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, 2000 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. [X]
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 and Executive Officers 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
33
PART I
Item 1. Business.
General
The business of U.S. Timberlands Klamath Falls, LLC a Delaware limited
liability company formed in 1996 (the "Company"), consists of the growing of
trees and the sale of logs and standing timber. The Company owns approximately
553,000 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, 2001 to be approximately 1.5 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 155,000 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 39 years old. Initial thinning or harvesting of
the Plantation stands is expected to begin within the next three years. 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,
LLC, formerly known as U.S. Timberlands Services Company, LLC ("Old Services"),
acquired approximately 604,000 fee acres of timberland (the "Klamath Falls
Timberlands"), containing an estimated merchantable timber volume of
approximately 1.9 BBF and related assets from Weyerhaeuser (the "Weyerhaeuser
Acquisition"). In July 1997, 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. As
of December 31, 2000, the Company has harvested substantially all of the Old
Growth timber on the Ochoco Timberlands. The average age of the remaining
merchantable timber on the Ochoco Timberlands is approximately 40 - 50 years in
age. During October 1999, the Company contributed primarily non-income
producing, pre-merchantable pine plantation timberlands in exchange for an
investment in an affiliate (See Item 13 Certain Relationships and Related
Transactions and Notes 3 and 9 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 the Company's sales are made to
unaffiliated third parties. Concurrent with the 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, the 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 in
exchange for a general partner interest in the Master Partnership, the right to
receive Incentive Distributions (as defined herein) and 1,387,963 subordinated
units representing limited partner interests in the Master Partnership
("Subordinated Units"), and Holdings contributed all of its interest in the
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
Initial 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 the
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 less 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 244 million board feet
(MMBF) in 2000 and plans to harvest, or commit to harvest, approximately 150
MMBF in 2001. The Company also sold approximately 14 MMBF through property sales
in 2000 and intends to sell up to 90 MMBF through property sales in 2001. Under
the current harvest plans, the Company intends to harvest its current
Timberlands aggressively over approximately the next six to eight 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. 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 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 2000, sawlogs, stumpage sales and timber
deed sales accounted for approximately 49.9%, 0.3% and 45.3%, respectively, of
the Company's revenue. Chips, which can be used to make hardboard or pulp,
accounted for approximately 0.5% of the Company's revenues in 2000. The market
price of chips has historically been volatile, rising and falling with the price
of pulp. Sales of seedlings accounted for 0.2% of the Company's revenues in
2000. Timber and property sales accounted for the remaining 3.8% of the
Company's revenue in 2000.
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 over
25 different customers. Concurrent with the Weyerhaeuser Acquisition, the
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 2000, timber sales to Collins,
Crown Pacific Partners, Boise Cascade Corporation and Ochoco Lumber Company,
combined, accounted for approximately 58% of the Company's revenue. No other
single customer accounted for more than 10% of the Company's net revenues for
2000. 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 1.5 BBF of merchantable, good
quality timber, approximately 155,000 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 60% 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 300 trees per acre. The Company also attempts
to protect and maintain the ecosystem within the Timberlands while providing for
a reasonable harvest. For example, the Company typically leaves a mix of green
and dead trees at the harvest site, including some large trees, snags and downed
logs to provide habitats for a variety of wildlife species while enriching the
soil for successive generations of trees.
6
Particular forestry practices vary by geographic region and depend upon
factors such as soil productivity, weather, terrain, tree size, age and
stocking. The climate, site and soil conditions on the east side of the Cascade
Range, for example, permit management to harvest on an optimal rotation, or
harvest cycle, of 50 to 60 years. Forest stands are thinned periodically to
improve growth and stand quality until harvested. The Company actively utilizes
commercial thinning as a timber management practice. Pre-commercial thinning,
which occurs only in the Plantation stands, is utilized when the timber
harvested is not merchantable. The Company believes that such thinning improves
the overall productivity of the Timberlands by enhancing the growth of the
remaining trees. Occasionally, revenues are generated from pre-merchantable
thinning due to strong markets for wood chips.
The Company's policy is to ensure that every acre harvested is
reforested in order to enhance the long-term value of its timberlands. Based on
the geographic and climatic conditions of a given harvest site, harvested areas
may be regenerated naturally, by leaving mature trees to reseed the area, or
replanted with seedlings. Natural regeneration methods are widely used on
approximately 40% of the Company's harvested land. Approximately 27% of the
Timberlands acreage currently consist of Plantations. The Company expects to
convert an average of 14,000 acres of natural stands per year over the next
three years to Plantations. The seed orchard produces seed from trees selected
because they were the best genotype in their respective environments. During
2000, the Company planted approximately 1.7 million seedlings. Similar planting
levels are expected for 2001. The Company uses the seed collected from its
orchard (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 Weyerhaeuser in 1973.
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 Company believes the GIS may 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.
The United States Fish and Wildlife Service (the "USFWS") listed the
American Bald Eagle in 1976 and the Northern Spotted Owl in 1990 as threatened
species throughout its range in Washington, Oregon and California. The Oregon
Forest Practices Act and related regulations also protect endangered species and
has specific provisions governing habitat protection for the spotted owl, the
bald eagle and other threatened species.
7
Based on the 2000 survey year, there were approximately 70 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 the near future.
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 August 2000, and
identified approximately 31 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 have
a material adverse effect on 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 which may affect water courses or in proximity to
certain ocean and inland shore lines, water protection and enhancement 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. The Company has entered into road use agreements with the USFS and the
BLM. The majority of the Company's timberland management activities to include
the transportation of timber products across federal land and roads fall under
such agreements, which describe the Company's exclusive rights to transport
timber products across federal lands and roads without USFWS consultation. 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. 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, 2001, the Company had 29 salaried employees, including
employees of the Manager that manage the business of the Company. The employees
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 553,000 fee acres
of timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 2001 to
be approximately 1.5 BBF in Oregon east of the Cascade Range. 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 a substantial percentage 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 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 155,000
acres of the 553,000 acre total consist of actively managed pine Plantations
with stands ranging in age from one to 39 years. The Plantations are stocked
with high quality Ponderosa Pine (approximately 78%) and Lodgepole Pine
(approximately 22%). Initial thinning of the Plantation stands, including the
thinning of commercial quantities of merchantable timber, is expected to begin
within the next three 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, 2001, the total
timber inventory amounted to 1.5 BBF. The Company's combined timber inventory by
MMBF and percentage is Ponderosa Pine (692.2 (47%)), Lodgepole Pine (253.2
(17%)), White Fir (286.3 (20%)), Douglas fir (181.6 (13%)) and other species
(47.2 (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, 2001, approximately 343
MMBF, or 23%, 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, 2001, the Plantations
totaled 155,000 acres. Of the total acreage, 62,000 acres range from 1 to 15
years of age, 73,000 acres range from 16 to 25 years of age, and 20,000 acres
are 26 years of age or older.
10
Item 3. Legal Proceedings
In November 2000, six purported class action lawsuits were filed
against the Manager and the Board of Directors of the Manager (the "Board")
alleging breach of fiduciary duty and self-dealing by the Manager and the Board
in connection with an announcement on November 2, 2000 that a group led by
senior management has begun the process to explore taking the Master Partnership
private (the "Going-Private Transaction").
All six lawsuits were filed in the Court of Chancery of the State of
Delaware for the County of New Castle. Each lawsuit was filed by a unitholder of
the Master Partnership, on behalf of all other unitholders of the Master
Partnership who are similarly situated, and seeks to have the class certified
and the unitholder bringing the lawsuit named as representative of the class. In
addition, the lawsuits seek to enjoin the Going-Private Transaction, to rescind
the Going-Private Transaction if it is consummated, and to recover damages and
attorneys' fees. In addition to naming the Manager and the Board as defendants,
all six lawsuits name the Master Partnership as a defendant.
In the opinion of management, after consultation with outside counsel,
the pending lawsuits are not expected to have a material adverse effect on the
Master Partnership or the Company's financial position or results of operations.
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 2000.
11
PART II
Item 5. Market for Registrant's Common Units and Related Security Holder Matters
In connection with the consummation of the Initial Public Offering for
the Master Partnership and the Public Note Offering for the Company (hereafter
the "Transactions"), a 98.9899% member interest in the Company was issued to the
Master partnership and a 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 (as defined in the Company's
partnership agreement) on a quarterly basis.
The Company made its first cash distribution to the Master Partnerhip
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 the Minimum Quarterly Distributions of $0.50 per Unit for each
subsequent quarter on August 14, 1998, November 13, 1998, February 12, 1999, May
14, 1999, August 13, 1999, November 15, 1999, February 14, 2000, May 15, 2000,
August 14, 2000, November 14, 2000 and February 14, 2001, respectively.
12
Item 6. Selected Financial Data
U.S. Timberlands (1) Predecessor (1)
-------------------------------------------- -----------------------------
August 30, January 1,
1996 through 1996 through
December 31, August 29,
2000 1999 1998 1997 1996 1996
CASH FLOWS AND OTHER DATA
(IN MILLIONS):
Modified EBITDDA (6) . . . . . . . . . . . . . . $ 49.9 $ 50.9 $ 44.2 $ 53.3 $ (1.4) $ 3.6.4
Additions to timber and timberlands (3) 2.3 1.0 0.6 111.6 283.6 0.5
Cash flow from (used in) operating
activities . . . . . . . . . . . . . . . . . . ..28.9 25.5 18.5 26.3 (3.0) 5.5
Cash flow from (used in) investing
activities . . . . . . . . . . . . . . . . . . . (2.3) (1.3) (0.6) (101.6) (291.5) (0.5)
Cash flow from (used in) financing
activities . . . . . . . . . . . . . . . . . . .(26.2) (26.2) (23.7) 69.3 311.0 (5.1)
OPERATING STATEMENT DATA
(IN MILLIONS):
Revenues (2)(3) . . . . . . . . . . . . . . . . . . 75.7 77.0 71.3 77.3 14.0 15.6
Depreciation, depletion and road
amortization (2)(3) . . . . . . . . . . . . . . 28.8 23.3 21.9 17.3 3.3 0.9
Cost of timber and property sales (2)(3) 2.6 - 5.9 8.7 - -
Operating income (loss) (2)(3) . . . . . . . . . . 18.1 27.5 16.3 27.3 (4.8) 2.7
Income (loss) before extraordinary
items (4) . . . . . . . . . . . . . . . . . . . (3.9) 6.7 (6.4) (1.4) (13.0) 2.7
Extraordinary items, losses on
extinguishment of debt (5) . . . . . . . . . . - - - (9.3) - -
Net income (loss) (3.9) 6.7 (6.4) (10.7) (13.0) 2.7
BALANCE SHEET DATA (AT
PERIOD END, IN MILLIONS):
Working capital . . . . . . . . . . . . . . . . . . 2.0 2.4 1.4 1.8 21.5 0.5
Total assets (3) . . . . . . . . . . . . . . . . . .301.3 327.9 350.7 385.2 310.2 27.8
Long-term debt (7) . . . . . . . . . . . . . . . . .225.0 225.0 225.0 225.0 305.0 -
Equity (deficit) (8) . . . . . . . . . . . . . . . ..68.2 98.4 118.0 147.1 (2.9) 27.8
OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
volumes (MMBF) (2)(3) . . . . . . . . . . . . 243.7 187.3 144.5 138.9 30.2 32.8
Property sales volumes (MMBF) (2) . . . . 13.6 - 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 2000 consist of $72.3 million of log, stumpage and deed
sales, $2.9 million of timber and property sales and $0.5 million of
by-products and other sales. 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) In July 1997, the Company acquired the Ochoco Timberlands for $110
million from Ochoco Lumber Company. 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) On July 14, 1997 the Company retired certain borrowings under its then
existing revolving credit facility term loan which resulted in an
extraordinary loss on extingjuishment of debt of $3.6 million.
Additionally, in conjunction with the issuance of the Notes, the
Company retired all existing debt under certain pre-existing long-term
financing arrangements resulting in an extraordinary loss on
extinguishment of debt of $5.7 million. Such extraordinary losses were
due principally to the write-off of existing unamortized deferred
financing fees.
(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 7 of the Notes to Consolidated
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 be affected
if governmental, environmental or endangered species policies change, and
limitations on the Company's ability to harvest its timber due to adverse
natural conditions or increased governmental restrictions. The results of the
Company's operations and its ability to pay quarterly distributions to its
Unitholders depend upon a number of factors, many of which are beyond its
control. These factors include general economic and industry conditions,
domestic and export prices, supply and demand for logs, seasonality, government
regulations affecting the manner in which timber may be harvested, and
competition from other supplying regions and substitute products. These and
other risks are described in the Company's other reports and registration
statements, which are available from the United States Securities and Exchange
Commission.
14
General
The Company's primary business is the growing and harvesting of timber
(see Item 1. Business).
The Company's results of operations are affected by various factors,
many of which are beyond its control, including general industry conditions,
domestic and international prices and supply and demand for logs, lumber and
other wood products, seasonality and competition from other domestic and
international supplying regions and substitute products.
Supply and Demand Factors
Supply
The supply of logs available for purchase has been most affected in
recent years by significant reductions in timber harvested from public
timberlands, principally as a result of efforts to preserve the habitat of
certain endangered species, as well as a change in the emphasis of government
policy toward habitat preservation, conservation and recreation and away from
timber management. Since the early 1970s, environmental and other similar
concerns and governmental policies have substantially reduced the volume of
timber under contract to be harvested from public lands. The pace of regulatory
activity accelerated in the late 1980s. The resulting supply decrease caused
prices for logs to increase significantly, reaching peak levels during 1993. 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. Certain market conditions for finished
products, however, have negatively impacted stumpage and log prices in 2000.
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 significant increases. While raw material supply
is expected to be an ongoing challenge for the lumber and wood products
industry, such conditions would likely be favorable for timber owners such as
the Company.
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. Imports are likely to
continue to increase over the next few years and could significantly affect the
raw material supplies in the domestic lumber and wood products industry.
Demand
Changes in general economic and demographic factors, including the
strength of the economy, unemployment rates 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 2000 were down significantly from
1999 levels. 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.
Given the strong, growing economy of the past several years, domestic markets
have been able to absorb the increasing quantities of imported Radiata pine
lumber. With the current slowing of our domestic economy, decreasing demand for
repair and remodeling markets and over supply of finished products in the
industry, the level of imports could have a negative impact on pricing for 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 restricted the
availability of Canadian softwood lumber in the United States. The Company
believes that this agreement, which expires on March 31, 2001, has not had a
material impact on the price or demand for logs in the United States although
its long-term effect, as well as the effect of its termination, is uncertain.
15
Due to transportation costs, domestic conversion facilities in the
Pacific Northwest tend to purchase raw materials within relatively confined
geographic areas, generally within a 200-mile radius. The conversion facilities
in the vicinity of the Timberlands need more wood supply to run at capacity than
can be produced by nearby timberlands. As a result, the demand from this region
is relatively steady, although prices fluctuate with market conditions.
Current Market Conditions
Log prices in the Northwest drastically declined during 2000 as compared
to 1999 due to the slowing United States economy and supply and demand factors.
During 2000, the United States economy began experiencing an economic
slow-down. Mortgage interest rates were climbing to levels significantly higher
than those experienced over the past few years and as such created weakening
conditions for new home construction, home repair and remodeling, and industrial
and other construction, which weakened the demand for finished lumber and
plywood products. As a result of the decreased demand and excess production
capacity within the industry the markets for finished lumber and plywood
products dropped to their lowest levels in the last ten years. As a result of
the weakening in the finished products markets, the prices being realized for
the Company's logs and timber declined significantly from 1999 levels. Prices
for the Company's logs and stumpage are also at or near ten year lows.
Prices for the fourth quarter of 2000 remained weak continuing a trend
started near the end of the second quarter. For the fourth quarter of 2000, the
Company's average delivered log prices for Ponderosa Pine, Douglas Fir,
Lodgepole Pine, and White Fir were down approximately 16%, 8%, 17%, and 10%,
respectively, from the same period in 1999.
The excess production levels of 2000 are expected to continue into the
first half of 2001, reducing the chances of a near-term recovery of wood product
prices. In addition, the impact of the expiration of the agreement between
Canada and United States limiting the Canadians lumber imports into the United
States through March 31, 2001 is yet to be determined and could add to the over
supply of finished wood products. As a result of the above conditions, the
Company does not expect a significant increase in prices during 2001.
16
Results of Operations
The following table sets forth sales volume for each of 2000, 1999 and
1998 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 (MBF)
------------------------------------- --------------------------------------
Timber Timber Timberland
Period Logs Stumpage Deeds Logs Stumpage Deeds Sales ($000)
------ ---- -------- ----- ---- -------- ----- ------------
2000
Year ended 12/31 96,112 503 147,083 $ 393 $ 379 $ 246 $ 2,900
4th Quarter 38,922 -- 57,844 $ 382 -- $ 174 $ 2,900
3rd Quarter 22,718 -- 29,501 $ 372 -- $ 189 --
2nd Quarter 13,908 -- 51,037 $ 432 -- $ 346 --
1st Quarter 20,564 503 8,701 $ 425 $ 379 $ 325 --
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 -- $ 6,275
4th Quarter 24,299 23,787 -- $ 396 $ 441 -- --
3rd Quarter 29,017 22,617 -- $ 431 $ 511 -- --
2nd Quarter 23,832 2,506 -- $ 432 $ 570 -- $ 6,275
1st Quarter 16,409 1,984 -- $ 418 $ 447 -- --
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues. Revenues decreased $1.3 million, or 1.7%, from $77.0 million
in 1999 to $75.7 million in 2000. The decrease is primarily attributable to a
decrease in log sales of $4.5 million and a $1.3 million decrease in stumpage
sales, partially offset by a $1.5 million increase in timber deed sales and the
fact that the Company had a $2.9 million dollar timber and property sale in
2000. To meet its working capital requirements, the Company harvested and sold
logs and stumpage in 2000 at rates in excess of both 1999 levels and the
estimated current annual board footage growth on the Timberlands.
Log sales for 2000 were $37.8 million on volumes of 96,112 MBF,
compared to log sales of $42.3 million on volumes of 97,170 in 1999. The average
log sales price for 2000 was $393 compared to an average log sales price of $436
in 1999, a 9.9% decrease, reflecting weaker markets for the Company's log sales.
17
Timber deed sales for 2000 were $34.3 million on volumes of 147,083
MBF, compared to timber deed revenue of $32.8 million on volumes of 86,463 MBF
in 1999. The average timber deed sales price per MBF for 2000 was $246 compared
to an average timber deed sales price of $379 in 1999, a 35.1% decrease. The
significant decrease in timber deed sales realization is due to overall declines
in market conditions as well as a reduction in the quality of the timber mix
being sold in timber sales. During 2000 there were less timber deed sales
containing larger, old growth timber which commands a premium, than in 1999. In
addition the Company's timber deed sales in the second quarter represented
substantially all of the remaining old growth timber on the Ochoco Timberlands.
and was of a lower grade species mix than sales of timber on the Ochoco
Timberlands in previous years.
Stumpage sales for 2000 were $0.2 million on volumes of 503 MBF,
compared with stumpage sales of $1.5 million on volumes of 3,645 MBF in 1999.
The reduction in stumpage volumes is a result of the Company's strategic
decision to utilize log sales and timber deed sales as its primary source of
revenue.
The Company had $2.9 million in revenue from planned timber and
property sales in 2000 compared to no revenue from timber and property sales
during 1999.
Gross Profit. Gross profit decreased $12.2 million from $36.6 million
in 1999 to $24.4 million in 2000 and gross margin decreased from 47.6% in 1999
to 32.3% in 2000. The decrease in gross margin was primarily from three factors.
First, contracted log and haul costs on a per MBF basis were approximately 20%
higher during 2000 as compared to 1999 due to longer hauls for delivered logs
and higher fuel costs. Second, the Company's timber deed sales were composed of
a lower value grade mix as compared to 1999. Finally continued declines in the
timber markets have resulted in lower realizations on delivered log and stumpage
values.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $8.4 million in 2000, consistent with selling,
general and administrative expenses of $8.5 million in 1999. Within selling,
general and administrative expenses salaries and wages were up $0.3 million and
professional services were up $0.5 million over 1999. Those increases were
offset by a settlement with previous employees of $0.7 million in 1999.
Equity in Net Income (Loss) of Affiliate. The equity in net income of
affiliate was $2.1 million during 2000 as compared to equity in net loss of
affiliate of $0.6 million in 1999. The income in 2000 reflects the recapture of
$0.6 million in losses absorbed from its preferred investment in U.S.
Timberlands Yakima, LLC, and the Company's accrued return of $1.4 million on its
preferred investment.
Interest Expense. Interest expense was $21.9 million in 2000 and 1999
consisting primarily of interest expense on the Company's $225.0 million of
Senior Notes.
Other Income (Expense), net. Other income, net, was $0.2 million for
2000, compared to $1.1 million for 1999, representing a decrease in income of
$0.9 million. The decrease is primarily attributable to a mark-to-market gain on
an interest rate collar of approximately $1.0 million during 1999 and no such
gains in 2000.
Cash Flow From Operations. During 2000, cash flow from operations
increased $3.4 million or 13.3% over 1999 primarily because of a $10.4 million
decrease in net income, which was more than offset by the addback of non-cash
items and changes in assets and liabilities.
18
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 of 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.
The Company had no revenue from timber and property sales during 1999
as compared to approximately $6.3 million in planned timber and property sales
during 1998.
Gross Profit. Gross profit increased by $9.8 million from $26.8 million
in 1998 to $36.6 million in 1999 and gross margin increased from 37.6% in 1998
to 47.6% in 1999. The increase in gross margin was primarily from three factors.
First, the Company's normal annual review of its standing timber inventory and
depletion rate during the first quarter of 1999 resulted in a reduction of the
Company's depletion rate, and a savings of approximately $4.9 million in 1999.
Also, the Company did not have any land sales during 1999, which have typically
resulted in lower margins than log, stumpage and deed sales. In addition to the
above items, the Company benefited from an overall increase in log prices during
1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $2.0 million from $10.5 million in 1998 to
$8.5 million in 1999. This expense also decreased as a percentage of net sales
from 14.7% in 1998 to 11.0% in 1999. The decrease was primarily attributable to
one-time expenses of $1.7 million related to severance costs and the repurchase
of member interests in the General Partner that were incurred during the first
and fourth quarters of 1998, combined with the provision in 1998 for the closure
of the Seattle office.
Interest Expense. Interest expense for 1999 was $21.9 million as
compared to $22.2 million for 1998, representing a $0.3 million or 1.4%
reduction. Interest expense for both 1999 and 1998 was incurred primarily on the
$225.0 million of Notes issued in the November 1997 Public Note Offering. The
slight decrease in interest expense in 1999 can be attributed to a reduced level
of borrowing against the available revolving credit facilities during 1999 as
compared to 1998.
Interest Income. Interest income for 1999 was $0.6 million, an increase
of $0.1 million or 20.0% from interest income for 1998 of $0.5 million. The
increase is primarily attributable to imputed interest from deed sales with a
term of more than one year. Imputed interest income from deed sales was
approximately $0.3 million in 1999. The increase in interest from timber deed
sales was partially offset by a reduction in other interest income due to a
decrease in cash and cash equivalents available in 1999 compared to 1998.
19
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.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been cash provided by
operating activities as well as debt and equity financings. As of December 31,
2000 the Company had a cash balance of $3.2 million and had $2.0 million of
working capital.
Operating Activities. Cash flows provided by operating activities in
2000 were $28.9 million, compared to cash flows provided by operating activities
of $25.5 million in 1999. The $3.4 million increase in cash flows provided by
operating activities was primarily attributable to a $10.4 million decrease in
net income which was more than offset by the addback of non-cash operating items
and the changes in assets and liabilities.
Investing Activities. Cash flows used in investing activities were $2.3
million in 2000, as compared to cash flows used in investing activities of $1.3
million during 1999. The increase is primarily attributable to a purchase of
cutting rights in June 2000 for approximately $1.3 million, partially offset by
the Company's $0.3 million investment in affiliate in 1999.
Financing Activities. Cash flows used in financing activities were
$26.2 million in 1999 and 2000. During 1999 and 2000, the Company paid $26.2
million in distributions to its members.
20
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, 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.
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. There can be no assurance that the
Company will have access to sufficient funds to repurchase the Notes in the
event of a change in control.
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 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, 2000 and 1999.
Affiliate Credit Facility
During the second quarter of 2000, the Company renewed its existing
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, 2001. At that time, amounts borrowed will be due and payable. As of
December 31, 2000 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 during 2001. 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 intent is to use new funds raised through
investment and commercial banks for acquisitions, if any, although there can be
no assurance that such financing will be available on terms acceptable to the
Company.
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.
21
Capital Expenditures/Cash Distributions
Capital expenditures in 2000 totaled $2.3 million. The Company
purchased timber cutting rights for approximately 4.2 MMBF of timber for $1.3
million. The remaining $1.0 million in capital expenditures incurred were mainly
in the nature of land management/silvicultural costs, miscellaneous equipment
and computer hardware. Capital expenditures were financed through cash flow
generated by operations. As the Company does not currently own and does not plan
to own manufacturing facilities, and all logging is subcontracted to third
parties, it is anticipated that capital expenditures in the future will not be
significant and will consist mainly of land management/silvicultural
expenditures. It is currently anticipated that the Company will not maintain
significant log inventories, although small log inventories may be maintained
for a short period of time, or incur material capital expenditures for machinery
and equipment. The Company anticipates that capital expenditures will be
approximately $1.5 million in 2001. Capital expenditures will consist primarily
of capitalized silvicultural costs and miscellaneous equipment purchases.
Cash required to meet the Company's debt service and the 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 debt service and
quarterly cash distributions have been 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 will be adversely affected. The Company
continues to evaluate means to improve cash flows, including the factors
mentioned above. There can be no assurance that prices will improve or that the
Company will be able to take any of these actions and it is unlikely prices will
improve or any of these actions will take effect within a short-term horizon.
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.
Recent Developments
In November 2000, the Company announced that an independent committee of
the board of directors had been formed to evaluate management proposals to take
the Master Partnership private. The independent committee has retained separate
legal counsel and intends to retain financial advisors to assist in this
process. To date, a proposal from management has not been received.
New Accounting Standard - 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 as amended, is required to
be adopted for fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS 133 requires the Company to recognize all derivatives in the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through earnings. If the derivative is a hedge, depending upon the nature of the
hedge, changes in fair value of the derivative will either be offset against the
changes in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company had no
outstanding derivative positions at December 31, 2000, and therefore believes
that adoption of SFAS 133 will not significantly affect its financial
statements.
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
Not applicable.
23
PART III
Item 10. Directors and Executive Officers 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 General Partner
---- --- -----------------------------
John M. Rudey 57 Chairman, Chief Executive Officer, President and Director (1)
Aubrey L. Cole 77 Director (2)
George R. Hornig 46 Director (3)
William A. Wyman 62 Director (4)
Alan B. Abramson 55 Director (5)
Robert F. Wright 75 Director (6)
Thomas C. Ludlow 54 Vice President and Chief Financial Officer
Martin Lugus 60 Vice President, Timberland Operations
Toby A. Luther 27 Assistant Vice President, Corporate Controller - Western Operations
Walter L. Barnes 58 Assistant Vice President, Harvesting
Robert A. Broadhead 49 Assistant Vice President, Marketing
Jay Jeffrey Vermilya 44 Assistant Vice President, Planning
Christopher J. Sokol 51 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). Mr. Cole is a Director of Deotexas
Inc. (a development stage company).
25
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 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 Unity
Mutual Life Insurance Company 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 when he retired, 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, SS&C Technologies, Prime
Response, Predictive Systems, Internosis, and Pega Systems.
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).
Thomas C. Ludlow became Vice President and Chief Financial Officer of
the Manager in July 2000. From 1998 to 2000, Mr. Ludlow was Chief Financial
Officer of Forest Systems, LLC, a Boston based timber investment management
company. From 1995 to 1998, Mr. Ludlow was Director and head of North American
Forest Products for Deutsche Morgan Grenfell, an international investment bank.
Prior to 1995, Mr. Ludlow worked with various financial institutions. Mr. Ludlow
holds an HBA in Business from the University of Western Ontario and an MBA from
the Anderson School at the University of California, Los Angeles.
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 and
then for the Manager in his current role.
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 since 1996, responsible for all log and stumpage sales transactions.
Prior to joining the Manager in 1996, 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.
Jay Jeffrey Vermilya 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 1979 to 1987 Mr. Vermilya worked
for Crown Zellerbach Corp. and them from 1987 to 1994 as Chief Forester for the
Cambell Group. Mr. Vermilya then went to work for Weyerhaeuser as district
forester and then for the Manager in 1996 in the same role until 2000, when he
assumed his current responsibilities.
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 Master Partnership, 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 Master Partnership's
securities, the Company believes that during the fiscal year 2000, 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
$100,000 (the "Named Executive Officers") for services rendered during the
fiscal year ended December 31, 2000:
SUMMARY COMPENSATION TABLE
--------------------------
Long-Term
Annual Compensation
Compensation Awards
------------ ------
Securities
Name and Principal Fiscal Underlying All Other
Position Year Salary ($) Bonus ($) Options/SARs(#) Compensation
-------- ---- ---------- --------- --------------- ------------
John M. Rudey 2000 $ 463,500 $ 256,750 -- --
Chairman and 1999 450,000 225,000 50,000 --
Chief Executive Officer 1998 300,000 150,000 -- --
Thomas C. Ludlow 2000 80,208 75,000 50,000 --
Vice President and 1999 -- -- -- --
Chief Financial Officer 1998 -- -- -- --
Martin Lugus 2000 123,600 30,900 -- --
Vice President - Timberland 1999 120,000 35,000 -- --
1998 101,521 24,625 -- --
Walter L. Barnes 2000 97,850 24,463 -- --
Assistant Vice President 1999 95,000 23,750 -- --
- Harvesting 1998 80,000 20,150 -- --
Robert A. Broadhead 2000 92,700 23,175 -- --
Assistant Vice President 1999 90,000 22,500 -- --
- Marketing 1998 77,150 19,275 -- --
Greg G. Byrne (1) 2000 110,833 41,833 -- --
Vice President and 1999 150,000 90,000 50,000 --
Chief Financial Officer 1998 -- -- -- --
- ----------------------
(1) In August of 2000 Mr. Byrne resigned as the CFO of U.S. Timberlands.
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
option grants to the named executive officers during fiscal 2000:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options/SARs of Unit Appreciation
Underlying Granted Exercise or for Option Term (2)
--------------------
Options/SARs to Employees Base Price Expiration
Name Granted During Fiscal Year ($/Unit) (1) Date 5% 10%
---- ------- ------------------ ------------- ---- -- ---
Thomas C. Ludlow 50,000 92.6% $9.813 07/03/10 $308,567 $781,970
(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 the date of record for the distribution
for the quarter ended 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.
The following table sets forth certain information with respect to the
aggregate number and value of options at the fiscal year-end 2000:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR ENDED OPTION/SAR VALUES
-----------------------------------
Number of Securities
Underlying/Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/SARs at
Shares December 31, 2000 December 31, 2000
----------------- -----------------
Acquired
Name on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------
John M. Rudey -- $-- -- 157,218 $-- N/A (1)
Thomas C. Ludlow -- $-- -- 50,000 $-- N/A (1)
Martin Lugus -- $-- -- 64,331 $-- N/A (1)
Walter L. Barnes -- $-- -- 34,310 $-- N/A (1)
Robert A. Broadhead -- $-- -- 34,310 $-- N/A (1)
Greg G. Byrne (2) -- $-- -- -- $-- N/A
(1) At the close of trading on December 31, 2000, the market value of the
Common Units was $6.69 per common unit. Since the Unit Options, once
exercisable, would be exercisable at a range of $9.813 to $14.750 per unit,
the in-the-money computation is inapplicable.
(2) In August of 2000 Mr. Byrne resigned as the CFO of U.S. Timberlands.
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.
30
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.
The Company paid approximately $129,000, $117,000 and $144,000 to the
Directors of the Manager for consulting services during 2000, 1999 and 1998,
respectively.
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 General Partner may authorize
from time to time. Effective January 1, 2001, the Board of Directors authorized
an increase to $463,500. 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.
31
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 Long-Term Incentive Plan Committee for the Company's
Long-Term Incentive Plan.
When setting executive officer compensation levels, the Compensation
Committee considers a variety of quantitative and qualitative criteria tied to
the strategic goals of the Company, such as maintaining the Minimum Quarterly
Distribution, an executive's acceptance of additional responsibility and
acquisition activity. The above factors were applied by the Compensation
Committee in determining the salary and bonus amounts for all executives,
including the CEO.
32
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. Each consulting agreement will be reviewed annually by a
majority of the directors who do not have consulting agreements. 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. See also Compensation of Directors included in Item 11.
Related Party Transactions
Glenn A. Zane, a principal of Mason, Bruce & Girard, served as the
Acting Senior Vice President and Acting Director of Operations for the Company
during 1999. In January 2000, Mr. Zane resigned as the Acting Senior Vice
President and Acting Director of Operations for the Company. The Company has
continued to utilize Mr. Zane and Mason, Bruce & Girard for consulting services.
The Company paid approximately $821,000 and $925,000 to Mason, Bruce and Girard
during 2000 and 1999, respectively. Such payments were for consulting services
and include Mr. Zane's compensation as Acting Senior Vice President and Acting
Director of Operations during 1999.
Investment in Affiliate
In October 1999, the Company made an investment in U.S. Timberlands
Yakima, LLC (USTY), an unconsolidated affiliate. USTY, a then 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 Company's Manager, hold a controlling interest. The
Company also acquired all of the senior preferred interests in USTY (the "Senior
or Preferred LLC Interests") for its contribution to USTY of timberlands
consisting primarily of non-income producing, pre-merchantable pine plantations
having an agreed upon value of $22.0 million. The Company recorded its
investment in the Senior LLC interest at its $18.9 million cost basis for the
contributed timberlands. Terms of the Preferred LLC Interests include a
cumulative annual guaranteed return of 5% of the $22.0 million agreed upon value
of the contributed timberlands. The Preferred LLC Interests are redeemable at
the Company's option on December 31, 2004 or at USTY's option at any time prior
thereto, for a redemption price equal to the agreed upon value of the Preferred
LLC Interests plus any portion of the guaranteed return not received by the
Company prior to the redemption date. Generally, USTY's net income or losses are
allocated to the Common LLC 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 Interest at cost, reduced
by losses, if any, 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 Holdings 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.
33
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.
Affiliate Credit Facility
See the description of the Affiliate Credit Facility included in the
Liquidity and Capital Resources section of Item 7.
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
+3.1 -- Amended and Restated Agreement of Limited Partnership of U.S. Timberlands Company, LP
-- Second Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, LLC
+3.2
-- Indenture among U.S. Timberlands Klamath Falls, LLC, U.S. Timberlands Finance Corp. and
+10.2 State Street Bank and Trust Company, as trustee
+10.3 -- Contribution, Conveyance and Assumption Agreement among U.S. Timberlands Company, LP
and certain other parties
*10.4 -- Form of U.S. Timberlands Company, LP 1997 Long-Term Incentive Plan
*10.5 -- Employment Agreement for Mr. Rudey
*10.9 -- Supply Agreement between U.S. Timberlands Klamath Falls, LLC and Collins Products LLC
*21.1 -- List of Subsidiaries
23.1 -- Consent of Richard A. Eisner & Company, LLP dated April 13, 2001.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 2000.
* 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.
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 16th day of
April 2001.
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.
April 16, 2001
/s/ John M. Rudey Chairman, Chief Executive Officer,
- -------------------------------------------
John M. Rudey President and Director (Principal Executive
Officer)
April 16, 2001
/s/ Thomas C. Ludlow Chief Financial Officer
- --------------------------------------------
Thomas C. Ludlow
April 16, 2001
/s/ Toby A. Luther Corporate Controller -
- -------------------------------------------- Western Operations
Toby A. Luther (Principal Accounting Officer)
April 16, 2001
/s/ Aubrey L. Cole Director
- --------------------------------------------
Aubrey L. Cole
April 16, 2001
/s George R. Hornig Director
- --------------------------------------------
George R. Hornig
April 16, 2001
/s/ Alan B. Abramson Director
- --------------------------------------------
Alan B. Abramson
April 16, 2001
/s/ William A. Wyman Director
- --------------------------------------------
William A. Wyman
April 16, 2001
/s/ Robert F. Wright Director
- --------------------------------------------
Robert F. Wright
36
EXHIBIT INDEX
23.1 Consent of Richard A. Eisner & Company, LLP dated April 13, 2001.
37
CONSOLIDATED FINANCIAL STATEMENTS
Contents Page
Independent auditors' report F-2
Consolidated balance sheets as of December 31, 2000 and 1999 F-3
Consolidated statements of operations for the years ended December 31, 2000, 1999, and 1998 F-4
Consolidated statements of changes in members' equity for the years ended December 31, 2000,
1999 and 1998 F-5
Consolidated statements of cash flows for the years ended December 31, 2000, 1999 and 1998 F-6
Notes to consolidated financial statements F-7
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, 2000 and 1999, and the
related consolidated statements of operations, changes in members' equity and
cash flows for each of the years in the three-year period ended December 31,
2000. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
January 24, 2001, except as to Note 15, as
to which the date is February 26, 2001
F-2
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
December 31,
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 3,168 $ 2,798
Accounts receivable, net 4,430 672
Other receivables 160 124
Notes receivable 2,285 2,344
Prepaid expenses and other current assets 35 981
--------- ---------
Total current assets 10,078 6,919
Timber and timberlands, net 265,109 293,828
Investment in affiliate 20,588 18,537
Property, plant and equipment, net 926 1,038
Notes receivable, less current portion - 2,304
Deferred financing fees, net 4,648 5,323
--------- ---------
Total assets $ 301,349 $ 327,949
========= =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable $ 1,222 $ 346
Accrued liabilities 3,326 3,286
Deferred revenue 1,474 39
Payable to manager and affiliate 2,065 840
--------- ---------
Total current liabilities 8,087 4,511
--------- ---------
Long-term debt 225,000 225,000
--------- ---------
Commitments and contingencies (Note 14)
Members' Equity:
Managing member's interest 683 984
Nonmanaging member's interest 67,579 97,454
--------- ---------
68,262 98,438
--------- ---------
Total liabilities and members' equity $ 301,349 $ 327,949
========= =========
See notes to consolidated financial statements. F-3
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Statements of Operations
(in thousands)
Year Ended December 31,
2000 1999 1998
-------- -------- --------
Revenues:
Log and stumpage sales $ 72,268 $ 76,594 $ 63,636
Timber and property sales 2,900 - 6,275
By-products and other 571 400 1,413
-------- -------- --------
75,739 76,994 71,324
-------- -------- --------
Cost of products sold:
Cost of timber harvested (19,853) (17,056) (16,683)
Cost of timber and property sales (2,641) - (5,917)
Depletion, depreciation and road amortization (28,816) (23,318) (21,938)
-------- -------- --------
Gross profit 24,429 36,620 26,786
Selling, general and administrative expenses (8,428) (8,477) (10,462)
Share of net income (loss) of affiliate 2,051 (607) -
-------- -------- --------
Operating income 18,052 27,536 16,324
Interest expense (21,921) (21,937) (22,183)
Amortization of deferred financing fees (675) (675) (675)
Interest income 403 565 460
Other income (expense), net 208 1,162 (309)
-------- -------- --------
Net income (loss) $ (3,933) $ 6,651 $ (6,383)
======== ======= ========
See notes to consolidated financial statements. F-4
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Statements of Changes in Members' Equity
(in thousands)
Managing Nonmanaging
Member's Member's Total
Interest Interest Members' Equity
Balance, January 1, 1998 $ 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
Distributions to members (262) (25,981) (26,243)
Net loss (39) (3,894) (3,933)
---------- ------------- ------------
Balance, December 31, 2000 $ 683 $ 67,579 $ 68,262
========== ============= ============
See notes to consolidated financial statements. F-5
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2000 1999 1998
-------- ------- --------
Cash flows from operating activities:
Net income (loss) $ (3,933) $ 6,651 $ (6,383)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion, amortization and cost of
timber and property sold 31,457 23,318 27,855
(Gain) loss on disposal of assets (39) 66 -
Amortization of deferred financing fees 675 675 675
Share of net (income) loss of affiliate (2,051) 607 -
Other non-cash items - - 361
Changes in assets and liabilities:
Accounts receivable (3,758) 855 999
Other receivables (36) 989 (939)
Notes receivable 2,363 (3,469) 1,065
Prepaid expenses and other current assets 946 (555) 108
Accounts payable 876 (387) (671)
Accrued liabilities 40 (1,119) (653)
Deferred revenue 1,435 (1,575) (4,130)
Payable to manager and affiliate 896 (553) 257
-------- ------- --------
Net cash provided by operating activities 28,871 25,503 18,544
-------- ------- --------
Cash flows from investing activities:
Receivable from affiliate - (294) -
Purchase of property, plant and equipment (55) (44) (32)
Proceeds from sale of assets 50 8 -
Timber and road additions (2,253) (955) (610)
-------- ------- --------
Net cash used in investing activities (2,258) (1,285) (642)
-------- ------- --------
Cash flows from financing activities:
Distributions to members (26,243) (26,244) (22,703)
Payment to affiliate - - (1,000)
-------- ------- --------
Net cash used in financing activities (26,243) (26,244) (23,703)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents 370 (2,026) (5,801)
Cash and cash equivalents, beginning of period 2,798 4,824 10,625
-------- ------- --------
Cash and cash equivalents, end of period $ 3,168 $ 2,798 $ 4,824
======== ======= ========
Supplemental cash flow information:
Cash paid for interest $ 21,786 $ 21,746 $ 21,418
Noncash activities:
Contribution of timberlands for investment in affiliate $ - $ 18,850 $ -
See notes to consolidated financial statements. F-6
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(dollar amounts in thousands)
1. Business and Significant Accounting Policies:
Business
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, plus accrued
dividends to the extent earned, reduced by losses, if any, in excess of the
common members' interest in the investee (See Notes 3 and 9).
U.S. Timberlands Company, LP (the "MLP") owns a 99% nonmanaging member interest
in USTK. The MLP was formed on June 27, 1997 to acquire and own substantially
all of the equity interests in USTK and through USTK to acquire and own the
business and assets of U.S. Timberlands Management Company, LLC, formerly known
as U.S. Timberlands Services Company, LLC. 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue Recognition
Revenue on delivered log sales are recognized upon delivery to the customer.
Revenue on timber deeds and timber and property sales are generally recognized
upon closing. Revenue from timber sold under stumpage contracts (i.e., the
customer arranges to harvest and deliver the logs) is recognized when the timber
is harvested. Deferred revenue as of December 31, 2000 represents a customer
deposit for a timber deed sale that was closed in January 2001. At December 31,
1999 deferred revenue represents cash received in advance of logs harvested
under stumpage contracts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts and notes receivable. The
majority of the Company's trade accounts and notes receivable are derived from
sales to third party wood processors. The Company's four largest customers
accounted for approximately 22%, 14%, 11%, and 10% of the Company's aggregate
net revenues from log, stumpage, and timber deed sales for the year ended
December 31, 2000. In 1999, these customers represented approximately 17%, 15%,
18%, and 14%, respectively, of aggregate net revenues from log, stumpage and
deed sales. In 1998, these four customers accounted for approximately 27%, 18%,
19%, and 10% 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 27% of the Company's accounts
receivable at December 31, 2000 and none of the Company's accounts receivable at
December 31, 1999. The Company periodically reviews its allowance for doubtful
accounts and reserves an estimated amount for such accounts. As of December 31,
2000 and 1999 the Company had an allowance for doubtful accounts of $550 and
$200, respectively.
F-7
1. Business and Significant Accounting Policies (Continued):
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.
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. The Company presents deferred financing fees net
of accumulated amortization. The accumulated amortization of deferred financing
fees as of December 31, 2000 and 1999 was $2,102 and $1,427, respectively.
Income Taxes
USTK is a limited liability company. Accordingly, USTK is not liable for federal
or state income taxes since USTK's income or loss is reported on the separate
tax returns of the individual members. Accordingly, no provision for current or
deferred income taxes has been reflected in the accompanying financial
statements.
F-8
1. Business and Significant Accounting Policies (Continued):
Unit-Based Compensation Plans
The Company accounts for its 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 10).
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 as amended, is required to be adopted
for fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133
requires the Company to recognize all derivatives in the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
earnings. If the derivative is a hedge, depending upon the nature of the hedge,
changes in fair value of the derivative will either be offset against the
changes in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company had no
outstanding derivative positions at December 31, 2000, and therefore believes
that the adoption of SFAS 133 will not significantly affect its financial
statements.
Reclassifications
Certain amounts in prior years have been reclassified for comparability purposes
and have no impact on net income or members' equity.
2. Timber and Timberlands:
Timber and Timberlands consisted of the following at December 31:
2000 1999
----------- ------------
Timber and logging roads $ 317,651 $ 317,856
Timberlands 39,111 39,338
Seed orchard and nursery stock 1,364 1,277
----------- ------------
358,126 358,471
Less accumulated depletion and road amortization 93,017 64,643
----------- ------------
$ 265,109 $ 293,828
=========== ============
F-9
3. Investment in Affiliate:
Following is summarized financial information for U.S. Timberlands Yakima, LLC,
the MLP's equity basis affiliate (See Note 9), as of and for the years ended
December 31:
2000 1999
------------ ------------
Current assets $ 3,887 $ 9,129
Noncurrent assets, principally timber and timberlands 71,174 74,726
Current liabilities 11,195 5,611
Noncurrent liabilities - long-term debt 42,807 60,000
Redeemable preferred member interest (owned by the
Company) 20,295 18,243
Net sales 25,606 560
Gross profit 10,018 342
Net income (loss) 2,815 (1,207)
4. Property, Plant and Equipment:
Property, plant and equipment consisted of the following at December 31:
2000 1999
------------ ------------
Equipment $ 661 $ 674
Buildings and improvements 843 843
------------ ------------
1,504 1,517
Less accumulated depreciation and amortization 578 479
------------ ------------
$ 926 $ 1,038
============ ============
5. Accrued Liabilities:
Accrued liabilities consisted of the following at December 31:
2000 1999
------------ ------------
Interest $ 2,792 $ 2,729
Severance and harvest tax 217 242
Other 317 315
------------ ------------
$ 3,326 $ 3,286
============ ============
F-10
6. Short-Term Debt:
In 2000, the Company extended 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, 2000), which is based on
the Company's leverage ratio. The prime lending rate was 9.50% at December 31,
2000. The Affiliate Credit Facility expires on June 30, 2001 and all amounts
borrowed thereunder shall then be due and payable. There were no outstanding
borrowings under the Affiliate Credit Facility at December 31, 2000 and 1999.
Peak borrowings were $6,000 and $3,000 under the Affiliate Credit Facility
during 2000 and 1999, respectively. A commitment fee of 0.5% is payable
quarterly on the unused available portion of the Affiliate Credit Facility.
Total interest and fees paid to the affiliate were $130 and $58 in 2000 and $25
and $29 in 1999, respectively.
The Affiliate Credit Facility contains certain restrictive covenants, including
limits on the ability of the Company to make cash distributions, incur certain
additional indebtedness or incur certain liens. The Affiliate Credit Facility
also contains financial ratio covenants as to EBITDDA (earnings before interest,
taxes, depreciation, depletion, and amortization), interest coverage ratio, and
leverage ratio. The Company was in compliance with these covenants at December
31, 2000.
7. Long-Term Debt:
Senior Notes
The $225,000 of Notes, which were issued in 1997, were issued jointly and
severally by the Company 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 Company and bear interest
at 9-5/8% payable semiannually in arrears on May 15 and November 15, and mature
on November 15, 2007 unless previously redeemed. The Notes are redeemable at the
option of the Issuers in whole or in part, on or after November 15, 2002 at
predetermined redemption prices plus accrued interest to the redemption date.
The Notes contain certain restrictive covenants, including limiting the ability
of the Company and its subsidiary to make cash distributions, incur additional
indebtedness, sell assets or harvest timber in excess of certain limitations.
F-11
8. Members' Equity:
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 sets forth certain cash distribution target rates for the
Company 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 $.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 $.633 per Common and
Subordinated Unit, the Manager receives 25% of the excess Available Cash and to
the extent that the quarterly distributions exceed $.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 2000, 1999 or 1998, the Manager did not receive any such Incentive
Distributions for those years.
9. Certain Relationships and Related Party Transactions:
Manager
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 USTK's Operating Agreement and in the MLP's Partnership Agreement, as
amended. 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, 2000 and 1999, the Company had a payable to the
Manager of $955 and $840, respectively. During 2000, 1999, and 1998 expenses
allocated to and reimbursed by the Company totaled $7,717, $8,347, and $9,058,
respectively.
F-12
9. Certain Relationships and Related Party Transactions (Continued):
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 and the MLP 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, 2000, the Manager has consulting agreements with affiliates
of certain Directors of the Manager, pursuant to which each such person or firm
has provided and/or will provide consulting services to the Manager. The
agreements provide 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 2000, 1999, and 1998 amounted to $129, $117, and
$144, respectively.
Investment in Affiliate
In October 1999, the Company made an investment in U.S. Timberlands Yakima, LLC
(USTY), an unconsolidated affiliate. USTY, a then 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 Company's Manager,
hold a controlling interest. The Company also acquired all of the senior
preferred interests in USTY (the "Senior or Preferred LLC Interests") for its
contribution to USTY of timberlands consisting primarily of non-income
producing, pre-merchantable pine plantations having an agreed upon value of
$22,000. The Company recorded its investment in the Senior LLC interest at its
$18,850 cost basis for the contributed timberlands. Terms of the Preferred LLC
Interests include a cumulative annual guaranteed return of 5% of the $22,000
agreed upon value of the contributed timberlands. The Preferred LLC Interests
are redeemable at the Company's option on December 31, 2004 or at USTY's option
at any time prior thereto, for a redemption price equal to the agreed upon value
of the Preferred LLC Interests plus any portion of the guaranteed return not
received by the Company prior to the redemption date. Generally, USTY's net
income or losses are allocated to the Common LLC Interests. However, net losses
exceeding the account balances of the Common LLC Interests are allocated to the
Preferred LLC Interest. The Company accounts for the Preferred LLC Interest at
cost plus accrued dividends to the extent earned, reduced by losses, if any, 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 MLP and Company granted U.S. Timberlands Holding Group, LLC an irrevocable
proxy to vote their respective 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 Manager's Conflicts Committee reviewed and approved the
structure of the Company's investment in the affiliate.
In June 2000, the Company purchased timber cutting rights for approximately 4.2
million board feet from USTY for $1.3 million. These timber cutting rights
expire in June 2003. In December 2000, the Company sold approximately 8,000
acres of timberland located in Central Oregon to USTY for $2,900.
F-13
9. Certain Relationships and Related Party Transactions (Continued):
Payments to Affiliate
See Note 6 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 Manager's operating
agreement, the member interests of three former employees were subject to
repurchase at an aggregate price of $385 payable in three annual installments
commencing February 1, 1998. The aggregate repurchase of the member interests
was included in selling, general and administrative expenses in 1998 and the
Company has reimbursed the Manager for such repurchase payments.
Other Related Party Transactions
During 1999, Glenn A. Zane served as Acting Senior Vice President and Acting
Director of Operations for the Company. The Company paid approximately $821 and
$925 during 2000 and 1999, respectively, to Mason, Bruce & Girard, of which Mr.
Zane is a partner. Such payments were for consulting services and include Mr.
Zane's compensation.
10. 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 who perform
services for the Company.
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.
During 1997, in connection with the reorganization of the Company and concurrent
with the initial offering of public units by the MLP, 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. In 2000,
54,000 Unit 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 members' equity. Although the performance criteria
were met for the years ended December 31, 2000, 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.
F-14
10. Management Incentive Plans (Continued):
Activity with respect to the MLP's unit option plan follows:
Weighted
Average
Number of Exercise
Shares Price
------------------ ------------------
Outstanding, December 31, 1997 694,775 14.75 (a)
Unit options granted 340,170 14.75
Unit options cancelled (584,628) 14.75
------------------
Outstanding, December 31, 1998 450,317 14.75
Unit options granted 342,620 13.16
Unit options cancelled (35,310) 14.71
------------------
Outstanding, December 31, 1999 757,627 14.02
Unit options granted 54,000 9.70
Unit options cancelled (54,000) 13.89
------------------
Outstanding, December 31, 2000 757,627 13.75
==================
(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, 2000 exercise prices for options outstanding were between
$5.84 and $14.75 with a weighted average exercise price of $13.75 per unit. The
weighted average remaining contractual life of the options was 8 years. There
were no unit options exercisable at December 31, 2000, 1999 or 1998.
F-15
10. 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
2000, 1999 and 1998:
2000 1999 1998
------------------ ------------------ ------------------
Risk-free rate of return 5.98% 4.88% 5.50%
Expected dividend yield 9.52% 9.52% 9.52%
Expected life of the Unit Options 5 Years 5 Years 5 Years
Expected volatility 80.59% 49.65% 25.50%
The weighted-average fair value of unit options was $3.61, $2.87 and $2.02 for
options granted in 2000, 1999 and 1998, respectively.
If the Company had adopted the expensing provisions of SFAS 123, the impact on
2000, 1999 and 1998's net income (loss) would have been as follows:
Year Ended December 31,
2000 1999 1998
-------- ------- --------
Net income (loss) as reported $ (3,933) $ 6,651 $ (6,383)
Net income (loss) pro forma (4,470) 6,204 (6,629)
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.
Restricted Unit Plan:
During 1997, 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, 2000.
Income Interests of the Manager
In connection with the Common Units offering and the related formation of the
MLP's General Partner, the Manager 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 MLP's 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 9, severance
and settlement).
F-16
11. 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 $180,000 and $207,000 at December 31, 2000 and
1999, 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. Income or losses on these agreements is reflected in
other income (expense) in the accompanying statements of operations in
the amount $991 in 1999 and ($361) in 1998.
12. Quarterly Results (Unaudited):
Quarter Ended
December 31 (a) September 30 June 30 March 31 Total Year
------------------- ------------- ----------- -------------- -----------------
2000
Revenues $ 25,791 $ 14,064 $ 23,960 $ 11,924 $ 75,739
Gross profit 4,598 2,716 12,881 4,234 24,429
Net income (loss) (2,306) (5,229) 5,559 (1,957) (3,933)
1999
Revenues $ 19,394 $ 26,175 $ 20,296 $ 11,129 $ 76,994
Gross profit 7,853 11,389 12,254 5,124 36,620
Net income (loss) (55) 3,981 4,457 (1,732) 6,651
(a) The quarter ended December 31, 2000 includes revenues of $2,773 and related
costs of $2,641 from a property sale.
13. 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
$30 in 2000, $34 in 1999 and $26 in 1998.
F-17
14. 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
In November 2000, six purported class action lawsuits were filed against the
Manager and the Board of Directors of the Manager (the "Board") alleging breach
of fiduciary duty and self-dealing by the Manager and the Board in connection
with an announcement on November 2, 2000 that a group led by senior management
has begun the process to explore taking the MLP private (the "Going-Private
Transaction").
All six lawsuits were filed in the Court of Chancery of the State of Delaware
for the County of New Castle. Each lawsuit was filed by a unitholder of the MLP,
on behalf of all other unitholders of the MLP who are similarly situated, and
seeks to have the class certified and the unitholder bringing the lawsuit named
as representative of the class. In addition, the lawsuits seek to enjoin the
Going-Private Transaction, to rescind the Going-Private Transaction if it is
consummated, and to recover damages and attorneys' fees. In addition to naming
the Manager and the Board as defendants, all six lawsuits name the MLP as a
defendant.
In the opinion of management, after consultation with outside counsel, the
pending lawsuits are not expected to have a material adverse effect on the
Company's financial position or results of operations.
15. Subsequent Event:
Distribution
In January 2001, the Board of Directors of the Manager authorized the Company to
make a distribution applicable to the fourth quarter 2000. The total
distribution in the amount of $6,561 (including $131 to the Manager) was paid on
February 14, 2001 to Unitholders of record as of February 2, 2001.
Preferred Investment
On February 26, 2001, the Company contributed cutting rights on approximately
31,000 acres of timberland located in Central Oregon to its affiliate, USTY. The
cutting rights have an agreed upon value of $12.0 million and were added to the
Company's Preferred Interest in USTY. Terms of the additional senior preferred
interest include a cumulative annual guaranteed return of 5% of the $12.0
million agreed upon value. The additional senior preferred interest is
redeemable at the Company's option on December 31, 2004 or at USTY's option any
time prior thereto for a redemption price equal to the agreed upon value of the
Preferred Interest, either in cash or by returning the contributed timberlands,
plus any portion of the guaranteed return not yet paid by USTY prior to the
redemption date. The Company recorded its additional preferred interest at its
basis for the timber of approximately $10.9 million.
F-18