 Manager, 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 Manager, responsible for all accounting functions. Prior to
joining the Manager in 1999, Mr. Luther was an accountant with
PricewaterhouseCoopers.
26
Key Employees
Walter L. Barnes serves as Assistant Vice President - Harvesting of
the Manager, responsible for all solid wood logging and fiber operations. From
1993-1996, prior to joining the Manager, 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 Manager, 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
Manager, 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 Manager, responsible for forestry operations, environmental
relationships, harvest prescriptions and nursery/orchard operations. Prior to
joining the Manager 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 Manager'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.
27
Item 11. Executive Compensation
The Master Partnership and the Manager were formed in June 1997.
Under the terms of the Operating Company Agreement, the Company is required to
reimburse the Manager 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 Manager'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.
28
Long-Term Incentive Plan
The Manager 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 Manager 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 Manager 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 Manager, or any combination of the foregoing. The Manager
will be entitled to reimbursement by the Company for the difference between the
cost incurred by the Manager in acquiring such Common Units and the proceeds
received by the Manager from an optionee at the time of exercise. Thus, the cost
of the Unit Options will be borne by the Company. If the Master Partnership
issues new Common Units upon exercise of the Unit Options, the total number of
Units outstanding will increase and the Manager 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.
29
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 10% 5%
- ---- ------- ------------------ ------ ---- --- --
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.
30
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 Units 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 Manager in the open market, Common Units already
owned by the Manager, Common Units acquired by the Manager directly from the
Company or any other person, or any combination of the foregoing. The Manager
will be entitled to reimbursement by the Company for the cost incurred in
acquiring such Common Units. If the Master Partnership 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 Manager'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 Manager'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.
31
Compensation of Directors
Compensation for Directors of the Manager covers services rendered
for both the Company and the Master Partnership. 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 Manager 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 Manager. 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 Manager. In addition, the Manager 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 Manager. Each consulting agreement will
be reviewed annually by a majority of the directors who do not have consulting
agreements.
Employment Agreements
The Manager 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 Manager 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 Manager 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 Manager's members to elect or re-elect the Executive to the Board of
Directors, (ii) failure of the Manager to vest in the Executive the position,
duties and responsibilities contemplated by his Employment Agreement, (iii)
failure of the Manager to pay any portion of the Executive's compensation, (iv)
any material breach by the Manager 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 Manager or (vi) any fraud, misappropriation of funds,
embezzlement or other similar acts of misconduct with respect to the Company.
32
Committee Interlocks and Insider Participation in Compensation
Decisions
The Compensation Committee of the Manager is composed of Messrs.
Rudey, Abramson, Wyman, Hornig and Cole. Mr. Rudey also serves as Chairman of
the Manager.
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 in determining the
compensation and bonus levels for all executive officers.
Item 12. Security Ownership of Certain Beneficial Owners and Management
None.
Item 13. Certain Relationships and Related Transactions
The Company is managed by the Manager pursuant to the Operating
Company Agreement. Under the Operating Company Agreement the Manager is entitled
to reimbursement of certain costs of managing the Company. These costs included
compensation and benefits payable to officers and employees of the Manager,
payroll taxes, general and administrative expenses and legal and professional
fees.
Consulting Agreements
The Manager 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 Manager. 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 Manager. In addition, the Manager 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 Manager. Each consulting agreement will
be reviewed annually by a majority of the directors who do not have consulting
agreements.
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 Master Partnership 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 Manager,
33
hold a controlling interest. The Company 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
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 Master Partnership accounts for its Common LLC Interest by
the equity method. The Manager 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 Manager's Conflicts Committee reviewed and approved
the structure of the Company's investment in the affiliate.
Repurchase of Certain Member Interests; Severance Payments
On January 5, 1998, the Manager 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 Manager,
became entitled to receive approximately $700,000 in severance payments pursuant
to his employment agreement. In addition, pursuant to the terms of the Manager's
operating agreement, the member interests of each of Mr. Stephens, Mr. Kobacker
and John H. Beuter, a former Director of the Manager, 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 Manager 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.
34
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
+3.2 -- Second Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, LLC
+10.2 -- Indenture among U.S. Timberlands Klamath Falls, LLC, U.S. Timberlands Finance Corp. and State Street
Bank and Trust Company, as trustee
+0.3 -- Contribution, Conveyance and Assumption Agreement among U.S. Timberlands Klamath Falls, LLC and certain
other parties
*10.4 -- Form of U.S. Timberlands Klamath Falls, LLC 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 referenceto Exhibit 1 to the Registrant's Form 8-K filed
on December 8, 1998.
35
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 KLAMATH FALLS, LLC
By: U.S. Timberlands Services Company, LLC
Its Manager
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
36
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
37
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
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 members' equity (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
Consolidated notes to financial statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Members of
U.S. Timberlands Klamath Falls, LLC
We have audited the accompanying consolidated balance sheets of U.S. Timberlands
Klamath Falls, LLC and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in members' eqity 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
Klamath Falls, LLC and subsidiary 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
To the Board of Directors of
U.S. Timberlands Klamath Falls, LLC:
We have audited the accompanying consolidated statements of operations, changes
in members' equity (deficit), and cash flows of U.S. Timberlands Klamath Falls,
LLC 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 Klamath Falls, LLC 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 KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
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 18,537 --
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 $327,949 $350,697
======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable $ 346 $ 733
Accrued liabilities 3,286 4,405
Deferred revenue 39 1,614
Payable to affiliate 840 914
-------- --------
Total current liabilities 4,511 7,666
-------- --------
Long-term debt 225,000 225,000
-------- --------
Commitments and contingencies
Members' equity:
Managing member's interest 984 1,180
Nonmanaging member's interest 97,454 116,851
-------- --------
98,438 118,031
-------- --------
Total liabilities and members' equity $327,949 $350,697
======== ========
F-4
See Notes to consolidated financial statements
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Statements of Operations
(in thousands)
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
Share of net loss of affiliate 607 -- --
-------- -------- --------
Operating income 27,536 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 6,651 (6,383) (1,368)
Extraordinary items, losses on extinguishment of debt -- (9,337)
-------- -------- --------
Net income (loss) $ 6,651 $ (6,383) $(10,705)
======== ======== ========
F-5
See notes to consolidated financial statements
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Statements of Changes in Members' Equity (Deficit)
(in thousands)
U.S.
Timberlands
Management U.S. Timberlands Klamath Falls, LLC
Company,
LLC
---------- -----------------------------------
Members'
Equity Total
Members' (Deficit) Managing Nonmanaging Members'
Equity Prior to the Member's Member's Equity
(Deficit) Transaction Interest Interest (Deficit)
--------- ----------- -------- -------- ---------
Balance, January 1, 1997 $ (1,127) $ (1,809) $ (2,936)
Members' distribution (1,191) - (1,191)
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 net
liabilities 5,327 (5,584) (257)
Allocation of managing and
nonmanaging members' interests in
members' deficit - 14,817 $ (148) (14,669) -
Members' contributions - - 1,632 161,574 163,206
Net loss November 19, 1997 through
December 31, 1997 - - (13) (1,259) (1,272)
- - --------- ------ ------
Balance, December 31, 1997 $ - $ - 1,471 145,646 147,117
======== ========
Distributions to members (227) (22,476) (22,703)
Net loss
(64) (6,319) (6,383)
---- ------- -------
Balance, December 31, 1998 1,180 116,851 118,031
Distributions to members (263) (25,981) (26,244)
Net income 67 6,584 6,651
-- ----- -----
Balance, December 31, 1999 $ 984 $ 97,454 $ 98,438
========= ============= =========
F-6
See notes to consolidated financial statements
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Year Ended
December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 6,651 $ (6,383) $ (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
Share of net loss of affiliate 607 - -
Other noncash items - 361 630
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 affiliate
(553) 257 252
--------- --------- --------
Net cash provided by operating activities 25,503 18,544 26,283
--------- --------- --------
Cash flows from investing activities:
Receivable from affiliate (294) - 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)
--------- --------- --------
Net cash used in investing activities (1,285) (642) (101,566)
--------- --------- --------
Cash flows from financing activities:
Member's contributions - - 163,206
Distributions to members (26,244) (22,703) (1,191)
Deferred financing fees - - (12,720)
Long-term borrowings - - 510,000
Repayment of long-term borrowings - - (590,000)
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 financial statements
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
1. Business and Significant Accounting Policies:
Business and Consolidation
The accompanying consolidated financial statements include the accounts of U.S.
Timberlands Klamath Falls, LLC ("USTK"), a Delaware limited liability company,
and its wholly owned subsidiary, U.S. Timberlands Finance Corp. ("Finance
Corp"), collectively referred to hereafter as the Company. Finance Corp. serves
as the co-obligor for USTK's notes (defined below). It has nominal assets and
does not conduct operations. All intercompany transactions have been eliminated
in consolidation. An investment in affiliate is carried at cost, reduced by
losses in excess of common members' interest in the investee (See Notes 4 and
10).
U.S. Timberlands Company, LP (the "MLP") owns a 99% nonmanaging member interest
in USTK. The MLP was forrmed on June 27, 1997 to acquire and own substantially
all of the equity interests in USTK through USTK and to acquire and own the
business and assets of U.S. Timberlands Management Company, LLC, formerly known
as U.S. Timberlands Services Company, L.L.C. ("Old Services"). U.S. Timberlands
Services Company, LLC (the "Manager") manages the business of the Company and
owns a 1% managing member interest in USTK.
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.
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
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 Manager in exchange for interests therein. Immediately
thereafter, USTK assumed certain indebtedness of U.S. Timberlands Holdings, LLC
("Holdings"), an affiliate of USTK, and the Manager contributed its timber
operations to USTK in exchange for a member's interest in USTK. The Manager 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 Manager 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 MLP 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 Manager, 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 of Old Services and USTK prior to the Transactions, after the
elimination of intercompany transactions.
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 is 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.
F-8
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
1. Business and Significant Accounting Policies: (continued)
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.
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.
F-9
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
Business and Significant Accounting Policies: (continued)
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, which approximates the effective interest method.
Income Taxes
USTK and Old Services are both limited liability companies ("LLC's").
Accordingly, they are not liable for federal or state income taxes since the
respective LLC's income or loss is reported on the separate tax returns of the
members. Accordingly, no provision for current or deferred income taxes has been
reflected in the accompanying financial statements.
Unit-Based Compensation Plans
The Company accounts for the granting of unit options to employees and directors
of the MLP's Manager under the MLP's 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).
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.
F-10
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
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
============== ==============
4. Investment in Affiliate:
Following is summarized financial information for U.S. Timberlands Yakima, LLC,
the MLP's equity basis affiliate (See Note 10), as of and for the year ended
December 31, 1999.
1999
----
Current assets $9,129
Noncurrent assets, primarily timber and timberlands 74,726
Current liabilities 5,611
Noncurrent liabilities- long-term debt 60,000
Redeemable preferred member interest (Owned by USTK) 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-11
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
7. Short-Term Debt:
In 1999 the Company established a credit facility with an affiliate of the
Manager (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 commitment 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 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 USTK and its wholly owned subsidiary Finance
Corp. (collectively, the "Issuers"). The Issuers serve as co-obligors of the
Notes. The Notes represent unsecured general obligations of the Issuers 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 USTK or the MLP, 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
USTK and its subsidiary to make cash distributions, incur additional
indebtedness, sell assets or harvest timber in excess of certain limitations.
In conjunction with the Notes issuance, USTK 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 Transactions
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-12
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
9. Members' Equity (Deficit):
Members' Equity
On November 19, 1997, the MLP issued 7,458,684 Common Units. 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 MLP 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. Net
proceeds of $163,206 from the common units were contributed by the MLP to USTK
upon closing of the transactions.
Allocation of Income (loss)
As provided in the Company's Operating Agreement, income and losses are
allocated 99% to the MLP and 1% to the Manager.
Cash Distributions
The MLP is required to make quarterly cash distributions from Available Cash, as
defined in the MLP's Partnership Agreement. The Company distributes cash to the
MLP to the extent necessary for the MLP to meet its required quarterly cash
distributions, in accordance with USTK's Operating Agreement. Generally, cash
distributions are paid in order of preferences: first the minimum quarterly
distribution of $0.50 per unit (the "MQD") to the MLP's Common Unitholders and
the Manager, and second, to the extent cash remains available, to Subordinated
Unitholders.
The MLP Agreement set forth certain cash distribution target rates for the MLP
to meet in order for the Manager's share of Available Cash to increase (such
increases referred to as "Incentive Distributions"). To the extent that the
quarterly distributions exceed $0.550 per Common and Subordinated Unit, the
Manager receives 15% of the excess Available Cash rather than the base amount of
2%. To the extent that the quarterly distributions exceed $0.633 per Common and
Subordinated Unit, the manager receives 25% of the excess Available Cash and to
the extent that the quarterly distributions exceed $0.822 per Common and
Subordinated Unit, the manager receives 50% of the excess Available Cash. Since
the quarterly distributions did not exceed the minimum quarterly distributions
for 1999 or 1998, the Manager did not receive any such Incentive Distributions
for those years.
F-13
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
10. Certain Relationships and Related Party Transactions:
The Manager has the ability to control management of the Company and the MLP and
has all voting rights of the Company and the MLP except for certain matters set
forth in the USTK's Operating Agreement and in the MLP's Partnership Agreement.
The ownership of Subordinated and Common Units by certain affiliates of the
Manager effectively gives the Manager the ability to prevent its removal.
The Manager does not receive any management fee or other compensation in
connection with its management of the Company. The Manager 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.
USTK's Operating Agreement provides that the Manager will determine the expenses
that are allocable to the Company in any reasonable manner determined by the
Manager in its sole discretion. Related noninterest bearing receivables and
payables between the Manager 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
Manager 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 Manager 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 Manager 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 Manager. Each agreement provides
for an annual retainer of $25 to $50, plus an hourly rate for services rendered
at the request of the Manager. Payments by the Manager related to consulting
agreements in 1999, 1998 and in 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 of the Company. 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 MLP 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 Manager, hold a
controlling interest. The Company 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 the Preferred LLC at cost, reduced by losses
in excess of the Common LLC Interests. The MLP accounts for its Common LLC
Interest by the equity method. The Manager 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 $2,700 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.
F-14
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
10. Certain Relationships and Related Party Transactions (Continued):
the seller for its agreement to acquire such property and any related
liabilities. The Manager'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
Manager 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 on 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 Manager 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.
11. Management Incentive Plans:
Unit Option Plans
The MLP maintains a Unit Option Plan which provides for the granting of unit
options ("Unit Options") to employees and directors of the Manager.
The Plan permits the grant of Unit Options covering 857,749 of the MLP's Common
Units. Unit Options granted under the MLP's Unit Option Plan are determined by
the Long-Term Incentive Plan Committee of the MLP's 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 MLP's 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. In 1998, 100,000 Unit Options were granted to directors and 240,170
options were granted to employees, and 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 MLP's
Subordinated Units to Common Units. Provided that the minimum quarterly
distribution (as that term is defined in the MLP Agreement) has been paid to
Common and Subordinated Unitholders for three 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. 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
F-15
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
11. Management Incentive Plans (Continued):
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
such years.
Activity with respect to the MLP's unit option plan follows:
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 of the options was 8.5 years. There
were no unit options exercisable at December 31, 1999, 1998 or 1997.
F-16
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
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 by the MLP 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) would have been as follows:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Net income (loss) - as reported $ 6,651 $ ( 6,383) $ (10,705)
Net income (loss) - pro forma 6,204 (6,629) (10,732)
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 MLP authorized the
establishment of a restricted unit plan (the "Restricted Unit Plan") which
allows it 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-17
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
11. Management Incentive Plans (Continued):
Income Interests of the General Partner:
In connection with the Common Units offering and the related formation of the
MLP's General Partner, who is also the Manager, 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 MLP. 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-18
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
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) (55) 3,981 4,457 (1,732) 6,651
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) 649 2,570 (2,886) (6,716) (6,383)
(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.
F-19
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)
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.
F-20