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, 2001 Commission File No.: 0-23259
U.S. TIMBERLANDS COMPANY, LP
(Exact name of registrant as specified in its charter)
DELAWARE 91-1842156
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
625 Madison Avenue, Suite 10-B, New York, NY 10022
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 212-755-1100
-----------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class: Name of Each Exchange on Which Registered:
Common Units NASDAQ National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during then preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes_X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
The aggregate market value of the Common Units held by non-affiliates
of the registrant, based on the last reported sale price of the Common Units on
the NASDAQ National Market on March 27, 2002, was approximately $14,043,848.
Documents incorporated by reference: None
U.S. TIMBERLANDS COMPANY, LP
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................................................................1
Item 2. Properties.....................................................................................10
Item 3. Legal Proceedings..............................................................................11
Item 4. Submission of Matters to a Vote of Security Holders............................................11
PART II
Item 5. Market for Registrant's Common Units and Related Security Holder Matters.......................12
Item 6. Selected Financial Data........................................................................14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................23
Item 8. Financial Statements...........................................................................24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........24
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................25
Item 11. Executive Compensation.........................................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................35
Item 13. Certain Relationships and Related Transactions.................................................36
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K........................................38
ii
PART I
Item 1. Business.
General
The business of U.S. Timberlands Company, LP, a Delaware limited
partnership formed in June 1997 (the "Company"), consists of the growing of
trees and the sale of logs and standing timber. The Company owns approximately
489,000 fee acres of timberland and cutting rights on approximately 18,000 acres
of timberland (collectively the "Timberlands") containing total merchantable
timber volume estimated as of January 1, 2002 to be approximately 1.2 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 75% of which are used
for its own internal reforestation programs, with the balance sold to other
forest products companies. Except as the context otherwise requires, references
herein to, or descriptions of, assets and operations of the Company include the
assets and operations of the Operating Company (as defined below).
The Timberlands' merchantable timber consists of Ponderosa Pine
(approximately 48%) and Douglas Fir (approximately 14%), 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 141,000 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 40 years old. Initial thinning or harvesting of
the Plantation stands is expected to begin within the next three years. The
balance of the Timberlands is composed of natural stands. For a more complete
description of the Company's properties, see "Properties."
In August 1996, U.S. Timberlands Klamath Falls, LLC, a Delaware limited
liability company ("USTK") and U.S. Timberlands Management Company, LLC,
formerly known as U.S. Timberlands Services Company, LLC ("Old Services"),
acquired approximately 604,000 fee acres of timberland (the "Klamath Falls
Timberlands"), containing an estimated merchantable timber volume of
approximately 1.9 BBF and related assets from Weyerhaeuser (the "Weyerhaeuser
Acquisition"). In July 1997, USTK, which is now the Company's subsidiary
operating company (in such capacity, the "Operating Company"), acquired
approximately 42,000 fee acres of timberland and cutting rights on approximately
3,000 acres of timberland (the "Ochoco Timberlands"), containing an estimated
merchantable timber volume of approximately 280 million board feet ("MMBF") from
Ochoco Lumber Company ("Ochoco") (the "Ochoco Acquisition"). At the date of
acquisition, over 40% of the merchantable timber on the Ochoco Timberlands was
at least 80 years old. As of December 31, 2000, the Company had 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 and again in the first
and second quarters of 2001, 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 USTK, approximately 58% of the logs harvested from
the Klamath Falls Timberlands were delivered to a plywood mill owned by
Weyerhaeuser at Klamath Falls, Oregon. Similarly, prior to the Ochoco
Acquisition, substantially all of the timber harvested from the Ochoco
Timberlands was delivered to Ochoco's mills. The Company does not currently own
any conversion facilities nor does it presently intend to own any such
facilities on a long-term basis; consequently the Company's sales are made to
unaffiliated third parties. Concurrent with USTK's acquisition of the Klamath
Falls Timberlands, USTK arranged for Collins Products LLC ("Collins"), a
privately owned forest products company located within the Klamath Falls
Timberlands area, to purchase Weyerhaeuser's Klamath Falls mill facilities. In
September 1996, 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. During 2001, Collins suspended
plywood production at the Klamath Falls mill and it was mutually decided to
cancel the remaining years on the contract. In addition to its sales under the
Collins Supply Agreement, the Company sold and continues to sell logs to
conversion facilities located in the area surrounding the Timberlands. There are
currently more than 40 primary conversion facilities located within a 150-mile
radius of the Company's Timberlands.
1
Formation of the Company
On November 19, 1997, the Company acquired substantially all of the
equity interests in USTK and the business and assets of Old Services (the
"Acquisition") and completed its initial public offering (the "Initial
Offering") of common units representing limited partner interests ("Common
Units"). Upon the closing of the Acquisition, Old Services contributed all of
its assets, including its timber operations, to U.S. Timberlands Services
Company, LLC, a newly formed Delaware limited liability company and the
Company's general partner (the "General Partner" or "New Services"), in exchange
for interests therein. Immediately thereafter, USTK assumed certain indebtedness
(the "Holdings Debt") of U.S. Timberlands Holdings, LLC, an affiliate of USTK
("Holdings"), and the General Partner contributed its timber operations to USTK
in exchange for a member interest in USTK. Then the General Partner contributed
all but a 1% member interest in USTK to the Company in exchange for a general
partner interest in the Company, the right to receive Incentive Distributions
(as defined herein) and 1,387,963 subordinated units representing limited
partner interests in the Company ("Subordinated Units"), and Holdings
contributed all of its interest in USTK to the Company in exchange for 2,894,157
Subordinated Units. The General Partner then distributed the Subordinated Units
to Old Services. Approximately 143,398 Subordinated Units were used by Old
Services to redeem interests in Old Services held by certain founding directors
of the General Partner (the "Founding Directors"). As a result of such
transactions, USTK became the Operating Company and the General Partner owns an
aggregate 2% interest in the Company and the Operating Company on a combined
basis, and the right to receive Incentive Distributions; U.S. Timberlands
Holdings Group, LLC, a successor to Old Services and Holdings owns 3,140,162
Subordinated Units and the Founding Directors own an aggregate of 143,398
Subordinated Units. The 3,283,560 Subordinated Units owned by U.S. Timberlands
Holdings Group, LLC and the Founding Directors represent an aggregate 25.5%
interest in the Company. The Common Units and the Subordinated Units are
referred to herein collectively as "Units" and the holders of Units are referred
to herein as "Unitholders."
Concurrent with the closing of the Initial Offering, the Operating
Company and its wholly owned subsidiary, U.S. Timberlands Finance Corp.
("Finance Corp."), consummated the public offering (the "Public Note Offering")
of $225.0 million aggregate principal amount of unsecured senior notes (the
"Notes). See "Management's Discussion and Analysis of Liquidity and Capital
Resources."
The purpose of the Company under the Partnership Agreement is limited
to serving as the non-managing member of the Operating Company and engaging in
any business activity that may be engaged in by the Operating Company. The
Operating Company's operating agreement provides that the Operating Company may,
directly or indirectly, engage in (i) any activity engaged in by USTK
immediately prior to the Initial Offering, (ii) any other activity approved by
the General Partner but only to the extent that the General Partner reasonably
determines that, as of the date of the acquisition or commencement of such
activity, such activity generates "qualifying income" (as such term is defined
in Section 7704 of the Internal Revenue Code) or (iii) any activity that
enhances the operations of an activity that is described in (i) or (ii) above.
Although the General Partner has the ability under the Partnership Agreement to
cause the Company and the Operating Company to engage in activities other than
the ownership or operation of timber-producing real property, the General
Partner has no current intention of doing so. The General Partner is authorized
in general to perform all acts deemed necessary to carry out such purposes and
to conduct the business of the Company.
2
Company Structure and Management
The operations of the Company are conducted through, and the operating
assets are owned by, USTK, as the Operating Company. The Company owns a 98.9899%
member interest in the Operating Company and the General Partner owns a 1%
general partner interest in the Company and a 1.0101% managing member interest
in the Operating Company. The General Partner therefore owns an aggregate 2%
interest in the Company and the Operating Company on a combined basis.
The Company's business is managed by the General Partner. The General
Partner does not receive any management fee or other compensation in connection
with its management of the Company, but is reimbursed for all direct and
indirect expenses incurred on behalf of the Company (including wages and
salaries of employees, officers and directors of the General Partner) and all
other necessary or appropriate expenses allocable to the Company or otherwise
reasonably incurred by the General Partner in connection with the operation of
the Company's business.
Conflicts of interest may arise between the General Partner and its
affiliates, on the one hand, and the Company, the Operating Company and the
Unitholders, on the other, including conflicts relating to the purchase and sale
of timber and/or timber deeds, compensation of the directors, officers and
employees of the General Partner and the determination of fees and expenses that
are allocable to the Company. The General Partner has a conflicts committee (the
"Conflicts Committee"), consisting of two independent members of its Board of
Directors, that is available at the General Partner's discretion to review
matters involving conflicts of interest.
The principal executive offices of the Company and the General Partner
are located at 625 Madison Avenue, Suite 10-B, New York, New York 10022. The
telephone number at such offices is (212) 755-1100.
3
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 150 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.
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 and biological 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 251 million board feet
(MMBF) in 2001 and plans to harvest, or commit to harvest, approximately 196
MMBF in 2002. The Company did not sell any MMBF through property sales in 2001,
but intends to sell up to 90 MMBF through property sales in 2002. If current
market conditions do not improve, the Company will be required to harvest its
current Timberlands aggressively over approximately the next one to two 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. Because 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 2002. 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 established roadways or low-maintenance roads owned by the Company or its
Affiliates. 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 2001, sawlogs, stumpage sales and timber
deed sales accounted for approximately 48%, 0% and 52%, respectively, of the
Company's revenue. Chips, which can be used to make hardboard or pulp, and
seedlings combined accounted for less than 1% of the Company's revenues in 2001.
There were no timber and property sales in 2001.
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, USTK
arranged for Collins, a privately owned forest products company located within
the Klamath Falls Timberlands, to purchase Weyerhaeuser's Klamath Falls mill
facilities. At such time, the Company entered into the Collins Supply Agreement,
a 10-year log supply agreement with Collins providing for purchase by the
plywood mill and delivery by the Company of a minimum of 34 MMBF of logs each
year at market prices. In the fourth quarter of 2001, the Collins Supply
Agreement was cancelled by mutual agreement as a result of the closure of the
Collins Klamath Falls Plywood Mill in Klamath Falls. In 2001, sales to Timber
Products, Scott Timber, Crown Pacific and Boise Cascade accounted for
approximately 41% of the Company's revenue. No other single non-affiliated
customer accounted for more than 5% of the Company's net revenues for 2001.
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 40 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 log 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 at a market clearing price. 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 of
foreign imports, primarily from Canada, Chile, and New Zealand. In recent years,
the strength of the U.S. dollar combined with the much lower value of currencies
in Canada, the Pacific Rim and South America have made international competition
a larger factor in competitive pricing. 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 1.2 BBF of merchantable, good
quality timber, approximately 141,000 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 1 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 29% of the
Timberlands acreage currently consists 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
2001, the Company planted approximately 2.3 million seedlings and expects to
plant 3.8 million seedlings in 2002. 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 27,000 acres.
7
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.
Based on the 2001 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 2001, and
identified approximately 33 northern spotted owl sites affecting the Klamath
Falls Timberlands, three of which are located, totally, 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.
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.
8
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.
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.
9
Employees
As of March 15, 2002, the Company had 32 employees, including employees
of the General Partner 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.
Item 2. Properties
Timber Inventory
The Company currently owns and manages approximately 489,000 fee acres
of timberland and cutting rights on approximately 18,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 2002 to
be approximately 1.2 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 141,000
acres of the 489,000 acre total consist of actively managed Pine Plantations
with stands ranging in age from one to 40 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, 2002, the total
timber inventory amounted to 1.2 BBF. The Company's combined timber inventory by
MMBF and percentage is Ponderosa Pine (550.1 (48%)), Lodgepole Pine (190.5
(16%)), White Fir (211.6 (18%)), Douglas Fir (163.1 (14%)) and other species
(41.8 (4%)). 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, 2002, approximately 256
MMBF, or 22%, 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, 2002, the Plantations
totaled 141,000 acres. Of the total acreage, 67,000 acres range from 1 to 15
years of age, 51,000 acres range from 16 to 25 years of age, and 23,000 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 General Partner and the Board of Directors of the General Partner
(the "Board") alleging breach of fiduciary duty and self-dealing by the General
Partner 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 Company 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 Company, on behalf of all other Unitholders of the Company 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 General Partner and the Board as defendants, all six lawsuits name
the Company as a defendant. As of March 15, 2002, all of the lawsuits have been
withdrawn, without prejudice, by the plaintiffs pending further developments in
the Going Private Transaction.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the Company's Unitholders
during the fourth quarter of 2001.
11
PART II
Item 5. Market for Registrant's Common Units and Related Security Holder Matters
The Common Units are listed and traded on the NASDAQ National Market
("NASDAQ") under the symbol "TIMBZ." The Common Units began trading on November
14, 1997, at an initial public offering price of $21.00 per Common Unit. As of
December 31, 2001, there were approximately 8,100 record holders of the
Company's Common Units and four record holders of the Company's Subordinated
Units. There is no established public trading market for the Company's
Subordinated Units.
The following table sets forth the high and low closing sales prices for the
Common Units on Nasdaq:
Common Unit Price Range
--------------------------
High Low
--------------------------
First Quarter 1998 ..................... $ 21.50 $ 20.31
Second Quarter 1998 .................... 21.88 18.00
Third Quarter 1998 ..................... 19.50 14.88
Fourth Quarter 1998 .................... 18.25 13.00
First Quarter 1999 ..................... 14.50 11.56
Second Quarter 1999 .................... 14.69 11.50
Third Quarter 1999 ..................... 15.75 10.75
Fourth Quarter 1999 .................... 13.38 9.81
First Quarter 2000 ..................... 11.38 9.50
Second Quarter 2000 .................... 10.56 9.56
Third Quarter 2000 ..................... 11.38 9.63
Fourth Quarter 2000 .................... 10.75 5.38
First Quarter 2001 ..................... 8.50 7.13
Second Quarter 2001 .................... 8.48 5.20
Third Quarter 2001 ..................... 5.92 2.68
Fourth Quarter 2001 .................... 2.90 1.59
First Quarter 2002 ..................... 2.04* 1.68*
The last reported sale price of the Common Units on NASDAQ on March 27,
2002 was $ 1.77 per Common Unit.
Cash Distributions
The Company made its first cash distribution on the Common Units and
the Subordinated Units on May 15, 1998, of $0.73, representing the sum of $0.50,
the Minimum Quarterly Distribution for the first quarter of 1998, plus $0.23,
the pro rata portion of the Minimum Quarterly Distribution for the period from
November 19, 1997 through December 31, 1997. The Company made the Minimum
Quarterly Distributions of $0.50 per Unit for 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. On May 10, 2001, due to declining
log prices and deteriorating business conditions, the Board of Directors
indefinitely suspended further distributions. Given the current state of the
timber markets, the Company does not expect to be in a position to make any
distributions to the Unitholders for the foreseeable future.
Pursuant to the provisions of the Notes, no distributions may be made
by the Operating Company to the Company with respect to any quarter if the
Consolidated Fixed Charge Coverage Ratio ( as defined in the Indenture) for the
four-quarter period ended with such quarter is equal to or less than 1.75 to
1.00.
12
Item 6: Selected Financial Data
U.S. Timberlands
2001 2000 1999 1998 1997
CASH FLOWS AND OTHER DATA
(IN MILLIONS):
Modified EBITDDA (5) . . . . . . . . . . . . . . $ 23.2 $ 49.3 $ 50.6 $ 44.2 $ 53.3
Additions to timber and timberlands (2) 5.6 2.3 1.0 0.6 111.6
Cash flow from operating activities 9.2 28.9 25.5 18.5 26.3
Cash flow from (used in) investing
activities . . . . . . . . . . . . . . . . . (4.7) (2.3) (1.3) (0.6) (101.6)
Cash flow from (used in) financing
activities . . . . . . . . . . . . . . . . . (6.6) (26.2) (26.2) (23.7) 69.3
OPERATING STATEMENT DATA
(IN MILLIONS EXCEPT PER
UNIT AMOUNTS):
Revenues (1) . . . . . . . . . . . . . . . . . . 54.6 75.6 77.0 71.3 77.3
Depreciation, depletion and road
amortization (1) . . . . . . . . . . . . . . 37.3 28.8 23.3 21.9 17.3
Cost of timber and property sales (1) - 2.6 - 5.9 8.7
Operating income (loss) (1) . . . . . . . . . . (14.1) 17.9 27.2 16.3 27.3
Income (loss) before extraordinary
items . . . . . . . . . . . . . . . . . . (36.6) (4.1) 6.4 (6.4) (1.4)
Extraordinary items, losses on
extinguishment of debt (4). . . . . . . . . - - - 9.3
Income (loss) before general partner
and minority interest . . . . . . . . . . . (36.6) (4.1) 6.4 (6.4) (10.7)
PER UNIT DATA :
Basic income (loss) before
extraordinary items per unit:
Common . . . . . . . . . . . . . . . . . . (2.79) (0.31) 0.48 (0.49) 3.05
Subordinated . . . . . . . . . . . . . . . (2.79) (0.31) 0.48 (0.49) (1.01)
Basic net income (loss) per unit:
Common . . . . . . . . . . . . . . . . . . (2.79) (0.31) 0.48 (0.49) (0.86)
Subordinated . . . . . . . . . . . . . . . (2.79) (0.31) 0.48 (0.49) (2.30)
BALANCE SHEET DATA (AT
PERIOD END, IN MILLIONS):
Working capital . . . . . . . . . . . . . . . . (1.7) 2.0 2.4 1.4 1.8
Total assets . . . . . . . . . . . . . . . . . 254.4 300.9 327.7 350.7 385.2
Long-term debt (4)(6) . . . . . . . . . . . . . 225.0 225.0 225.0 225.0 225.0
Equity (deficit) . . . . . . . . . . . . . . . 24.4 67.1 97.2 116.9 145.6
OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
volumes (MMBF) (1) . . . . . . . . . . . . . 250.7 243.7 187.3 144.5 138.9
Property sales volumes (MMBF) (1) . . . . .. . . - 13.6 - 26.6 41.5
13
(1) Revenues in 2001 consist of $54.1 million of log, stumpage and deed sales,
$0.0 million of timber and property sales and $0.4 million of by-products
and other sales. Revenues in 2000 consist of $72.3 million of log, stumpage
and deed sales, $2.8 million of timber and property sales and $0.6 million
of by-products and other sales. Revenues in 1999 consist of $76.6 million
of log and stumpage 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."
(2) 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.
(3) 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."
(4) On July 14, 1997 the Company retired certain borrowings under the Operating
Company's then existing revolving credit facility term loan which resulted
in an extraordinary loss on extinguishment 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.
(5) 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."
(6) See discussion of long-term debt at Note 7 of the Notes to Consolidated
Financial Statements.
14
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.
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.
15
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.
Prior to 1998, the low supply of timber from public lands, which is expected to
continue for the foreseeable future, benefited private timber holders such as
the Company through higher stumpage and log prices. Since 1998, the strength of
the U.S. dollar has decreased exports and increased imports and has equalized
the supply and demand equation and contributed to the general downward trend of
prices Certain market conditions for finished products have also negatively
impacted stumpage and log prices in 2001.
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 maintain supply of domestic produced logs and have kept prices from
increasing.
In response to an increase in domestic 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 2001 were up slightly from 2000
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.
Prices for Pine 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 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 has had 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 expired on March 31, 2001, has not had a
material impact on the price or demand for logs in the United States. The United
States and Canada are presently negotiating a new softwood lumber agreement even
though it has been recommended that a 30% tariff be imposed on Canadian softwood
lumber. The long term effect of not having an agreement or having a new
agreement is uncertain.
16
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 have generally declined with market
conditions.
Current Market Conditions
While log prices in the Company's market area were down 6.5% between
the fourth quarter of 2000 and the first quarter of 2001 and decreased again by
12% in the second quarter, prices showed some improvement in the third and
fourth quarters.
The average log price realizations in 2001 were down to $349 per MBF
from $393 per MBF in 2000 (-11%) continuing a trend where average prices
declined 9.8% between 1999 and 2000. During 2001 realizations on timber deeds
were down to $160 per MBF from $249 per MBF in 2000 (-36%). This decrease
follows a decrease in timber deed realizations of 35% in 2000.
17
Results of Operations
The following table sets forth sales volume for each of 2001, 2000 and
1999 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)
------ ---- -------- ----- ---- -------- ----- ------------
2001
Year ended 12/31 74,640 - 176,105 $ 349 $ 160
4th Quarter 15,827 - 48,838 $ 361 - $ 158
3rd Quarter 27,984 - 83,899 $ 347 - $ 173
2nd Quarter 9,890 - 28,624 $ 313 - $ 138
1st Quarter 20,939 - 14,744 $ 357 $ - $ 133
2000
Year ended 12/31 96,112 503 147,083 $ 393 $ 379 $ 246 $ 2,773
4th Quarter 38,922 - 57,844 $ 382 -- $ 174 $ 2,773
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 -
18
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues. Revenues decreased $21.0 million, or 28%, from $75.6 million
in 2000 to $54.6 million in 2001. The decrease is primarily attributable to a
decrease in log sales of $11.8 million and a $6.4 million decrease in stumpage
sales and deed sales, and the fact that the Company had a $2.8 million dollar
timber and property sale in 2000. To meet its working capital requirements, the
Company harvested and sold logs and stumpage in 2001 at rates in excess of the
estimated current annual board footage growth on the Timberlands.
Log sales for 2001 were $26.0 million on volumes of 74,640 MBF,
compared to log sales of $37.8 million on volumes of 96,112 in 2000. The average
log sales price for 2001 was $349 compared to an average log sales price of $393
in 2000, an 11% decrease, reflecting weaker markets for the Company's log sales.
Timber deed sales for 2001 were $28.1 million on volumes of 176,105
MBF, compared to timber deed revenue of $34.3 million on volumes of 147,083 MBF
in 2000. The average timber deed sales price per MBF for 2001 was $160 compared
to an average timber deed sales price of $246 in 2000, a 35% decrease. The
significant decrease in timber deed sales realization is due to overall declines
in market conditions, as well as a change in the timber mix being sold in timber
sales.
There were no stumpage sales for 2001, compared with stumpage sales of
$0.2 million on volumes of 503 MBF in 2000. 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 no revenue from timber and property sales in 2001
compared to $2.8 million in revenue from timber and property sales during 2000.
Gross Profit. Gross profit decreased along with revenues by $23.7
million from $24.3 million in 2000 to $0.6 million in 2001 and gross margin
decreased from 32% in 2000 to 1% in 2001. The decrease in gross margin was
primarily from three factors. First, contracted log and haul costs on a per MBF
basis were higher during 2001 as compared to 2000 due to longer hauls for
delivered logs. Second, the Company's timber deed sales were composed of a
different value grade mix as compared to 2000. Finally, continued declines in
the timber markets have resulted in lower realizations on delivered log and
stumpage values. Depletion, depreciation and road amortization increased from
$28.8 million in 2000 to $37.3 million in 2001 due to increased volume of timber
sales, increases in depletion rates effective January 1, 2001 and increased
volume of timber sold from a separate pool with a higher depletion rate.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $8.3 million in 2001, consistent with selling,
general and administrative expenses of $8.4 million in 2000. Within selling,
general and administrative, most categories of expenses were down. Salaries and
wages were down $1.0 million due to the elimination of the annual bonuses of
$0.6 million, management positions that were vacant for a portion of the year of
$0.2 million, and a settlement with previous employee of $0.2 million in 2000.
Those decreases were offset by increases in professional services of $1.2
million over 2000, relating to the cost of advisors for the independent
committee.
Equity in Net Income (Loss) of Affiliate. The equity in net loss of
affiliate was $6.4 million during 2001 as compared to equity in net income of
affiliate of $2.0 million in 2000. The loss in 2001 reflects the Company's share
of losses absorbed from its common and preferred investment in U.S. Timberlands
Yakima, LLC. and the income in 2000 reflects the recapture of $0.6 million in
losses previously absorbed by its preferred investment in U.S. Timberlands
Yakima, LLC and the Company's accrued return of $1.4 million on its preferred
investment See "Investment in Affiliate" included in Note 9 of the Financial
Statements for an explanation of the preferred and common investments in U.S.
Timberlands Yakima, LLC.
Interest Expense. Interest expense was $22.0 million in 2001 and $21.9
million in 2000 consisting primarily of interest expense on the Company's $225.0
million of Senior Notes.
Other Income (Expense), net. Other income, net, was $0.1 million for
2001, compared to $0.2 million for 2000, representing a decrease in income of
$0.1 million.
Cash Flow From Operations. During 2001, cash flow from operations
decreased $19.7 million or 68% over 2000, primarily because of a $32.1 million
decrease in net income.
19
Partners' Capital
During 2001, the limited partner interest in the Company declined $42.2
million from $66.4 million to $24.2 million. This decline was the result of
distributions to Unitholders of $6.4 million during 2001, as well as the limited
partners' share of the Company's net loss of $35.8 million in 2001. The General
Partner interest in the Company also declined during 2001 reflecting its share
of the Company's distributions and net loss for 2001. The Company anticipates
that partners' capital will continue to decline given current operating
conditions.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues. Revenues decreased $1.4 million, or 2%, from $77.0 million in
1999 to $75.6 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 $2.8 million 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 10% decrease, reflecting weaker markets for the Company's log sales.
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 $258 compared
to an average timber deed sales price of $379 in 1999, a 32% 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 were 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 $2.8 million in revenue from timber and property sales
in 2000 compared to no revenue from timber and property sales during 1999.
Gross Profit. Gross profit decreased $12.3 million from $36.6 million
in 1999 to $24.3 million in 2000 and gross margin decreased from 48% in 1999 to
32% 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.
20
Equity in Net Income (Loss) of Affiliate. The equity in net income of
affiliate was $2.0 million during 2000 as compared to equity in net loss of
affiliate of $0.9 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. During 1999, the Company absorbed $0.3 million in losses
on its common investment in U.S. Timberlands Yakima, LLC and $0.6 million in
losses absorbed by its preferred investment in U.S. Timberlands Yakima, LLC. See
"Investment in Affiliate" included in Note 9 of the Financial Statements for
explanation of the preferred and common investments in U.S. Timberlands Yakima,
LLC.
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% over 1999 primarily because of a $10.4 million
decrease in net income, which was more than offset by the add back of non-cash
items and changes in assets and liabilities.
Partners' Capital
During 2000, the limited partner interest in the Company declined $29.8
million from $96.2 million to $66.4 million. This decline was the result of
distributions to Unitholders of $25.8 million during 2000, as well as the
limited partners' share of the Company's net loss of $4.0 million in 2000. The
General Partner interest in the Company also declined during 2000 reflecting its
share of the Company's distributions and net loss for 2000. The Company
anticipates that partners' capital will continue to decline given current
operating conditions.
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,
2001, the Company had a cash balance of $1.1 million and had $1.7 million
working capital deficit.
Operating Activities. Cash flows provided by operating activities in
2001 were $9.2 million, compared to cash flows provided by operating activities
of $28.9 million in 2000. The $19.7 million decrease in cash flows provided by
operating activities was primarily attributable to a $32.1 million increase in
net loss.
Investing Activities. Cash flows used in investing activities were $4.7
million in 2001, as compared to cash flows used in investing activities of $2.3
million during 2000 principally for reforestation, timber acquisitions and road
additions in each year.
Financing Activities. Cash flows used in financing activities were
$26.2 and $6.6 million in 2000 and 2001. During 2000 and 2001, the Company paid
$26.2 and $6.6 million in distributions to Unitholders, General Partner and
minority interest. Beginning in the second quarter of 2001, the Company ceased
making distributions to its Unitholders.
21
Notes
On November 14, 1997, the Operating Company issued $225.0 million
aggregate principal amount of Notes (the "Notes") representing unsecured general
obligations of the Operating Company which bear interest at 9 5/8% per annum,
payable semiannually in arrears on May 15 and November 15. The Notes mature on
November 15, 2007 unless previously redeemed. The Notes do not require any
mandatory redemption or sinking fund payments prior to maturity and are
redeemable at the option of the Operating Company in whole or in part, on or
after November 15, 2002, at predetermined redemption prices plus accrued
interest to the redemption date. 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 Operating Company and
its subsidiaries, including limitations on the ability of the Operating Company
and its subsidiaries to, among other things, (i) incur additional indebtedness
(other than certain permitted indebtedness) unless the Operating Company's
Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is
greater than 2.25 to 1.00, and (ii) make distributions to the Company, make
investments (other than permitted investments) in any person, create liens,
engage in transactions with affiliates, suffer to exist any restrictions on the
ability of a subsidiary to make distributions or repay indebtedness to the
Company, engage in sale and leaseback transactions, enter into a merger,
consolidation or sale of all or substantially all of its assets, sell assets or
harvest timber in excess of certain limitations or engage in a different line of
business. Under the Indenture, the Operating Company will be permitted to make
cash distributions to the Company so long as no default or event of default
exists or would exist upon making such distribution (a) if the Operating
Company's Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture)
is greater than 1.75 to 1.00, in an amount, in any quarter, equal to Available
Cash (as defined in the Indenture) for the immediately preceding fiscal quarter
or (b) if the Operating Company's Consolidated Fixed Charge Coverage Ratio is
equal to or less than 1.75 to 1.00, in an aggregate amount not to exceed (i)
$7.5 million less the aggregate of all restricted payments made under this
clause (b)(i) during the immediately preceding 16 fiscal quarters (or shorter
period, if applicable, beginning on the issue date of the Notes), plus (ii) the
net proceeds of certain capital contributions (including the sale of Units)
received by the Company. The Operating Company was not in compliance with these
fixed charge coverage tests at December 31, 2001 and is therefore not permitted
to make any cash distributions to the Company. Accordingly, the Company is not
able to make distributions to its Unitholders.
Affiliate Credit Facility
During the second quarter of 2001, the Company renewed its existing
credit agreement with an affiliate of the General Partner ("Affiliate Credit
Facility"). The Affiliate Credit Facility allows the Company to borrow up to
$12.0 million. The Affiliate Credit Facility will expire on April 30, 2002. At
that time, amounts borrowed will be due and payable. As of December 31, 2001,
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 2002. 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 Operating
Company will be permitted to make quarterly cash distributions to the Company in
an amount not to exceed Available Cash (as defined in the Affiliate Credit
Facility) in the preceding quarterly period.
22
Capital Expenditures/Cash Distributions
Capital expenditures in 2001 totaled $5.6 million. The Company
purchased timber cutting rights from its affiliate for approximately 17.2 MMBF
of timber for $4.5 million. The remaining $1.1 million in capital expenditures
incurred were mainly in the nature of land management/silviculture costs.
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/silviculture 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 $1.1 million in 2002. Capital
expenditures will consist primarily of capitalized silviculture costs and
miscellaneous equipment purchases.
Cash required to meet the Company's debt service will be significant.
To meet its working capital requirements, the Company has been selling logs and
making timber sales at a rate in excess of the General Partner's estimate of the
current annual board footage growth on the Company's timberlands. The debt
service and, prior to the first quarter of 2001, 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 does not expect to make cash distributions. 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 2001, management amended its offer to take the company
private, reducing the offer to a total of $3.75 per unit, $1.875 in cash and
$1.875 in 7 year notes. As of this date, the offer is being reviewed by the
independent committee.
New Accounting Standard - SFAS No. 133
In June 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. Although the Company
had no outstanding derivative positions at December 31, 2001, it has absorbed a
loss of approximately $146 from its allocable share of the effect of adoption of
SFAS 133 by its equity basis investee, U.S. Timberlands Yakima, LLC, to reduce
the carrying value of an interest rate cap agreement to its fair value.
23
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.
24
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partner manages and operates the activities of the
Company. As is commonly the case with publicly traded limited partnerships, the
Company does not directly employ any of the persons responsible for managing or
operating the Company. In general, the management of the General Partner manages
and operates the Company's business as officers and employees of the General
Partner and its affiliates. The Unitholders do not directly or indirectly
participate in the management or operation of the Company.
In January 1999, the General Partner appointed William A. Wyman and
Alan B. Abramson, two members of the General Partner's Board of Directors who
are neither officers, employees or security holders of the General Partner nor
directors, officers, or employees of any affiliate of the General Partner, to
serve on the General Partner's Conflicts Committee. The Conflicts Committee has
the authority to review specific matters as to which the Board of Directors
believes there may be a conflict of interest in order to determine if the
resolution of such conflict proposed by the General Partner is fair and
reasonable to the Company. Any matters approved by the Conflicts Committee will
be conclusively deemed to be fair and reasonable to the Company, approved by all
partners of the Company and not a breach by the General Partner or its Board of
Directors of any duties they may owe the Company or the Unitholders. The Board
of Directors also has an audit committee (the "Audit Committee") composed of the
two independent directors as well as George R. Hornig, which reviews the
external financial reporting of the Company, recommends engagement of the
Company's independent public accountants and reviews the Company's procedures
for internal auditing and the adequacy of the Company's internal accounting
controls. The Board of Directors also has a compensation committee (the
"Compensation Committee"), consisting of five directors, including the two
independent directors, which determines the compensation of the officers of the
General Partner and administers its employee benefit plans. In addition, the
Board of Directors has a Long-Term Incentive Plan Committee (the "LTIP
Committee"), which consists of four directors, including the two independent
directors, which acts with respect to the Company's Long-Term Incentive Plan. As
of May 2001, the Board of Directors formed an independent committee to evaluate
management's proposal regarding the offer to take the Company private. William
A. Wyman and Alan B. Abramson are members of the independent committee.
25
Directors, Executive Officers and Key Employees of the General Partner
The following table sets forth certain information with respect to the
members of the Board of Directors of the General Partner, its executive officers
and certain key employees. Executive officers and directors are elected for
one-year terms.
Name Age Position with General Partner
- ------------------------------------------------------------------------------------------------------------------------------------
John M. Rudey 58 Chairman, Chief Executive Officer, President and Director (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Aubrey L. Cole 78 Director (2)
- ------------------------------------------------------------------------------------------------------------------------------------
George R. Hornig 47 Director (3)
- ------------------------------------------------------------------------------------------------------------------------------------
William A. Wyman 63 Director (4)
- ------------------------------------------------------------------------------------------------------------------------------------
- - Alan B. Abramson 56 Director (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Robert F. Wright 76 Director (6)
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas C. Ludlow 55 Vice President and Chief Financial Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Martin Lugus 61 Vice President, Timberland Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Robert B. Longo 48 Corporate Controller
- ------------------------------------------------------------------------------------------------------------------------------------
Walter L. Barnes 59 Assistant Vice President, Harvesting
- ------------------------------------------------------------------------------------------------------------------------------------
Robert A. Broadhead 50 Assistant Vice President, Marketing
- ------------------------------------------------------------------------------------------------------------------------------------
Jay Jeffrey Vermilya 45 Assistant Vice President, Planning
- ------------------------------------------------------------------------------------------------------------------------------------
Christopher J. Sokol 52 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 ,
LTIP and Independent Committees.
(5) Member of the Audit, Conflicts, Compensation (Chairman), LTIP and
Independent Committees.
(6) Member of the Nominating, Finance and LTIP (Chairman) Committees.
26
John M. Rudey serves as Chairman, Chief Executive Officer, President
and as a Director of the General Partner. Since 1992, Mr. Rudey has served as
Chief Executive Officer of Garrin Properties Holdings, Inc., a private
investment company that manages and advises investment portfolios principally
concentrated in the timber and forest products industries and in real estate.
Aubrey L. Cole serves as a Director of the General Partner. Since 1989,
Mr. Cole has been a consultant for Aubrey Cole Associates, a sole proprietorship
which provides management consulting services and makes investments. From 1986
to 1989, Mr. Cole was the Vice Chairman of the Board and Director of Champion
International Corporation (a publicly traded forest products company) and from
1983 to 1993, Mr. Cole was the Chairman of Champion Realty Corporation (a land
sales subsidiary of Champion International).
George R. Hornig serves as a Director of the General Partner. Since
1999, Mr. Hornig has been Managing Director of Credit Suisse First Boston's
Private Equity Division. From 1993 to 1999, Mr. Hornig was an Executive Vice
President of Deutsche Bank Americas Holdings, Inc. (the United States arm of
Deutsche Bank, a German banking concern) and affiliated predecessor entities.
From 1991 to 1993, Mr. Hornig was the President and Chief Operating Officer of
Dubin & Swieca Holdings, Inc., an investment management business. From 1988 to
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 General Partner, having
been elected to the Board in January 1999. Mr. Wyman is a former President of
the Management Consulting Group of Booz, Allen & Hamilton. Mr. Wyman joined Booz
Allen in 1965, as a consultant to a variety of service, natural resources and
manufacturing and financial companies. In 1984, he formed his own consulting
firm, Oliver, Wyman & Company, to provide strategic and operating counsel to
large financial institutions. Since his retirement in 1995, he has been working
as a counselor to Chief Executives of several companies. He is a Director of
Predictive Systems Inc, Pegasystems Inc., and Internosis, Inc, and serves on the
Board of Advisors for The Sprout Group, a venture capital partnership, and
Castle Harlan Inc., a buyout partnership.
Alan B. Abramson serves as a Director of the General Partner, having
been elected to the Board in January 1999. Mr. Abramson is the President of
Abramson Brothers Incorporated, a real-estate management and investment firm,
where he has been employed since 1972. He serves as a Director of Datascope,
Inc., a medical technology company.
Robert F. Wright serves as a Director of the General Partner. Since
1988, Mr. Wright has served as President and Chief Executive Officer of Robert
F. Wright Associates, Inc., a firm making strategic investments and providing
business consulting services. Previously, Mr. Wright spent 40 years, 28 years as
a partner, at Arthur Andersen & Co. Mr. Wright is a director of the following
companies: Reliance Standard Life Insurance Co. and affiliates (life insurance
companies), The Navigators Group Inc. (a property insurance company), Universal
American Financial Corp. (an insurance company), C.D.G. Technology Inc. (growth
stage systems and suppliers to water utilities) 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 General Partner 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. .
Martin Lugus serves as Vice President - Timberland Operations of the
General Partner, responsible for all land management and operations on fee
lands. Mr. Lugus was employed by Weyerhaeuser for 28 years, during which time he
served as Forestry Manager from 1981 to 1991 and Timberlands Manager from 1991
to 1996 and then for the General Partner in his current role.
27
Key Employees
Walter L. Barnes serves as Assistant Vice President - Harvesting of the
General Partner, responsible for all solid wood logging and fiber operations.
From 1993 to 1996, prior to joining the General Partner, Mr. Barnes acted as the
Operations Harvest Manager for Weyerhaeuser. Mr. Barnes was employed by
Weyerhaeuser for 28 years and has extensive experience managing different
harvesting systems on both the East and West sides of the Cascade Range.
Robert A. Broadhead serves as Assistant Vice President - Marketing of
the General Partner since 1996, responsible for all log and stumpage sales
transactions. Prior to joining the General Partner 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.
Robert B. Longo serves as the Corporate Controller of the General
Partner, responsible for accounting functions. Prior to joining the General
Partner in 2001, Mr. Longo was Chief Financial Officer of Desert Lake
Technologies, LLC and The New Algae Company, Inc. From 1980 to 1995, Mr. Longo
held various financial and management positions at American Cyanamid Company.
Jay Jeffrey Vermilya serves as Assistant Vice President - Planning of
the General Partner, responsible for all harvest planning as well as operating
and developing the inventory and GIS systems. From 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 General Partner 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 General Partner, responsible for forestry operations, environmental
relationships, harvest prescriptions and nursery/orchard operations. Prior to
joining the General Partner in 1996, Mr. Sokol was employed by Weyerhaeuser for
22 years and gained additional experience in forest regeneration and timber
sales while serving as District Forester from 1982 to 1991 and as Forestry
Manager thereafter.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the General Partner's officers and directors, and persons who own more
than 10% of a registered class of equity securities of the Company, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the NASDAQ National Market. Officers, directors and greater than
ten percent security holders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based on its review of the copies of such forms received by it, or
written representations regarding ownership of the Company's securities, the
Company believes that during the fiscal year 2001, all filings required were
properly made.
28
Item 11. Executive Compensation
The Company and the General Partner were formed in June 1997. Under the
terms of the Partnership Agreement, the Company is required to reimburse the
General Partner for expenses relating to the operation of the Company, including
salaries and bonuses of employees employed on behalf of the Company, as well as
the costs of providing benefits to such persons under employee benefit plans and
for the costs of health and life insurance.
The following table sets forth annual salary, bonus and all other
compensation awards and payouts earned by the General Partner's Chief Executive
Officer and the four most highly compensated executive officers who earned in
excess of $100,000 (the "Named Executive Officers") for services rendered during
the fiscal year ended December 31, 2001:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation
Compensation Awards
Securities
Name and Principal Fiscal Underlying All Other
Position Year Salary ($) Bonus ($) Options/SARs(#) Compensation
-------- ---- ---------- --------- --------------- ------------
John M. Rudey 2001 $ 463,500 $ -- -- --
Chairman and 2000 463,500 256,750 -- --
Chief Executive Officer 1999 450,000 225,000 50,000 --
- -----------------------------------------------------------------------------------------------------------------------------------
Thomas C. Ludlow 2001 225,000 -
Vice President and 2000 80,208 75,000 50,000 --
Chief Financial Officer 1999 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Martin Lugus 2001 123,600 --
Vice President - Timberland 2000 123,600 30,900 -- --
1999 120,000 35,000 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Walter L. Barnes 2001 97,850 --
Assistant Vice President 2000 97,850 24,463 -- --
- Harvesting 1999 95,000 23,750 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Robert A. Broadhead 2001 92,700 -
Assistant Vice President 2000 92,700 23,175 -- --
- Marketing 1999 90,000 22,500 -- --
29
Long-Term Incentive Plan
The General Partner has adopted the U.S. Timberlands Company, LP
Amended and Restated 1997 Long-Term Incentive Plan (the "Long-Term Incentive
Plan") for key employees and directors of the General Partner and its
affiliates. The summary of the Long-Term Incentive Plan contained herein does
not purport to be complete and is qualified in its entirety by reference to the
Long-Term Incentive Plan, which is filed as an exhibit to the Company's Form S-1
Registration Statement. The Long-Term Incentive Plan consists of two components,
a unit option plan (the "Unit Option Plan") and a restricted unit plan (the
"Restricted Unit Plan"). The Long-Term Incentive Plan currently permits the
grant of Unit Options and Restricted Units covering an aggregate of 857,748
Common Units.
Unit Option Plan. The Unit Option Plan currently permits the grant of
options ("Unit Options") covering 857,748 Common Units. Unit Options granted
during the Subordination Period will become exercisable automatically upon, and
in the same proportions as, the conversion of the Subordinated Units to Common
Units. If a grantee's employment is terminated by reason of his death,
disability or retirement, the grantee's Unit Options will become immediately
exercisable. In addition, a grantee's Unit Options will become immediately
exercisable in the event of a "change of control" of the Company (as defined in
the Long-Term Incentive Plan).
Upon exercise of a Unit Option, the General Partner will acquire Common
Units in the open market at a price equal to the then-prevailing price on the
principal national securities exchange upon which the Common Units are then
traded, or directly from the Company or any other person, or use Common Units
already owned by the General Partner, or any combination of the foregoing. The
General Partner will be entitled to reimbursement by the Company for the
difference between the cost incurred by the General Partner in acquiring such
Common Units and the proceeds received by the General Partner from an optionee
at the time of exercise. Thus, the cost of the Unit Options will be borne by the
Company. If the Company issues new Common Units upon exercise of the Unit
Options, the total number of Units outstanding will increase and the General
Partner will remit the proceeds received from the optionee to the Company.
The Unit Option Plan has been designed to furnish additional
compensation to key executives and key directors and to increase their
proprietary interest in the future performance of the Company measured in terms
of growth in the market value of Common Units.
There were no option grants to the named executive officers during
fiscal 2001.
30
The following table sets forth certain information with respect to the
aggregate number and value of options at the fiscal year-end 2001:
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
December 31, 2001 December 31, 2001
Shares ----------------- -----------------
Acquired
Name on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------
John M. Rudey -- $ -- 39,304 117,914 $ -- N/A (1)
Thomas C. Ludlow -- $ -- 12,500 37,500 $ -- N/A (1)
Martin Lugus -- $ -- 16,083 48,248 $ -- N/A (1)
Walter L. Barnes -- $ -- 8,577 25,733 $ -- N/A (1)
Robert A. Broadhead -- $ -- 8,577 25,733 $ -- N/A (1)
(1) At the close of trading on December 31, 2001, the market value of the
Common Units was $1.66 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.
Restricted Unit Plan. A Restricted Unit is a "phantom" unit that
entitles the grantee to receive a Common Unit upon the vesting of the phantom
unit. No grants have been made under the Restricted Unit Plan. The LTIP
Committee may, in the future, determine to make grants under such plan to key
employees and directors containing such terms as the Committee shall determine.
Restricted Units granted during the Subordination Period will vest automatically
upon, and in the same proportions as, the conversion of the Subordinated Units
to Common Units. Common Units to be delivered upon the "vesting" of rights may
be Common Units acquired by the General Partner in the open market, Common Units
already owned by the General Partner, Common Units acquired by the General
Partner directly from the Company or any other person, or any combination of the
foregoing. The General Partner will be entitled to reimbursement by the Company
for the cost incurred in acquiring such Common Units. If the Company issues new
Common Units, the total number of Units outstanding will increase and the
Company will receive no remuneration.
The issuance of the Common Units pursuant to the Restricted Unit Plan
is intended to serve as a means of incentive compensation for performance and
not primarily as an opportunity to participate in the equity appreciation in
respect of the Common Units. Therefore, no consideration will be payable by the
plan participants upon vesting and issuance of the Common Units.
The General Partner's Board of Directors in its discretion may
terminate the Long-Term Incentive Plan at any time with respect to any Common
Units or Unit Options for which a grant has not theretofore been made. The
General Partner's Board of Directors will also have the right to alter or amend
the Long-Term Incentive Plan or any part thereof from time to time; provided,
however, that no change in any outstanding grant may be made that would impair
the rights of the participant without the consent of such participant.
31
Compensation of Directors
Compensation for Directors of the General Partner covers services
rendered for both the Company and the Operating Company. No additional
remuneration will be paid to employees who also serve as directors. Each
independent director receives $50,000 annually, for which they each agree to
participate in four regular meetings of the Board of Directors and four
Audit/Conflicts Committee meetings. Each other non-employee director receives
$50,000 annually (to be paid in cash or Subordinated Units, as determined by
each director), for which they each agree to participate in four regular
meetings of the Board of Directors. Each non-employee director will receive
$1,250 for each additional meeting in which he participates. In addition, each
non-employee director will be reimbursed for his out-of-pocket expenses in
connection with attending meetings of the Board of Directors or committees
thereof. Each director will be fully indemnified by the Company for his actions
associated with being a director to the extent permitted under Delaware law.
The General Partner has entered into consulting agreements with each of
Aubrey Cole Associates (a consulting firm affiliated with Mr. Cole), Robert F.
Wright Associates, Inc. (a consulting firm affiliated with Mr. Wright) and Mr.
Hornig pursuant to which each such person or firm provides consulting services
to the General Partner. Each such agreement provides for an annual retainer of
$25,000, plus $150 per hour (with a maximum per diem of $1,200) for services
rendered at the request of the General Partner. In addition, the General Partner
entered into a consulting agreement with Mr. Wyman that provides for an annual
retainer of $50,000 for services rendered at the request of the General Partner.
Each consulting agreement will be reviewed annually by a majority of the
directors who do not have consulting agreements.
The Company paid approximately $98,000, $129,000, and $117,000 to the
Directors of the General Partner for consulting services during 2001, 2000 and
1999, respectively.
Employment Agreements
The General Partner has entered into an employment agreement with Mr.
Rudey (the "Executive"). The agreement has a term expiring on December 31, 2002,
and includes confidentiality and non-compete provisions.
The agreement provides for an annual base salary of $450,000, subject
to such increases as the Board of Directors of the General Partner may authorize
from time to time. 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 General Partner may provide for its
employees in general.
The agreement provides that in the event the Executive's employment is
terminated without "Cause" (as defined in the Employment Agreements) or if the
Executive terminates his employment for "Good Reason" (as defined below), such
individual will be entitled to receive a severance payment in an amount equal to
his base salary for the remainder of the employment term under the Employment
Agreement or 12 months, whichever is less, plus a prorated bonus for the year of
such termination calculated based on the bonus being equal to 100% of base
salary. In the event of termination due to death or disability, the Executive
will be entitled to accrued salary and benefits up to the date of the
termination. In the event the individual's employment is terminated for "Cause,"
he will receive accrued salary and benefits up to the date of termination.
32
Good Reason is defined in the agreement generally as: (i) failure of
the General Partner's members to elect or re-elect the Executive to the Board of
Directors, (ii) failure of the General Partner to vest in the Executive the
position, duties and responsibilities contemplated by his Employment Agreement,
(iii) failure of the General Partner to pay any portion of the Executive's
compensation, (iv) any material breach by the General Partner of any material
provision of the Employment Agreement and (v) a material reduction in the
individual's duties, responsibilities or status upon a "change of control" as
defined in the Employment Agreement. "Cause" is defined generally as: (i) any
felony conviction, (ii) any material breach by the Executive of a material
written agreement between the Executive and the Company, (iii) any breach caused
by the Executive of the Partnership Agreement, (iv) any willful misconduct by
the Executive materially injurious to the Company, (v) any willful failure by
the Executive to comply with any material policies, procedures or directives of
the Board of Directors of the General Partner or (vi) any fraud,
misappropriation of funds, embezzlement or other similar acts of misconduct with
respect to the Company.
Committee Interlocks and Insider Participation in Compensation Decisions
The Compensation Committee of the General Partner is composed of
Messrs. Rudey, Abramson, Wyman, Hornig and Cole. Mr. Rudey also serves as
Chairman of the General Partner.
The duties of the Compensation Committee are to (i) determine the
annual salary, bonus and benefits, direct and indirect, of all executive
officers, (ii) review and recommend to the full Board any and all matters
related to benefit plans covering the foregoing officers and any other employees
and (iii) serve as the 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.
33
Performance Table
The table below compares the total return of the Common Units of the
Company (TIMBZ) from November 1997 through December 2001 with the Wilshire 5000
Index (WFKX) and a portfolio (TIMBER) consisting of Boise Cascade Corporation,
Plum Creek Timber Co., LP and Crown Pacific Partners, LP.
TIMBZ Wilshire 5000 Timber Index
November 1997 100.0 100.0 100.0
December-97 97.1 101.9 94.4
December-98 69.2 125.7 92.9
December-99 60.0 155.4 106.8
December-00 50.6 138.4 102.9
December-01 13.3 141.0 118.7
34
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 28, 2002, the beneficial
ownership of Units held by (i) beneficial owners of five percent or more of the
Units (ii) directors and executive officers of the General Partner and (iii) all
directors and executive officers of the General Partner as a group.
Percentage of
Percentage of Subordinated Subordinated Percentage of
Common Units Common Units Units Units Total Units
Beneficially Beneficially Beneficially Beneficially Beneficially
Name of Beneficial Owners Owned Owned Owned Owned Owned
------------------------- ----- ----- ----- ----- -----
U.S. Timberlands Holdings Group, LLC (1) 1,597,880 18.70% 3,140,162 73.3% 36.9%
John M. Rudey (2) 1,817,645 8.7% 3,140,162 96.7% 38.0%
Thomas C. Ludlow (3) 12,500 * -- -- *
George R. Hornig (4) 189,000 2.2% -- -- 1.8%
Robert F. Wright (5) 189,000 2.2% -- -- 1.5%
Aubrey L. Cole (6) 189,000 2.2% -- -- 1.5%
Alan B. Abramson (7) 12,500 * -- -- *
William A. Wyman (8) 12,500 * -- -- *
All Directors and Executive Officers
as a Group (7 persons) 1,906,490 19.8% 3,140,162 97.8% 39.2%
*- Less than 1% of class.
(1) Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.
(2) Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.
Includes 1,597,880 Subordinated Units and 3,140,162 Common Units owned
by Holdings Group. Mr. Rudey is attributed 100% beneficial ownership
of all units owned by Holdings Group through his interests therein .
Includes Common Units owned by John Rudey's minor children, and U.S.
Timberlands Service Company, LLC. In addition, Mr. Rudey's units
include all 189,000 of Common Units owned by U.S. Timberlands Services
Co., LLC. Mr. Rudey owns a 78.75% interest in U.S. Timberlands
Services Company, LLC, the Partnership's General Partner. Also
includes 39,305 Common Unit equivalents representing exercisable unit
options at April 15, 2002.
(3) Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.
Common Units beneficially owned are Common Unit equivalents
representing exercisable unit options at April 15, 2002..
(4) Current address is 1220 Park Avenue, New York, NY 10128. Includes all
189,000 Common Units owned by U.S. Timberlands Services Co., LLC. Mr.
Hornig owns a 16.25% interest in U.S. Timberlands Services Company,
LLC, the Partnership's General Partner. Also includes 39,305 Common
Unit equivalents representing exercisable unit options at March 30,
2002.
(5) Current address is 57 West 57th Street, Suite 704, New York, NY 10019.
. Includes all 189,000 Common Units owned by U.S. Timberlands Services
Co., LLC. Mr. Wright owns a 2.5% interest in U.S. Timberlands Services
Company, LLC, the Partnership's General Partner.
(6) Current address is 16825 Northchase Drive, Suite 800, Houston, TX
77060. . Includes all 189,000 Common Units owned by U.S. Timberlands
Services Co., LLC. Mr. Cole owns a 2.5% interest in U.S. Timberlands
Services Company, LLC, the Partnership's General Partner.
(7) Current address is 501 Fifth Avenue, New York, NY 10017. Common Units
beneficially owned are Common Unit equivalents representing
exercisable unit options at April 15, 2002.
(8) Current address is 4 North Balch Street, Hanover, NH 03755. Common
Units beneficially owned are Common Unit equivalents representing
exercisable unit options at March 30,2002.
35
All of the outstanding member interests in the General Partner are
owned by management, directors and related persons and entities. The members of
the General Partner are parties to an operating agreement, which, among other
things, provides that the member interests of management and directors who
retire, resign or otherwise terminate their relationship with the General
Partner will be repurchased by the General Partner. In addition, each member
other than affiliates of Mr. Rudey is provided certain "tag along" and "bring
along" rights with respect to sales of member interests in the General Partner
by Mr. Rudey's affiliates. See "Certain Relationships and Related
Transactions--Repurchase of Certain Member Interests; Severance Payments."
Item 13. Certain Relationships and Related Transactions
The Company is managed by the General Partner pursuant to the
Partnership Agreement. Under the Partnership Agreement the General Partner is
entitled to reimbursement of certain costs of managing the Company. These costs
included compensation and benefits payable to officers and employees of the
General Partner, payroll taxes, general and administrative expenses and legal
and professional fees.
Consulting Agreements
The General Partner has entered into consulting agreements with each of
Aubrey Cole Associates (a consulting firm affiliated with Mr. Cole), Robert F.
Wright Associates, Inc. (a consulting firm affiliated with Mr. Wright) and Mr.
Hornig pursuant to which each such person or firm provides consulting services
to the General Partner. Each such agreement provides for an annual retainer of
$25,000, plus $150 per hour (with a maximum per Diem of $1,200) for services
rendered at the request of the General Partner. Each consulting agreement will
be reviewed annually by a majority of the directors who do not have consulting
agreements. In addition, the General Partner entered into a consulting agreement
with Mr. Wyman that provides for an annual retainer of $50,000 for services
rendered at the request of the General Partner. See also Compensation of
Directors included in Item 11.
Investment in Affiliate
In October 1999, the Company made an investment in U.S. Timberlands
Yakima, LLC (USTY), an unconsolidated affiliate. USTY, an entity organized to
acquire timber properties located in Central Washington and Central Oregon, is
engaged in the growing of trees and sale of logs and standing timber to third
party wood processors. The Company contributed to USTY $294,000 of cash for 49%
of USTY's common interests (the "Common LLC Interests"). The remaining Common
LLC Interests were acquired for $306,000 in cash by U.S. Timberlands Holding
Group, LLC, a Delaware limited liability company in which John Rudey and George
Hornig, respectively, the Chairman of the Board and a director of the Company's
General Partner, hold a controlling interest. The Company also acquired all of
the senior preferred interests in USTY (the "Senior or Preferred LLC Interests")
for its contribution to USTY of timberlands consisting primarily of non-income
producing, pre-merchantable pine plantations having an agreed upon value of
$22.0 million. The Company recorded its investment in the Senior LLC interest at
its $18.9 million cost basis for the contributed timberlands. Terms of the
Preferred LLC Interests include a cumulative annual guaranteed return of 5% of
the $22.0 million agreed upon value of the contributed timberlands until
December 31, 2001 and 6% thereafter. The Preferred LLC Interests are redeemable
at USTY's option 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 Company
accounts for its Common LLC Interest by the equity method. A subsidiary of the
General Partner of the Company provides management services to USTY for a fee
equal to 2% of USTY's agreed upon assets under management.
36
During the twelve months ended December 31, 2001, the Company contributed
cutting rights and timberland located in Central Oregon to its affiliate, USTY.
The contributions have an aggregate agreed upon value of $18.5 million and were
added to the Company's Preferred Interest in USTY. Terms of the additional
senior preferred interest acquired are the same terms as the senior preferred
interest previously issued to the Company. The Company recorded its additional
preferred interest at its basis for the cutting rights and timberland of
approximately $16.3 million. All property that has been contributed for the
Company's preferred interest in USTY has been pledged as collateral by USTY
under its credit facility with its lender.
On April 15, 2001, the Company purchased timber cutting rights for approximately
17.2 million board feet from USTY for $4.5 million. These timber cutting rights
expire in March 2004.
On August 29, 2001 the Company sold timber cutting rights for approximately 80.6
million board feet to USTY for $12.0 million. These timber cutting rights expire
in August 2004.
In November 2001, USTK sold timber cutting rights for approximately 44.8 mbf to
U.S.T.Y. for $7.0 million. These cutting rights expire in October 2004.
Affiliate Credit Facility
See the description of the Affiliate Credit Facility included in the
Liquidity and Capital Resources section of Item 7.
37
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
+ 3.2 -- Second Amended and Restated Operating Agreement of U.S.
Timberlands Klamath Falls, LLC
+10.2 -- Indenture among U.S. Timberlands Klamath Falls, LLC, U.S.
Timberlands Finance Corp. and State Street Bank and Trust
Company, as trustee
+10.3 -- Contribution, Conveyance and Assumption Agreement among U.S.
Timberlands Company, L Pand 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 12, 2002.
(b) Reports on Form 8-K
One report dated November 13, 2001 on Form 8-K was filed during the
quarter ended December 31, 2001.
* 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.
38
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 12th day of
April 2002.
U.S. TIMBERLANDS COMPANY, LP
By: U.S. Timberlands Services Company, LLC
It's General Partner
By: /s/ John M. Rudey
----------------------------
John M. Rudey, Chairman, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ John M. Rudey Chairman, Chief Executive Officer, April 15, 2002
- -------------------------------------------- President and Director (Principal Executive
John M. Rudey Officer)
/s/ Thomas C. Ludlow Chief Financial Officer
- -------------------------------------------- April 15, 2002
Thomas C. Ludlow
/s/ Robert B. Longo Corporate Controller
- -------------------------------------------- (Principal Accounting Officer) April 15, 2002
Robert B. Longo
/s/ Aubrey L. Cole Director
- -------------------------------------------- April 15, 2002
Aubrey L. Cole
/s/ George R. Hornig Director
- -------------------------------------------- April 15, 2002
George R. Hornig
/s/ Alan B. Abramson Director
- -------------------------------------------- April 15, 2002
Alan B. Abramson
/s/ William A. Wyman Director
- -------------------------------------------- April 15, 2002
William A. Wyman
/s/ Robert F. Wright Director
- -------------------------------------------- April 15, 2002
Robert F. Wright
39
EXHIBIT INDEX
23.1 Consent of Richard A. Eisner & Company, LLP dated April 15, 2002.
40
CONSOLIDATED FINANCIAL STATEMENTS
Contents Page
Independent auditors' report F-2
Consolidated balance sheets as of December 31, 2001 and 2000 F-3
Consolidated statements of operations for the years ended December 31, 2001, 2000, and 1999 F-4
Consolidated statements of changes in partners' capital for the years ended December 31, 2001,
2000 and 1999 F-5
Consolidated statements of cash flows for the years ended December 31, 2001, 2000 and 1999 F-6
Notes to consolidated financial statements F-7
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Partners of
U.S. Timberlands Company, LP
We have audited the accompanying consolidated balance sheets of U.S. Timberlands
Company, LP and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, changes in partners' capital and cash
flows for each of the years in the three-year period ended December 31, 2001.
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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the financial position of U.S. Timberlands
Company, LP and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
Richard A. Eisner & Company, LLP
New York, New York
February 1, 2002, except as to the
final paragraph of Note 14, as
to which the date is March 15, 2002
F-2
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except unit information)
December 31,
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,070 $ 3,168
Accounts receivable, net 311 4,430
Other receivables 280 160
Notes receivable 1,153 2,285
Prepaid expenses and other current assets 225 35
-------- --------
Total current assets 3,039 10,078
Timber and timberlands, net 214,511 264,673
Investment in affiliate 31,609 20,542
Property, plant and equipment, net 811 926
Notes receivable, less current portion 428 --
Deferred financing fees, net 3,973 4,648
-------- --------
Total assets $254,371 $300,867
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 1,334 $ 1,222
Accrued liabilities 3,331 3,326
Deferred revenue -- 1,474
Payable to general partner and affiliate 41 2,065
-------- --------
Total current liabilities 4,706 8,087
-------- --------
Long-term debt 225,000 225,000
-------- --------
Commitments and contingencies
Minority interest 247 678
-------- --------
Partners' capital:
General partner interest 247 678
Limited partner interest (12,859,607 units issued and outstanding as of
December 31, 2001 and 2000) 24,171 66,424
-------- --------
24,418 67,102
-------- --------
Total liabilities and partners' capital $254,371 $300,867
======== ========
See notes to consolidated financial statements
F-3
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except unit and per unit amounts)
Year Ended December
2001 2000 1999
-------- -------- --------
Revenues:
Log, timber deed and stumpage sales,
including $19,015 (2001) and $2,900 (2000) to an affiliate $ 54,128 $ 72,268 $ 76,594
Property sales -- 2,773 --
By-products and other 436 571 400
-------- -------- --------
54,564 75,612 76,994
-------- -------- --------
Cost of products sold:
Cost of timber harvested (16,652) (19,853) (17,056)
Cost of property sales -- (2,641) --
Depletion, depreciation and road amortization (37,287) (28,816) (23,318)
-------- -------- --------
(53,939) (51,310) (40,374)
-------- -------- --------
Gross profit 625 24,302 36,620
Selling, general and administrative expenses (8,340) (8,428) (8,477)
Equity in net income (loss) of affiliate (6,403) 1,990 (901)
-------- -------- --------
Operating income (loss) (14,118) 17,864 27,242
Interest expense (21,993) (21,921) (21,937)
Amortization of deferred financing fees (675) (675) (675)
Interest income 101 403 565
Other income, net 131 208 1,162
-------- -------- --------
Income (loss) before general partner and minority interest (36,554) (4,121) 6,357
Minority interest 366 41 (64)
-------- -------- --------
Net income (loss) before general partner interest (36,188) (4,080) 6,293
General partner interest 366 41 (64)
-------- -------- --------
Net income (loss) applicable to common and
subordinated units $(35,822) $ (4,039) $ 6,229
======== ======== ========
Net income (loss) per each common and subordinated unit-
basic and diluted ($ 2.79) ($ 0.31) $ 0.48
======== ======== ========
Weighted-Average Units outstanding 12,859,607 12,859,607 12,859,607
See notes to consolidated financial statements
F-4
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Consolidated Statements of Changes in Partners' Capital
(in thousands, except per unit amounts)
General Partner Limited Partner Total
Interest Interest Partners' Capital
Balance, December 31, 1998 $ 1,180 $ 115,671 $ 116,851
Distributions to unitholders ($2.00 per unit) (263) (25,718) (25,981)
Net income 64 6,229 6,293
----------------------- ---------------------- --------------------
Balance, December 31, 1999 981 96,182 97,163
Distributions to unitholders ($2.00 per unit) (262) (25,719) (25,981)
Net loss (41) (4,039) (4,080)
----------------------- ---------------------- --------------------
Balance, December 31, 2000 678 66,424 67,102
Distributions to unitholders ($0.50 per unit) (65) (6,431) (6,496)
Net loss (366) (35,822) (36,188)
----------------------- ---------------------- --------------------
Balance, December 31, 2001 $ 247 $ 24,171 $ 24,418
======================= ====================== ====================
See notes to consolidated financial statements
F-5
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $(36,188) $ (4,080) $ 6,293
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion, amortization and cost of
timber and property sold 37,287 31,457 23,318
(Gain) loss on disposal of assets (2) (39) 66
Amortization of deferred financing fees 675 675 675
Equity in net (income) loss of affiliate 6,403 (1,990) 901
Other non-cash items 233 127 --
Minority interest (366) (41) 64
Changes in assets and liabilities:
Accounts receivable 4,119 (3,758) 855
Other receivables (120) (36) 989
Notes receivable 704 2,363 (3,469)
Prepaid expenses and other current assets (190) 946 (555)
Accounts payable 112 876 (387)
Accrued liabilities 5 40 (1,119)
Deferred revenue (1,474) 1,435 (1,575)
Payable to general partner and affiliate (2,024) 896 (553)
-------- -------- --------
Net cash provided by operating activities 9,174 28,871 25,503
-------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment -- (55) (44)
Proceeds from sale of assets 904 50 8
Timber and road additions (5,615) (2,253) (955)
Investment in affiliate -- -- (294)
-------- -------- --------
Net cash used in investing activities (4,711) (2,258) (1,285)
-------- -------- --------
Cash flows from financing activities:
Distributions to partners (6,496) (25,981) (25,981)
Distributions to minority interest (65) (262) (263)
-------- -------- --------
Net cash used in financing activities (6,561) (26,243) (26,244)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,098) 370 (2,026)
Cash and cash equivalents, beginning of period 3,168 2,798 4,824
Cash and cash equivalents, end of period $ 1,070 $ 3,168 $ 2,798
======== ======== ========
Supplemental cash flow information:
Cash paid for interest $ 22,033 $ 21,786 $ 21,746
Noncash activities:
Contribution of timberlands for investment in affiliate $ 16,289 $ -- $ 18,850
See notes to consolidated financial statements
F-6
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollar amounts in thousands, except per unit amounts)
10K as of apr11 tcl.doc F -10 1. Business and Significant Accounting Policies:
Business U.S. Timberlands Company, LP (the "MLP"), a Delaware limited
partnership, was formed in 1997 to acquire and own 99% of the equity interests
in U.S. Timberlands Klamath Falls, LLC ("USTK" and the "Operating Company") and
through the Operating Company to acquire and own the business and assets of U.S.
Timberlands Management Company, LLC, formerly known as U.S. Timberlands Services
Company, LLC. As used herein, "Company" refers to the consolidated entities of
the MLP and the Operating Company.
The primary activity of the Company is the growing of trees and the sale of logs
and standing timber to third party wood processors. The Company's timber is
located principally in Oregon, east of the Cascade Range. Logs harvested from
the timberlands are sold to unaffiliated domestic conversion facilities. These
logs are processed for sale as lumber, plywood and other wood products,
primarily for use in new residential home construction, home remodeling and
repair and general industrial applications.
U.S. Timberlands Services Company, LLC (the "General Partner" and "New
Services") manages the businesses of the MLP and the Operating Company. The
General Partner owns a 1% general partner interest in the MLP and a 1% general
partner interest in the Operating Company. All management decisions related to
the Company are made by the General Partner.
Consolidation
The accompanying consolidated financial statements include the accounts of the
MLP and its subsidiary, the Operating Company. All material intercompany
transactions and balances have been eliminated. An investment in an affiliate is
accounted for by the equity method (See Note 3).
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue on delivered log sales is recognized upon delivery to the customer.
Revenue on timber deeds, timber and property sales is 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.
F-7
1. Business and Significant Accounting Policies (Continued):
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts and notes receivable. The
majority of the Company's trade accounts and notes receivable are derived from
sales to third party wood processors. The Company's four largest, non-affiliated
customers accounted for approximately 22%, 7%, 6%, and 6% of the Company's
aggregate net revenues from log, stumpage, and timber deed sales for the year
ended December 31, 2001. In 2000, these customers represented approximately 14%,
8%, 2%, and 16%, respectively, of aggregate net revenues from log, stumpage and
deed sales. In 1999, these four customers accounted for approximately 13%, 4%,
0%, and 17% 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 periodically reviews its allowance for doubtful accounts and
reserves an estimated amount for such accounts. As of December 31, 2001 and 2000
the Company had an allowance for doubtful accounts of $100 and $550,
respectively.
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, primarily 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.
F-8
1. Business and Significant Accounting Policies (Continued):
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, 2001 and 2000 was $2,777 and $2,102, respectively.
Minority Interest
The General Partner holds a 1% ownership interest in the Operating Company (the
"Minority Interest"). A pro rata share of the Operating Company's results of
operations is allocated to the Minority Interest in the accompanying financial
statements.
Income Taxes
The MLP is a master limited partnership and USTK is a limited liability company
("LLC"). Accordingly, the MLP and the LLC are not liable for federal or state
income taxes since the MLP's and the LLC's income or loss is reported on the
separate tax returns of the individual Unitholders or members. Accordingly, no
provision for current or deferred income taxes has been reflected in the
accompanying financial statements.
Per Unit Information
Net income (loss) per unit is calculated using the weighted average number of
common and subordinated units outstanding, divided into net income (loss), after
adjusting for the 1% General Partner interest in the MLP. Unit options will be
included in calculating diluted net income (loss) per unit, assuming the results
would be dilutive, upon achievement of the performance criteria which, if
maintained for the required period, would result in the options becoming
exercisable (See Note 10). Unit options have not been included in the diluted
calculation as the effect is anti-dilutive.
Unit-Based Compensation Plans
The Company accounts for unit-based compensation plans under the provisions of
the Accounting Principles Board's Opinion No. 25, "Accounting for Stock Issued
to Employees". The Company has adopted the disclosure only provisions of the
Financial Accounting Standards Board Statement No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" (see Note 10).
F-9
1. Business and Significant Accounting Policies (Continued):
New Accounting Standards
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as of January 1,
2001. 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.
Although the Company had no outstanding derivative positions at December 31,
2001, it has absorbed a loss of approximately $146 from its allocable share of
the effect of adoption of SFAS 133 by its equity basis investee, U.S.
Timberlands Yakima, LLC, to reduce the carrying value of an interest rate cap
agreement to its fair value.
2. Timber and Timberlands:
Timber and Timberlands consisted of the following at December 31:
2001 2000
-------- --------
Timber and logging roads $309,759 $317,215
Timberlands 34,566 39,111
Seed orchard and nursery stock 1,437 1,364
-------- --------
345,762 357,690
Less accumulated depletion and road amortization 131,251 93,017
-------- --------
$214,511 $264,673
======== ========
3. Investment in Affiliate:
Following is summarized financial information for U.S. Timberlands Yakima, LLC,
the Company's equity basis affiliate (See Note 9), as of and for the years ended
December 31:
2001 2000 1999
--------- --------- ---------
Current assets $ 5,779 $ 3,887 $ 9,129
Noncurrent assets, principally timber and timberlands 116,558 71,174 74,726
Current liabilities 1,883 11,195 5,611
Noncurrent liabilities - long-term debt 88,435 42,807 60,000
Redeemable preferred member interest (owned by the
Operating Company) 32,019 20,295 18,243
Net sales 13,574 25,606 560
Gross profit 3,120 10,018 342
Net income (loss) (5,329) 2,815 (1,207)
F-10
4. Property, Plant and Equipment:
Property, plant and equipment consisted of the following at December 31:
2001 2000
------ ------
Equipment $ 646 $ 661
Buildings and improvements 843 843
------ ------
1,489 1,504
Less accumulated depreciation and amortization 678 578
------ ------
$ 811 $ 926
====== ======
5. Accrued Liabilities:
Accrued liabilities consisted of the following at December 31:
2001 2000
------ ------
Interest $2,752 $2,792
Severance and harvest tax 65 217
Other 514 317
------ ------
$3,331 $3,326
====== ======
6. Short-Term Debt:
In 2001, the Company extended a credit facility with an affiliate of the General
Partner (the "Affiliate Credit Facility"), which allows the Company to borrow up
to $12.0 million. The Company's obligations under the Affiliate Credit Facility
represent unsecured general obligations. Borrowings under the Affiliate Credit
Facility bear interest at the prime lending rate as published in the Wall Street
Journal plus applicable margin (1.25% at December 31, 2001), which is based on
the Company's leverage ratio. The prime lending rate was 4.75% at December 31,
2001. The Affiliate Credit Facility expires on April 30, 2002 and all amounts
borrowed thereunder shall then be due and payable. There were no outstanding
borrowings under the Affiliate Credit Facility at December 31, 2001 and 2000.
Peak borrowings were $10,370 and $6,000 under the Affiliate Credit Facility
during 2001 and 2000, 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 $330 and $75 in 2001, $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.
7. Long-Term Debt:
Senior Notes
The $225,000 of Notes, which were issued in 1997, were issued jointly and
severally by the Operating Company and U.S. Timberlands Finance Corp. ("Finance
Corp."), a wholly owned subsidiary of the Operating Company (collectively, the
"Issuers"). The Issuers serve as co-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
F-11
7. Long-Term Debt (Continued)
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 Operating Company and its subsidiaries to make cash distributions, incur
additional indebtedness, sell assets or harvest timber in excess of certain
limitations. Under certain restrictive covenants, The Operating Company is
presently prohibited from making distributions to the Company.
8. Partners' Capital:
Partnership Equity
The MLP had 9,648,017 Common Units and 3,211,590 Subordinated Units outstanding
on December 31, 2001 and 8,577,487 Common Units and 4,282,120 Subordinated Units
on December 31, 2000 and 1999. In February, 2001. 1,070,530 Subordinated Units
converted into Common Units.
Partnership Income (loss)
As provided in the MLP Agreement and the Operating Company's Operating
Agreement, income and losses are allocated 98% to the holders of outstanding
Common Units (the Common Unitholders) and Subordinated Units (the Subordinated
Unitholders), 1% to the General Partner's general partner interest in the MLP
and 1% to the General Partner's minority interest in the Operating Company.
Cash Distributions
The Company is required to make quarterly cash distributions from Available
Cash, as defined in the MLP Agreement if cash is available for distributions. If
made, cash distributions are paid in order of preferences: first, the minimum
quarterly distribution of $.50 per unit (the "MQD") to Common Unitholders and
the General Partner, and second, to the extent cash remains available, to
Subordinated Unitholders. On February 14, 2001, The Company made a $0.50 per
unit distribution. The Company announced on May 10, 2001 that it has
indefinitely suspended further distributions due to declining log prices and
deteriorating business conditions..
The MLP Agreement sets forth certain cash distribution target rates for the
Company to meet in order for the General Partner's share of Available Cash to
increase (such increases referred to as "Incentive Distributions"). To the
extent that the quarterly distributions exceed $.550 per Common and Subordinated
Unit, the General Partner receives 15% of the excess Available Cash rather than
the base amount of 2%. To the extent that the quarterly distributions exceed
$.633 per Common and Subordinated Unit, the General Partner receives 25% of the
excess Available Cash and to the extent that the quarterly distributions exceed
$.822 per Common and Subordinated Unit, the General Partner receives 50% of the
excess Available Cash. Since the quarterly distributions did not exceed the
minimum quarterly distributions for 2001, 2000 or 1999, the General Partner did
not receive any such Incentive Distributions for those years.
Subordinated Units
The Subordinated Units are subordinated in right of distributions to the right
of Common Unitholders to receive the MQD. Because the MQD was paid to Common and
Subordinated Unitholders for three consecutive four-quarter periods and such
distributions were equal to or less than the Company's Adjusted Operating
Surplus, as that term is defined in the MLP Agreement, for two consecutive
four-quarter periods, in February 2001 25% of the then outstanding Subordinated
Units converted . Since no distributions have been made since February 2001and
the Company has announced an indefinite suspension of distributions, conversion
of the remaining Subordinated Units is unlikely in the foreseeable future.
F-12
8. Partners' Capital (Continued)
Liquidation Preference
During the subordination period, Common Unitholders will generally be entitled
to receive more per unit in liquidating distributions than Subordinated
Unitholders. Following conversion of the Subordinated Units into Common Units,
all units will receive the same liquidation treatment.
9. Certain Relationships and Related Party Transactions:
General Partner
The General Partner has the ability to control management of the Company and has
all voting rights of the Company except for certain matters set forth in the MLP
Agreement, as amended ("MLP Agreement"). The ownership of Subordinated and
Common Units by certain affiliates of the General Partner effectively gives the
General Partner the ability to prevent its removal.
The General Partner does not receive any management fee or other compensation in
connection with its management of the Company. The General Partner and its
affiliates perform services for the Company and are reimbursed for all expenses
incurred on behalf of the Company, including the costs of employee, officer and
director compensation properly allocable to the Company, and all other expenses
necessary or appropriate to the conduct of the business of, and allocable to,
the Company. The MLP Agreement provides that the General Partner will determine
the expenses that are allocable to the Company in any reasonable manner
determined by the General Partner in its sole discretion. Related non-interest
bearing receivables and payables between the General Partner and the Company are
settled in the ordinary course of business. As of December 31, 2001 and 2000,
the Company had a payable to the General Partner of $41 and $955, respectively.
During 2001, 2000, and 1999 expenses allocated to and reimbursed by the Company
totaled $6,760, $7,717, and $8,347, respectively.
Certain conflicts of interest could arise as a result of the relationships
described above. The Board of Directors and management of the General Partner
have a duty to manage the Company in the best interests of the Unitholders and,
consequently, must exercise good faith and integrity in handling the assets and
affairs of the Company.
Consulting Agreements
As of December 31, 2001, the General Partner has consulting agreements with
affiliates of certain Directors of the General Partner, pursuant to which each
such person or firm has provided and/or will provide consulting services to the
General Partner. The agreements provide for an annual retainer of $25 to $50,
plus an hourly rate for services rendered at the request of the General Partner.
Payments by the General Partner related to consulting agreements in 2001, 2000,
and 1999 amounted to $98, $129, and $117, respectively.
Investment in and Transactions with Affiliates
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 Company contributed to USTY $294 of cash for 49% of
USTY's common interests (the "Common LLC Interests"). The remaining Common LLC
Interests were acquired for $306 in cash by U.S. Timberlands Holding Group, LLC,
a Delaware limited liability company in which John Rudey and George Hornig,
respectively, the Chairman of the Board and a director of the Company's General
Partner, hold a controlling interest. The Company also acquired all of the
senior preferred interests in USTY (the "Senior or Preferred LLC Interests") for
its contribution to USTY of timberlands consisting primarily of non-income
producing, pre-merchantable pine plantations having an agreed upon value of
$22,000. The Company recorded its investment in the Senior LLC interest at its
$18,850 cost basis for the contributed timberlands. Terms of the Preferred LLC
Interests include a cumulative annual guaranteed return of 5% until December 31,
2001 and 6% thereafter of the $22,000 agreed upon value of the contributed
timberlands. The Preferred LLC Interests are redeemable at USTY's option for a
F-13
9. Certain Relationships and Related Party Transactions (Continued):
redemption price equal to the agreed upon value of the Preferred LLC Interests,
either in cash or by returning the contributed timberlands, 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 Company
accounts for its Common LLC Interest by the equity method.
As a result of a refinancing transaction entered into by USTY in September
2001, the Company's common beneficial interest in USTY is now held through the
Company's 49% common interest in a holding company, UST Yakima Holdings II, LLC.
On September 14, 2001, management of USTY was taken over by US Timberlands
Yakima Services, LLC ("Yakima Services"), a wholly owned subsidiary of the
General Partner of the Company. Yakima Services is paid a fee equal to 2% of
agreed upon valuation of the assets under management. Prior thereto, the General
partner provided management services for a fee equal to 2% of USTY's earnings
before interest, taxes, depletion, depreciation and amortization. Such fees
charged to operations by USTY in 2001 amounted to $1,137. The Company granted
U.S. Timberlands Holding Group, LLC an irrevocable proxy to vote its Common and
Preferred Interests.
During 1999, concurrently with and in order to facilitate USTY's acquisition of
the Washington timberlands referred to above, an entity controlled by John M.
Rudey agreed to acquire in the future a portion of the property and any related
liabilities that the Company and USTY were unwilling to acquire, the sale of
which was a condition of the seller to the USTY acquisition. Such entity was
paid $2,700 by the seller for its agreement to acquire such property and any
related liabilities. The General Partner's Conflicts Committee reviewed and
approved the structure of the Company's investment in the affiliate.
In June 2000, USTK 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, USTK sold approximately 8,000 acres of timberland located in
Central Oregon to USTY for $2,900.
During 2001, USTK contributed cutting rights and timberland located in Central
Oregon to its affiliate, USTY. The contributions have an aggregate agreed upon
value of $18.5 million and were added to USTK's Preferred Interest in USTY.
Terms of the additional senior preferred interest acquired are the same terms as
the senior preferred interest previously issued to USTK. USTK recorded its
additional preferred interest at its cost for the cutting rights and timberland
of approximately $16.3 million. All property that has been contributed for
USTK's preferred interest in USTY has been pledged as collateral by USTY under
its credit facility with its lender.
In March of 2001, USTK purchased timber cutting rights for approximately 17.2
million board feet from USTY for $4.5 million. These timber cutting rights
expire in March 2004.
In September of 2001 USTK sold timber cutting rights for approximately 80.6
million board feet to USTY for $12.0 million. These timber cutting rights expire
in August 2004.
In November of 2001 USTK sold timber cutting rights for approximately 44.8
million board feet to USTY for $7.0 million. These timber cutting rights expire
in October 2004.
F-14
9. Certain Relationships and Related Party Transactions (Continued):
Gross profits realized on USTK's sales of timber cutting rights to USTY, to the
extent of the Company's ownership interest in USTY, have been eliminated and are
recognized in operations upon USTY's sale of the timber to third parties. In
addition, the Company's equity in net income (loss) of affiliates has been
adjusted to eliminate its share of gross profits realized by USTY on sales of
timber cutting rights to USTK, until USTK sells the timber to third parties.
Payments to Affiliate
See Note 6 regarding interest and commitment fees paid to an affiliate of the
General Partner under the Affiliate Credit Facility.
Severance and Settlement
Selling, general and administrative expenses in 1999 and 2000 included $675 and
$203 respectively related to settlement with former employees of the Company.
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 $323,
$821 and $925 during 2001, 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 Company has a Unit Option Plan, which permits the grant of options (the
"Unit Options") to employees and directors of the General Partner who perform
services for the Company, covering 857,749 Common Units. Unit Options granted
under the Company's Unit Option Plan are determined by the Long-Term Incentive
Plan Committee of the Board of Directors (the "LTIP Committee") and are granted
at fair market value at the date of the grant. 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. In 2001, there were no Unit
Options granted. The Unit Options granted expire ten years from the date of
grant and become exercisable automatically upon and in the same proportion as
the conversion of Subordinated Units to Common Units. See further explanation of
subordinated units and related performance criteria in Note 8. Once the
performance criteria are achieved, the Company will record compensation expense
for the difference between the exercise price and fair value of the Common
Units, with a corresponding increase to partnership capital. Although the
performance criteria were met for the years ended December 31, 2000 and 1999, no
compensation expense was recorded during such years, as the market price of the
units was less than the exercise price during the years. As indicated in Note 8,
distributions have been suspended and accordingly the performance criteria had
not been met as of December 31, 2001.
F-15
10. Management Incentive Plans (Continued):
The following table summarizes the activity related to unit options for three
years ended December 31, 2001
Weighted
Average
Number of Exercise
Shares Price
---------------- ----------------
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
Unit options granted - -
Unit options cancelled (70,620) 13.22
----------------
Outstanding, December 31, 2001 687,007 13.78
As of December 31, 2001 exercise prices for options outstanding were between
$5.84 and $14.75 with a weighted average exercise price of $13.78 per unit. The
weighted average remaining contractual life of the options was 7 years. There
were no unit options exercisable at December 31, 2000 or 1999. Options for
171,752 units were exercisable at December 31, 2001, with a weighed average
exercise price of $13.78 per unit.
The Company has computed, for pro forma disclosure purposes as required by SFAS
123, the value of the Unit Options granted under the Unit Option Plan. These
computations were made using the Black-Scholes option-pricing model, as
prescribed by SFAS 123, with the following weighted average assumptions for 2000
and 1999:
2000 1999
---------------- ---------------
Risk-free rate of return 5.98% 4.88%
Expected dividend yield 9.52% 9.52%
Expected life of the Unit Options 5 Years 5 Years
Expected volatility 80.59% 49.65%
The weighted-average fair value of unit options was $3.61 and $2.87 for options
granted in 2000 and 1999, respectively.
F-16
10. Management Incentive Plans (Continued):
If the Company had adopted the expensing provisions of SFAS 123, the impact on
2001, 2000 and 1999's net income (loss) and net income (loss) per unit would
have been as follows:
Year Ended December 31,
2001 2000 1999
--------- -------- -------
Net income (loss) as reported $ (36,188) $ (4,080) $ 6,293
Net income (loss) pro forma (36,511) (4,617) 5,846
Basic and diluted net income (loss) per unit - as reported (2.79) (0.31) 0.48
Basic and diluted net income (loss) per unit - pro forma (2.84) (0.36) 0.45
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 unit's conversion period.
Restricted Unit Plan:
During 1997, the Company authorized the establishment of a restricted unit plan
(the "Restricted Unit Plan"), which allows the Company to grant units (the
"Restricted Units") to employees at the discretion of the LTIP Committee. No
consideration will be payable by the plan participants upon vesting and issuance
of the Restricted Units. Restricted Units granted during the subordination
period would vest automatically upon and in the same proportion as the
conversion of Subordinated Units to Common Units. Restricted Units granted
subsequent to the subordination period are the equivalent of Common Units. No
Restricted Units have been granted as of December 31, 2001.
Income Interests of the General Partner
In connection with the Common Units offering and the related formation of the
General Partner, the General Partner issued income interests to certain officers
and directors of the General Partner at no cost. Such income interests
participate pro rata in cash distributions from USTK and the Company. Under
certain circumstances, the General Partner is required to repurchase the income
interests from officers and directors upon termination of their employment at
fair market value as determined by independent appraisal (see Note 9, severance
and settlement).
F-17
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 $150,750 and $180,000 at December 31, 2001 and
2000, respectively, based on published market quotations.
12. Quarterly Results (Unaudited):
Quarter Ended
----------------------------------------------------------------------
December 31 (a) September 30 June 30 March 31 Total Year
2001
Revenues $ 13,471 $ 24,299 $ 7,327 $ 9,467 $ 54,564
Gross profit (loss) 245 764 (252) (132) 625
Net (loss) (10,190) (8,583) (8,600) (8,815) (36,188)
Net (loss) per unit (b)(C) (0.78) (0.66) (0.66) (0.68) (2.79)
2000
Revenues $ 25,664 $ 14,064 $ 23,960 $ 11,924 $ 75,612
Gross profit 4,471 2,716 12,881 4,234 24,302
Net income (loss) (2,038) (5,340) 5,119 (1,821) (4,080)
Net income (loss) per unit (b)(C) (0.15) (0.41) 0.39 (0.14) (0.31)
(a) The quarter ended December 31, 2000 includes revenues of $2,773 and related
costs of $2,641 from a property sale.
(b) See discussion of per unit information in Note 1 of the notes to
consolidated financial statements
(C) Basic and diluted.
14. 401(K) Defined Contribution Plan:
The Company sponsors a 401(k) defined contribution plan which covers
substantially all full-time employees. Company contributions to the plan totaled
$56 in 2001, $30 in 2000 and $34 in 1999.
14. Commitments, Contingencies and Other:
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 was ten years and was renewable for two additional terms of five
years, each at the option of Collins. As a result of Collins Products closing
its plywood mill in Klamath Falls in 2001, the Company and Collins mutually
decided to cancel the log supply agreement. Revenues from Collins Products were
approximately $2,125, $10,842 and $11,160 for 2001, 2000 and 1999 respectively.
F-18
Interest Rate Collar Agreement
The Company entered into interest rate collar agreements to manage interest rate
risk, the last of which ended in October 1999. Income of $991 in 1999 on these
agreements is included in other income in the accompanying statements of
operations.
Litigation
In November 2000, six purported class action lawsuits were filed against the
General Partner and the Board of Directors of the General Partner (the "Board")
alleging breach of fiduciary duty and self-dealing by the General Partner and
the Board in connection with an announcement on November 2, 2000 that a group
led by senior management had begun the process to explore taking the Company
private (the "Going-Private Transaction").
In February 2001 management put forward a formal offer for the "Going Private
Transaction" at $7.75 per unit in cash and notes. In November 2001, management
amended its offer to $3.75 per unit (50% in cash and 50% in 7 year notes of the
Company).
14. Commitments, Contingencies and Other (Continued):
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
Company, on behalf of all other Unitholders of the Company 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 General Partner and the Board as defendants, all six lawsuits name
the Company as a defendant.
As of March 15, 2002, all six lawsuits have been withdrawn, without
prejudice, by the plaintiffs, pending further developments in the Going Private
Transaction.
F-19