UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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.: 1-13573-01
1-13573
U.S. TIMBERLANDS KLAMATH FALLS, LLC
U.S. TIMBERLANDS FINANCECORP.
(Exact name
of registrant as specified in its charter)
DELAWARE 91-1217136
DELAWARE 91-1851612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
625 Madison Avenue, Suite 10-B, New York, NY 10022
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 212-755-1100
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Securities registered pursuant to Section 12(b) ofthe Act:
None
Securities registered pursuant to Section 12(g) ofthe Act:
Title of Each Class: Name of Each Exchange on Which Registered:
9-5/8% Senior Notes New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during then preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes_X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
Documents incorporated by reference: None
U.S. TIMBERLANDS KLAMATH FALLS, LLC
U.S. TIMBERLANDS FINANCE CORP.
TABLE OF CONTENTS
Page
PART I
Item 1. Business......................................................................................1
Item 2. Properties...................................................................................10
Item 3. Legal Proceedings............................................................................11
Item 4. Submission of Matters to a Vote of Security Holders..........................................11
PART II
Item 5. Market for Registrant's Common Units and Related Security Holder Matters.....................12
Item 6. Selected Financial Data......................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................22
Item 8. Financial Statements.........................................................................22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........22
PART III
Item 10. Directors and Executive Officers of the Registrant...........................................23
Item 11. Executive Compensation.......................................................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................33
Item 13. Certain Relationships and Related Transactions...............................................33
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K......................................37
ii
PART I
Item 1. Business.
General
The business of U.S. Timberlands Klamath Falls, LLC, a Delaware limited
liability company formed in 1996 (the "Company"), consists of the growing of
trees and the sale of logs and standing timber. The Company owns approximately
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 U.S. Timberlands, LP (the "Master Partnership").
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, the Company and U.S. Timberlands Management Company,
LLC, formerly known as U.S. Timberlands Services Company, LLC ("Old Services"),
acquired approximately 604,000 fee acres of timberland (the "Klamath Falls
Timberlands"), containing an estimated merchantable timber volume of
approximately 1.9 BBF and related assets from Weyerhaeuser (the "Weyerhaeuser
Acquisition"). In July 1997, the Company, which is now the Master Partnership's
subsidiary operating company, acquired approximately 42,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland (the
"Ochoco Timberlands"), containing an estimated merchantable timber volume of
approximately 280 million board feet ("MMBF") from Ochoco Lumber Company
("Ochoco") (the "Ochoco Acquisition"). At the date of acquisition, over 40% of
the merchantable timber on the Ochoco Timberlands was at least 80 years old. As
of December 31, 2000, the Company 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 the Company, approximately 58% of the logs
harvested from the Klamath Falls Timberlands were delivered to a plywood mill
owned by Weyerhaeuser at Klamath Falls, Oregon. Similarly, prior to the Ochoco
Acquisition, substantially all of the timber harvested from the Ochoco
Timberlands was delivered to Ochoco's mills. The Company does not currently own
any conversion facilities nor does it presently intend to own any such
facilities on a long-term basis; consequently the Company's sales are made to
unaffiliated third parties. Concurrent with the Company's acquisition of the
Klamath Falls Timberlands, the Company arranged for Collins Products LLC
("Collins"), a privately owned forest products company located within the
Klamath Falls Timberlands area, to
1
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.
Formation of the Company
On November 19, 1997, the Master Partnership acquired substantially all
of the equity interests in the Company and the business and assets of Old
Services (the "Acquisition") and completed its initial public offering (the "MLP
Offering") of common units representing limited partner interests ("Common
Units"). Upon the closing of the Acquisition, Old Services contributed all of
its assets, including its timber operations, to U.S. Timberlands Services
Company, LLC, a newly formed Delaware limited liability company and the
Company's Manager (the "General Partner" or "New Services"), in exchange for
interests therein. Immediately thereafter, the Company assumed certain
indebtedness (the "Holdings Debt") of U.S. Timberlands Holdings, LLC, an
affiliate of the Company ("Holdings"), and the Manager contributed its timber
operations to the Company in exchange for a member interest in the Company. Then
the Manager contributed all but a 1% member interest in the Company to the
Master Partnership in exchange for a General Partner interest in the Master
Partnership, the right to receive Incentive Distributions (as defined herein)
and 1,387,963 subordinated units representing limited partner interests in the
Master Partnership ("Subordinated Units"), and Holdings contributed all of its
interest in the Company to the Master Partnership in exchange for 2,894,157
Subordinated Units. The Manager then distributed the Subordinated Units to Old
Services. Approximately 143,398 Subordinated Units were used by Old Services to
redeem interests in Old Services held by certain founding directors of the
Manager (the "Founding Directors"). As a result of such transactions, the
Company became the Operating Company and the Manager owns an aggregate 2%
interest in the Master Partnership and the Company on a combined basis, and the
right to receive Incentive Distributions; 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 Master
Partnership. The Common Units and the Subordinated Units are referred to herein
collectively as "Units" and the holders of Units are referred to herein as
"Unitholders." Concurrent with the closing of the Initial Offering, the Company
and its wholly owned subsidiary, U.S. Timberlands Finance Corp. ("Finance
Corp."), consummated the public offering (the "Public Note Offering") of $225.0
million aggregate principal amount of unsecured senior notes (the "Notes). See
"Management's Discussion and Analysis of Liquidity and Capital Resources."
Finance Corp., a Delaware corporation, was formed on August 18, 1997,
and is a wholly-owned subsidiary of the Company. Finance Corp. serves as the
co-obligor for the Notes. It has nominal assets and does not conduct any
operations. Accordingly, a discussion of operations, liquidity and capital
resources of Finance Corp. is not presented.
2
Company Structure and Management
The operations of the Master Partnership are conducted through, and the
operating assets are owned by, the Company, as the Master Partnership's
operating subsidiary. The Master Partnership owns a 98.9899% member interest in
the Company and the Manager owns a 1% general partner interest in the Master
Partnership and a 1.0101% managing member interest in the Company. The Manager
therefore owns an aggregate 2% interest in the Master Partnership and the
Company on a combined basis.
The Company's business is managed by the Manager. The Manager does not
receive any management fee or other compensation in connection with its
management of the Company, but is reimbursed for all direct and indirect
expenses incurred on behalf of the Company (including wages and salaries of
employees, officers and directors of the Manager) and all other necessary or
appropriate expenses allocable to the Company or otherwise reasonably incurred
by the Manager in connection with the operation of the Company's business.
Conflicts of interest may arise between the Manager and its affiliates,
on the one hand, and the Master Partnership, the Company and the Unitholders, on
the other, including conflicts relating to the purchase and sale of timber
and/or timber deeds, compensation of the directors, officers and employees of
the Manager and the determination of fees and expenses that are allocable to the
Company. The Manager has a conflicts committee (the "Conflicts Committee"),
consisting of two independent members of its Board of Directors, that is
available at the Manager's discretion to review matters involving conflicts of
interest.
The principal executive offices of the Company and the Manager are
located at 625 Madison Avenue, Suite 10-B, New York, New York 10022. The
telephone number at such offices is (212) 755-1100.
The Timberlands
Timber Growth
Timber growth rates reflect timberland productivity and the rate of
return on a timber investment. Growth rate is an important factor in determining
when to harvest timber and the harvest potential of timberlands over the long
term. Merchantable timber is economically mature for harvesting when its current
growth rate falls below the desired rate of return on the investment in the
standing trees. The average growth rate from regeneration to economic maturity
measures the capacity of the land for timber production. The Company's older and
natural stands on the Timberlands that are expected to provide the near term
harvest have a current average growth rate of approximately 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.
3
Harvest Plans
The Company strives to manage all of its Timberlands, including the
Plantations, in an economically prudent and environmentally sensitive manner in
order to maximize their value over time. Integral to this management process are
the Company's long-term harvest plans. The Company prepares its harvest plans
annually based on analyses of the size and age class distribution of the
Timberlands and the economic maturity of each harvest tract. The factors the
Company considers in determining its long-term harvest plans include, among
other things, current and expected market conditions, competition, customer
requirements, the age, size and species distribution of the Company's timber,
assumptions about timber growth rates (which are improving over time as a result
of technological 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
4
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.
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, the Company
arranged for Collins, a privately owned forest products company located within
the Klamath Falls Timberlands, to purchase Weyerhaeuser's Klamath Falls mill
facilities. At such time, the Company entered into the Collins Supply Agreement,
a 10-year log supply agreement with Collins providing for purchase by the
plywood mill and delivery by the Company of a minimum of 34 MMBF of logs each
year at market prices. 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
6
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.
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
7
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.
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 Manager that manage the business of the Company. The employees are not
unionized, and the Company believes that its employee relations are good. All of
the silvicultural activities on the Timberlands and the harvesting and delivery
of logs are conducted by independent contractors who are not employees of the
Company.
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 Manager and the Board of Directors of the General Partner (the
"Board") alleging breach of fiduciary duty and self-dealing by the Manager and
the Board in connection with an announcement on November 2, 2000 that a group
led by senior management has begun the process to explore taking the Master
Partnership private (the "Going-Private Transaction").
All six lawsuits were filed in the Court of Chancery of the State of
Delaware for the County of New Castle. Each lawsuit was filed by a unitholder of
the Master Partnership, on behalf of all other Unitholders of the Master
Partnership who are similarly situated, and seeks to have the class certified
and the unitholder bringing the lawsuit named as representative of the class. In
addition, the lawsuits seek to enjoin the Going-Private Transaction, to rescind
the Going-Private Transaction if it is consummated, and to recover damages and
attorneys' fees. In addition to naming the Manager and the Board as defendants,
all six lawsuits name the Master Partnership as a defendant. 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 members or
the Master Partnership's Unitholders during the fourth quarter of 2001.
11
PART II
Item 5. Market for Registrant's Common Units and Related Security Holder Matters
In connection with the consummation of the Initial Public Offering for
the Master Partnership and the Public Note Offering for the Company (hereafter
the "Transactions"), a 98.9899% member interest in the Company was issued to the
Master Partnership and a 1.0101% member interest was issued to the Manager.
There is no public trading market for the Company's equity securities. The
Company distributes all of its Available Cash (as defined in the Company's
partnership agreement) on a quarterly basis.
The Company made its first cash distribution to the Master Partnership
for distribution to holders of the Common Units and the Subordinated Units on
May 15, 1998, of $0.73, representing the sum of $0.50, the Minimum Quarterly
Distribution (as defined in the Master Partnership Agreement) for the first
quarter of 1998, plus $0.23, the pro rata portion of the Minimum Quarterly
Distribution for the period from November 19, 1997 through December 31, 1997.
The Company made 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.
12
Item 6: Selected Financial Data
U.S. Timberlands (1)
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------
CASH FLOWS AND OTHER DATA
(IN MILLIONS):
Modified EBITDDA (5) . . . . . . . . . . . $ 23.5 $ 49.5 $ 50.9 $ 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)
Revenues (1) . . . . . . . . . . . . . . . 54.6 75.7 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) . . . . . . . (13.8) 18.1 27.5 16.3 27.3
Income (loss) before extraordinary
items (36.2) (3.9) 6.7 (6.4) (1.4)
Extraordinary items, losses on
extinguishment of debt (4) . . . . . . -- -- -- 9.3
Net income (loss). . . . . . . . . . . . . (36.2) (3.9) 6.7 (6.4) (10.7)
BALANCE SHEET DATA (AT
PERIOD END, IN MILLIONS):
Working capital . . . . . . . . . . . . . (1.7) 2.0 2.4 1.4 1.8
Total assets. . . . . . . . . . . . . . . 255.2 301.3 327.9 350.7 385.2
Long-term debt (4) . . . . . . . . . . . 225.0 225.0 225.0 225.0 225.0
Equity (deficit) (6) . . . . . . . . . . 25.5 68.2 98.4 118.0 147.1
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
- ----------------------------------------------------------------------------------------------------
(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. . 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 it'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.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Certain information contained in this report may constitute
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Forward-looking information is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected. Such risks, trends and
uncertainties include the highly cyclical nature of the forest products
industry, general economic conditions, competition, price conditions or trends
for the Company's products, the possibility that timber supply could be affected
if governmental, environmental or endangered species policies change, and
limitations on the Company's ability to harvest its timber due to adverse
natural conditions or increased governmental restrictions. The results of the
Company's operations and its ability to pay quarterly distributions to its
Unitholders depend upon a number of factors, many of which are beyond its
control. These factors include general economic and industry conditions,
domestic and export prices, supply and demand for logs, seasonality, government
regulations affecting the manner in which timber may be harvested, and
competition from other supplying regions and substitute products. These and
other risks are described in the Company's other reports and registration
statements, which are available from the United States Securities and Exchange
Commission.
14
General
The Company's primary business is the growing and harvesting of timber
(see Item 1. Business).
The Company's results of operations are affected by various factors,
many of which are beyond its control, including general industry conditions,
domestic and international prices and supply and demand for logs, lumber and
other wood products, seasonality and competition from other domestic and
international supplying regions and substitute products.
Supply and Demand Factors
Supply
The supply of logs available for purchase has been most affected in
recent years by significant reductions in timber harvested from public
timberlands, principally as a result of efforts to preserve the habitat of
certain endangered species, as well as a change in the emphasis of government
policy toward habitat preservation, conservation and recreation and away from
timber management. Since the early 1970s, environmental and other similar
concerns and governmental policies have substantially reduced the volume of
timber under contract to be harvested from public lands. The pace of regulatory
activity accelerated in the late 1980s. The resulting supply decrease caused
prices for logs to increase significantly, reaching peak levels during 1993.
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.
15
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.
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 $258 per MBF in 2000 (-37.9%). This decrease
follows a decrease in timber deed realizations 31.9% during 2000.
16
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 -
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.
17
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 $6.1 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 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
increase in net loss.
18
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 $246 compared
to an average timber deed sales price of $379 in 1999, a 35% 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.
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 $0.6 million in 1999. The income in 2000 reflects the recapture of
$0.6 million in losses absorbed from its preferred investment in U.S.
Timberlands Yakima, LLC, and the Company's accrued return of $1.4 million on its
preferred investment. During 1999, the Company absorbed $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.
19
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.
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 $32.3 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, Manager and minority
interest. Beginning in the second quarter of 2001, the Company ceased making
distributions to its members.
Notes
On November 14, 1997, the Company issued $225.0 million aggregate
principal amount of Notes (the "Notes") representing unsecured general
obligations of the Company which bear interest at 9 5/8% per annum, payable
semiannually in arrears on May 15 and November 15. The Notes mature on November
15, 2007 unless previously redeemed. The Notes do not require any mandatory
redemption or sinking fund payments prior to maturity and are redeemable at the
option of the Company in whole or in part, on or after November 15, 2002, at
predetermined redemption prices plus accrued interest to the redemption date.
Upon the occurrence of certain events constituting a "change of control" (as
defined in the Indenture), the Company must offer to purchase the Notes, at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase. There can be no assurance that the
Company will have access to sufficient funds to repurchase the Notes in the
event of a change in control.
The indenture governing the Notes (the "Indenture") contains various
affirmative and restrictive covenants applicable to the Company and its
subsidiaries, including limitations on the ability of the Company and its
subsidiaries to, among other things, (i) incur additional indebtedness (other
than certain permitted indebtedness) unless the Company's Consolidated Fixed
Charge Coverage Ratio (as defined in the Indenture) is greater than 2.25 to
1.00, and (ii) make distributions to the Master Partnership, make investments
(other than permitted investments) in any person, create liens, engage in
transactions with affiliates, suffer to exist any restrictions on the ability of
a subsidiary to make distributions or repay indebtedness to the Master
Partnership, engage in sale and leaseback transactions, enter into a merger,
20
consolidation or sale of all or substantially all of its assets, sell assets or
harvest timber in excess of certain limitations or engage in a different line of
business. Under the Indenture, the Company will be permitted to make cash
distributions to the Master Partnership so long as no default or event of
default exists or would exist upon making such distribution (a) if the Company's
Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is
greater than 1.75 to 1.00, in an amount, in any quarter, equal to Available Cash
(as defined in the Indenture) for the immediately preceding fiscal quarter or
(b) if the Company's Consolidated Fixed Charge Coverage Ratio is equal to or
less than 1.75 to 1.00, in an aggregate amount not to exceed (i) $7.5 million
less the aggregate of all restricted payments made under this clause (b)(i)
during the immediately preceding 16 fiscal quarters (or shorter period, if
applicable, beginning on the issue date of the Notes), plus (ii) the net
proceeds of certain capital contributions (including the sale of Units) received
by the Master Partnership. The 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 Manager ("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 Company
will be permitted to make quarterly cash distributions to the Master Partnership
in an amount not to exceed Available Cash (as defined in the Affiliate Credit
Facility) in the preceding quarterly period.
Capital Expenditures/Cash Distributions
Capital expenditures in 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 $0.8 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 Manager'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
21
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 Master
Partnership 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 or 2000, it has
absorbed a loss of approximately $146 from its allocable share of the effect of
adoption of SFAS 133 and therefore believes that adoption of SFAS 133 by its
affiliate, to reduce the carrying ovalue of an interest rate cap agreement to
its fair value.
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.
22
PART III
Item 10. Directors and Executive Officers of the Registrant
The Manager manages and operates the activities of the Company. As is
commonly the case with publicly traded limited partnerships, the Company does
not directly employ any of the persons responsible for managing or operating the
Company.
In January 1999, the Manager appointed William A. Wyman and Alan B.
Abramson, two members of the Manager's Board of Directors who are neither
officers, employees or security holders of the Manager nor directors, officers,
or employees of any affiliate of the Manager, to serve on the Manager's
Conflicts Committee. The Conflicts Committee has the authority to review
specific matters as to which the Board of Directors believes there may be a
conflict of interest in order to determine if the resolution of such conflict
proposed by the Manager is fair and reasonable to the Company. Any matters
approved by the Conflicts Committee will be conclusively deemed to be fair and
reasonable to the Company, approved by all partners of the Company and not a
breach by the Manager or its Board of Directors of any duties they may owe the
Company or the Unitholders. The Board of Directors also has an audit committee
(the "Audit Committee") composed of the two independent directors as well as
George R. Hornig, which reviews the external financial reporting of the Company,
recommends engagement of the Company's independent public accountants and
reviews the Company's procedures for internal auditing and the adequacy of the
Company's internal accounting controls. The Board of Directors also has a
compensation committee (the "Compensation Committee"), consisting of five
directors, including the two independent directors, which determines the
compensation of the officers of the Manager and administers its employee benefit
plans. In addition, the Board of Directors has a Long-Term Incentive Plan
Committee (the "LTIP Committee"), which consists of four directors, including
the two independent directors, which acts with respect to the Company's
Long-Term Incentive Plan. 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.
23
Directors, Executive Officers and Key Employees of the Manager
The following table sets forth certain information with respect to the
members of the Board of Directors of the Manager, its executive officers and
certain key employees. Executive officers and directors are elected for one-year
terms.
Name Age Position with Manager
---- --- ---------------------
John M. Rudey 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.
John M. Rudey serves as Chairman, Chief Executive Officer, President
and as a Director of the Manager. Since 1992, Mr. Rudey has served as Chief
Executive Officer of Garrin Properties Holdings, Inc., a private investment
company that manages and advises investment portfolios principally concentrated
in the timber and forest products industries and in real estate.
Aubrey L. Cole serves as a Director of the Manager. Since 1989, Mr.
Cole has been a consultant for Aubrey Cole Associates, a sole proprietorship
which provides management consulting services and makes investments. >From 1986
to 1989, Mr. Cole was the Vice Chairman of the Board and Director of Champion
International Corporation (a publicly traded forest products company) and from
1983 to 1993, Mr. Cole was the Chairman of Champion Realty Corporation (a land
sales subsidiary of Champion International).
24
George R. Hornig serves as a Director of the Manager. Since 1999, Mr.
Hornig has been Managing Director of Credit Suisse First Boston's Private Equity
Division. >From 1993 to 1999, Mr. Hornig was an Executive Vice President of
Deutsche Bank Americas Holdings, Inc. (the United States arm of Deutsche Bank, a
German banking concern) and affiliated predecessor entities. From 1991 to 1993,
Mr. Hornig was the President and Chief Operating Officer of Dubin & Swieca
Holdings, Inc., an investment management business. From 1988 to 1991, Mr. Hornig
was a co-founder, Managing Director and Chief Operating Officer of Wasserstein
Perella & Co., Inc. (a mergers and acquisitions investment bank). From 1983 to
1988, Mr. Hornig was an investment banker in the Mergers and Acquisitions Group
of The First Boston Corporation. Prior to 1983, Mr. Hornig was an attorney with
Skadden, Arps, Slate, Meagher & Flom. Mr. Hornig is also a director of Unity
Mutual Life Insurance Company and Forrester Research, Inc.
William A. Wyman serves as a Director of the Manager, having been
elected to the Board in January 1999. Mr. Wyman is a former President of the
Management Consulting Group of Booz, Allen & Hamilton. Mr. Wyman joined Booz
Allen in 1965, 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 Manager, having been
elected to the Board in January 1999. Mr. Abramson is the President of Abramson
Brothers Incorporated, a real-estate management and investment firm, where he
has been employed since 1972. He serves as a Director of Datascope, Inc., a
medical technology company.
Robert F. Wright serves as a Director of the Manager. Since 1988, Mr.
Wright has served as President and Chief Executive Officer of Robert F. Wright
Associates, Inc., a firm making strategic investments and providing business
consulting services. Previously, Mr. Wright spent 40 years, 28 years as a
partner, at Arthur Andersen & Co. Mr. Wright is a director of the following
companies: 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 Manager in July 2000. From 1998 to 2000, Mr. Ludlow was Chief Financial
Officer of Forest Systems, LLC, a Boston based timber investment management
company. From 1995 to 1998, Mr. Ludlow was Director and head of North American
Forest Products for Deutsche Morgan Grenfell, an international investment bank.
Prior to 1995, Mr. Ludlow worked with various financial institutions. .
Martin Lugus serves as Vice President - Timberland Operations of the
Manager, responsible for all land management and operations on fee lands. Mr.
Lugus was employed by Weyerhaeuser for 28 years, during which time he served as
Forestry Manager from 1981 to 1991 and Timberlands Manager from 1991 to 1996 and
then for the Manager in his current role.
25
Key Employees
Walter L. Barnes serves as Assistant Vice President - Harvesting of
the Manager, responsible for all solid wood logging and fiber operations. From
1993 to 1996, prior to joining the Manager, Mr. Barnes acted as the Operations
Harvest Manager for Weyerhaeuser. Mr. Barnes was employed by Weyerhaeuser for 28
years and has extensive experience managing different harvesting systems on both
the East and West sides of the Cascade Range.
Robert A. Broadhead serves as Assistant Vice President - Marketing of
the Manager since 1996, responsible for all log and stumpage sales transactions.
Prior to joining the Manager in 1996, Mr. Broadhead was employed by Weyerhaeuser
for 20 years and gained additional experience in investing and planning while
serving as Planning Manager from 1981 to 1994.
Robert B. Longo serves as the Corporate Controller of the Manager,
responsible for accounting functions. Prior to joining the Manager 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 Manager, responsible for all harvest planning as well as operating and
developing the inventory and GIS systems. From 1979 to 1987 Mr. Vermilya worked
for Crown Zellerbach Corp. and them from 1987 to 1994 as Chief Forester for the
Cambell Group. Mr. Vermilya then went to work for Weyerhaeuser as district
forester and then for the Manager in 1996 in the same role until 2000, when he
assumed his current responsibilities.
Christopher J. Sokol serves as Assistant Vice President - Forestry of
the Manager, responsible for forestry operations, environmental relationships,
harvest prescriptions and nursery/orchard operations. Prior to joining the
Manager in 1996, Mr. Sokol was employed by Weyerhaeuser for 22 years and gained
additional experience in forest regeneration and timber sales while serving as
District Forester from 1982 to 1991 and as Forestry Manager thereafter.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Manager's officers and directors, and persons who own more than 10%
of a registered class of equity securities of the Master Partnership, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the NASDAQ National Market. Officers, directors and greater than
ten percent 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 Master Partnership's
securities, the Company believes that during the fiscal year 2001, all filings
required were properly made.
26
Item 11. Executive Compensation
The Master Partnership and the Manager were formed in June 1997.
Under the terms of the Operating Company Agreement, the Company is required to
reimburse the Manager for expenses relating to the operation of the Company,
including salaries and bonuses of employees employed on behalf of the Company,
as well as the costs of providing benefits to such persons under employee
benefit plans and for the costs of health and life insurance.
The following table sets forth annual salary, bonus and all other
compensation awards and payouts earned by the Manager's Chief Executive Officer
and the four most highly compensated executive officers who earned in excess of
$100,000 (the "Named Executive Officers") for services rendered during the
fiscal year ended December 31, 2001:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation
Compensation Awards
Securities
Name and Principal Fiscal Underlying All Other
Position Year Salary ($) 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 -- --
27
Long-Term Incentive Plan
The Manager has adopted the U.S. Timberlands Company, LP Amended and
Restated 1997 Long-Term Incentive Plan (the "Long-Term Incentive Plan") for key
employees and directors of the Manager and its affiliates. The summary of the
Long-Term Incentive Plan contained herein does not purport to be complete and is
qualified in its entirety by reference to the Long-Term Incentive Plan, which is
filed as an exhibit to the Company's Form S-1 Registration Statement. The
Long-Term Incentive Plan consists of two components, a unit option plan (the
"Unit Option Plan") and a restricted unit plan (the "Restricted Unit Plan"). The
Long-Term Incentive Plan currently permits the grant of Unit Options and
Restricted Units covering an aggregate of 857,748 Common Units.
Unit Option Plan. The Unit Option Plan currently permits the grant of
options ("Unit Options") covering 857,748 Common Units. Unit Options granted
during the Subordination Period will become exercisable automatically upon, and
in the same proportions as, the conversion of the Subordinated Units to Common
Units. If a grantee's employment is terminated by reason of his death,
disability or retirement, the grantee's Unit Options will become immediately
exercisable. In addition, a grantee's Unit Options will become immediately
exercisable in the event of a "change of control" of the Company (as defined in
the Long-Term Incentive Plan).
Upon exercise of a Unit Option, the Manager will acquire Common Units
in the open market at a price equal to the then-prevailing price on the
principal national securities exchange upon which the Common Units are then
traded, or directly from the Company or any other person, or use Common Units
already owned by the Manager, or any combination of the foregoing. The Manager
will be entitled to reimbursement by the Company for the difference between the
cost incurred by the Manager in acquiring such Common Units and the proceeds
received by the Manager from an optionee at the time of exercise. Thus, the cost
of the Unit Options will be borne by the Company. If the Master Partnership
issues new Common Units upon exercise of the Unit Options, the total number of
Units outstanding will increase and the Manager will remit the proceeds received
from the optionee to the Company.
The Unit Option Plan has been designed to furnish additional
compensation to key executives and key directors and to increase their
proprietary interest in the future performance of the Company measured in terms
of growth in the market value of Common Units.
There were no option grants to the named executive officers during
fiscal 2001.
28
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
Shares December 31, 2001 December 31, 2001
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.
29
Restricted Unit Plan. A Restricted Unit is a "phantom" unit that
entitles the grantee to receive a Common Unit upon the vesting of the phantom
unit. No grants have been made under the Restricted Unit Plan. The LTIP
Committee may, in the future, determine to make grants under such plan to key
employees and directors containing such terms as the Committee shall determine.
Restricted Units granted during the Subordination Period will vest automatically
upon, and in the same proportions as, the conversion of the Subordinated Units
to Common Units. Common Units to be delivered upon the "vesting" of rights may
be Common Units acquired by the Manager in the open market, Common Units already
owned by the Manager, Common Units acquired by the Manager directly from the
Company or any other person, or any combination of the foregoing. The Manager
will be entitled to reimbursement by the Company for the cost incurred in
acquiring such Common Units. If the 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 Manager's Board of Directors in its discretion may terminate the
Long-Term Incentive Plan at any time with respect to any Common Units or Unit
Options for which a grant has not theretofore been made. The Manager's Board of
Directors will also have the right to alter or amend the Long-Term Incentive
Plan or any part thereof from time to time; provided, however, that no change in
any outstanding grant may be made that would impair the rights of the
participant without the consent of such participant.
30
Compensation of Directors
Compensation for Directors of the Manager covers services rendered for
both the Company and the Master Partnership. No additional remuneration will be
paid to employees who also serve as directors. Each independent director
receives $50,000 annually, for which they each agree to participate in four
regular meetings of the Board of Directors and four Audit/Conflicts Committee
meetings. Each other non-employee director receives $50,000 annually (to be paid
in cash or Subordinated Units, as determined by each director), for which they
each agree to participate in four regular meetings of the Board of Directors.
Each non-employee director will receive $1,250 for each additional meeting in
which he participates. In addition, each non-employee director will be
reimbursed for his out-of-pocket expenses in connection with attending meetings
of the Board of Directors or committees thereof. Each director will be fully
indemnified by the Company for his actions associated with being a director to
the extent permitted under Delaware law.
The Manager has entered into consulting agreements with each of Aubrey
Cole Associates (a consulting firm affiliated with Mr. Cole), Robert F. Wright
Associates, Inc. (a consulting firm affiliated with Mr. Wright) and Mr. Hornig
pursuant to which each such person or firm provides consulting services to the
Manager. Each such agreement provides for an annual retainer of $25,000, plus
$150 per hour (with a maximum per diem of $1,200) for services rendered at the
request of the Manager. In addition, the Manager entered into a consulting
agreement with Mr. Wyman that provides for an annual retainer of $50,000 for
services rendered at the request of the Manager. Each consulting agreement will
be reviewed annually by a majority of the directors who do not have consulting
agreements.
The Company paid approximately $98,000, $129,000, and $117,000 to the
Directors of the Manager for consulting services during 2001, 2000 and 1999,
respectively.
Employment Agreements
The Manager has entered into an employment agreement with Mr. Rudey
(the "Executive"). The agreement has a term expiring on December 31, 2002, and
includes confidentiality and non-compete provisions.
The agreement provides for an annual base salary of $450,000, subject
to such increases as the Board of Directors of the Manager may authorize from
time to time. Effective January 1, 2001, the Board of Directors authorized an
increase to $463,500. In addition, the Executive is eligible to receive an
annual cash bonus to be determined by the Compensation Committee not to exceed
100% of his base salary. The Executive will be entitled to participate in such
other benefit plans and programs as the Manager may provide for its employees in
general.
31
The agreement provides that in the event the Executive's employment is
terminated without "Cause" (as defined in the Employment Agreements) or if the
Executive terminates his employment for "Good Reason" (as defined below), such
individual will be entitled to receive a severance payment in an amount equal to
his base salary for the remainder of the employment term under the Employment
Agreement or 12 months, whichever is less, plus a prorated bonus for the year of
such termination calculated based on the bonus being equal to 100% of base
salary. In the event of termination due to death or disability, the Executive
will be entitled to accrued salary and benefits up to the date of the
termination. In the event the individual's employment is terminated for "Cause,"
he will receive accrued salary and benefits up to the date of termination.
Good Reason is defined in the agreement generally as: (i) failure of
the Manager's members to elect or re-elect the Executive to the Board of
Directors, (ii) failure of the Manager to vest in the Executive the position,
duties and responsibilities contemplated by his Employment Agreement, (iii)
failure of the Manager to pay any portion of the Executive's compensation, (iv)
any material breach by the Manager of any material provision of the Employment
Agreement and (v) a material reduction in the individual's duties,
responsibilities or status upon a "change of control" as defined in the
Employment Agreement. "Cause" is defined generally as: (i) any felony
conviction, (ii) any material breach by the Executive of a material written
agreement between the Executive and the Company, (iii) any breach caused by the
Executive of the Partnership Agreement, (iv) any willful misconduct by the
Executive materially injurious to the Company, (v) any willful failure by the
Executive to comply with any material policies, procedures or directives of the
Board of Directors of the Manager or (vi) any fraud, misappropriation of funds,
embezzlement or other similar acts of misconduct with respect to the Company.
Committee Interlocks and Insider Participation in Compensation Decisions
The Compensation Committee of the Manager is composed of Messrs. Rudey,
Abramson, Wyman, Hornig and Cole. Mr. Rudey also serves as Chairman of the
Manager.
The duties of the Compensation Committee are to (i) determine the
annual salary, bonus and benefits, direct and indirect, of all executive
officers, (ii) review and recommend to the full Board any and all matters
related to benefit plans covering the foregoing officers and any other employees
and (iii) serve as the Long-Term Incentive Plan Committee for the Company's
Long-Term Incentive Plan.
When setting executive officer compensation levels, the Compensation
Committee considers a variety of quantitative and qualitative criteria tied to
the strategic goals of the Company, such as maintaining the Minimum Quarterly
Distribution, an executive's acceptance of additional responsibility and
acquisition activity. The above factors were applied by the Compensation
Committee in determining the salary and bonus amounts for all executives,
including the CEO.
32
Item 12. Security Ownership of Certain Beneficial Owners and Management
None.
Item 13. Certain Relationships and Related Transactions
The Company is managed by the Manager pursuant to the Operating Company
Agreement. Under the Operating Company Agreement the Manager is entitled to
reimbursement of certain costs of managing the Company. These costs included
compensation and benefits payable to officers and employees of the Manager,
payroll taxes, general and administrative expenses and legal and professional
fees.
Consulting Agreements
The Manager has entered into consulting agreements with each of Aubrey
Cole Associates (a consulting firm affiliated with Mr. Cole), Robert F. Wright
Associates, Inc. (a consulting firm affiliated with Mr. Wright) and Mr. Hornig
pursuant to which each such person or firm provides consulting services to the
Manager. Each such agreement provides for an annual retainer of $25,000, plus
$150 per hour (with a maximum per Diem of $1,200) for services rendered at the
request of the Manager. Each consulting agreement will be reviewed annually by a
majority of the directors who do not have consulting agreements. In addition,
the Manager entered into a consulting agreement with Mr. Wyman that provides for
an annual retainer of $50,000 for services rendered at the request of the
Manager. See also Compensation of Directors included in Item 11.
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 Master Partnership contributed to USTY $294,000 of
cash for 49% of USTY's common interests (the "Common LLC Interests"). The
remaining Common LLC Interests were acquired for $306,000 in cash by U.S.
Timberlands Holding Group, LLC, a Delaware limited liability company in which
John Rudey and George Hornig, respectively, the Chairman of the Board and a
director of the Company's Manager, hold a controlling interest. The Company also
acquired all of the senior preferred interests in USTY (the "Senior or Preferred
LLC Interests") for its contribution to USTY of timberlands consisting primarily
33
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% until December 31, 2001 and 6% thereafter, of the $22.0 million agreed upon
value of the contributed timberlands. 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 Master
Partnership accounts for its Common LLC Interest by the equity method. A
subsidiary of the Manager of the Company provides management services to USTY
for a fee equal to 2% of USTY's agreed upon assets under management.
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 March 30, 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, the Company sold timber cutting rights for approximately 44.8
MMBF to USTY 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.
34
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
(a)(1) and (2) Financial Statements
See "Index to Financial Statements" set forth on page F-1.
(a)(3) Exhibits
+3.1 -- Amended and Restated Agreement of Limited Partnership of U.S.
Timberlands Company, LP
+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, LP and certain other parties
*10.4 -- Form of U.S. Timberlands Company, LP 1997 Long-Term Incentive Plan
*10.5 -- Employment Agreement for Mr. Rudey
*10. -- 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.
(psi)Incorporated by reference to the same numbered Exhibit to the Registrant's
Current Report on Form 8-K filed January 15, 1998.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 12th day of
April 2002.
U.S. TIMBERLANDS KLAMATH FALLS, LLC
By: U.S. Timberlands Services Company, LLC
It's Manager
By: /s/ John M. Rudey
-------------------------------------------------
John M. Rudey, Chairman, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
April 15, 2002
/s/ John M. Rudey Chairman, Chief Executive Officer,
- -------------------------------------------- President and Director (Principal Executive
John M. Rudey Officer)
April 15, 2002
/s/ Thomas C. Ludlow Chief Financial Officer
- --------------------------------------------
Thomas C. Ludlow
April 15, 2002
/s/ Robert B. Longo
- -------------------------------------------- Corporate Controller
Robert B. Longo (Principal Accounting Officer)
April 15, 2002
/s/ Aubrey L. Cole Director
- --------------------------------------------
Aubrey L. Cole
April 15, 2002
/s/ George R. Hornig Director
- --------------------------------------------
George R. Hornig
April 15, 2002
/s/ Alan B. Abramson Director
- --------------------------------------------
Alan B. Abramson
April 15, 2002
/s/ William A. Wyman Director
- --------------------------------------------
William A. Wyman
April 15, 2002
/s/ Robert F. Wright Director
- --------------------------------------------
Robert F. Wright
36
EXHIBIT INDEX
23.1 Consent of Richard A. Eisner & Company, LLP dated April 12, 2002.
37
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 members' equity 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 Klamath Falls, LLC
We have audited the accompanying consolidated balance sheets of U.S. Timberlands
Klamath Falls, LLC and subsidiary as of December 31, 2001 and 2000, and the
related consolidated statements of operations, changes in members' equity and
cash flows for each of the years in the three-year period ended December 31,
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
Klamath Falls, LLC and subsidiary 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 KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
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 215,298 265,109
Investment in affiliate 31,609 20,588
Property, plant and equipment, net 811 926
Notes receivable, less current portion 428 -
Deferred financing fees, net 3,973 4,648
--------------- --------------
Total assets $ 255,158 $ 301,349
=============== ==============
LIABILITIES AND MEMBERS' EQUITY
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
Members' Equity:
Managing member's interest 266 683
Nonmanaging members' interest 25,186 67,579
--------------- --------------
25,452 68,262
--------------- --------------
Total liabilities and members' equity $ 255,158 $ 301,349
=============== ==============
See notes to consolidated financial statements.
F -3
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Statements of Operations
(in thousands)
Year Ended December 31,
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 - 2,900 -
By-products and other 436 571 400
--------------- --------------- ----------------
54,564 75,739 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 24,429 36,620
Selling, general and administrative expenses (8,340) (8,428) (8,477)
Equity in net income (loss) of affiliate (6,098) 2,051 (607)
--------------- --------------- ----------------
Operating income (loss) (13,813) 18,052 27,536
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
--------------- --------------- ----------------
Net income (loss) $ (36,249) $ (3,933) $ 6,651
=============== =============== ================
See notes to consolidated financial statements.
F -4
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Statements of Changes in Members' Equity
(in thousands)
Managing Nonmanaging
Member's Members' Total
Interest Interest Members' Equity
Balance, December 31, 1998 $ 1,180 $ 116,851 $ 118,031
Distributions to members (263) (25,981) (26,244)
Net income 67 6,584 6,651
---------------------- ---------------------- --------------------
Balance, December 31, 1999 984 97,454 98,438
Distributions to members (262) (25,981) (26,243)
Net loss (39) (3,894) (3,933)
---------------------- ---------------------- --------------------
Balance, December 31, 2000 683 67,579 68,262
Distributions to members (65) (6,496) (6,561)
Net loss (352) (35,897) (36,249)
---------------------- ---------------------- --------------------
Balance, December 31, 2001 $ 266 $ 25,186 $ 25,452
See notes to consolidated financial statements.
F -5
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2001 2000 1999
-------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) $ (36,249) $ (3,933) $ 6,651
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 6,098 (2,051) 607
Other non-cash items 233 - -
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 members (6,561) (26,243) (26,244)
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 KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(dollar amounts in thousands, except per unit amounts)
1. Business and Significant Accounting Policies:
Business
The accompanying consolidated financial statements include the accounts of U.S.
Timberlands Klamath Falls, LLC ("the Company"), a Delaware limited liability
company, and its wholly owned subsidiary, U.S. Timberlands Finance Corp.
("Finance Corp."), collectively referred to hereafter as the Company. Finance
Corp. serves as the co-obligor for the Company's notes (defined below). It has
nominal assets and does not conduct operations. All intercompany transactions
have been eliminated in consolidation. An investment in affiliate is carried at
cost, plus accrued dividends to the extent earned, reduced by losses, if any, in
excess of the common members' interest in the investee (See Notes 3 and 9).
U.S. Timberlands Company, LP (the "MLP") owns a 99% non-managing member interest
in the Company. The MLP was formed on June 27, 1997 to acquire and own
substantially all of the equity interests in The Company and through the Company
to acquire and own business and assets of U.S. Timberlands Management Company,
LLC, formerly known as U.S. Timberlands Services Company, LLC. U.S. Timberlands
Services Company, LLC (the "Manager") manages the business of the Company and
owns a 1% managing member interest in The Company.
The primary activity of the Company is the growing of trees and 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 application.
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.
Income Taxes
The Company is a limited liability company. Accordingly, the Company is not
liable for federal or state income taxes since the Company's income or loss is
reported on the separate tax returns of the members. Accordingly, no provision
for current or deferred income taxes has been reflected in the accompanying
financial statements.
Unit-Based Compensation Plans
The Company accounts for the granting of unit options to employees and directors
of the MLP's Manager under MLP'S unit-based compensation plans under the
provisions of the Accounting Principles Board's Opinion No. 25, "Accounting for
Stock Issued to Employees". The Company has adopted the disclosure only
provisions of the Financial Accounting Standards Board Statement No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation" (see Note 10).
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 or 2000, it has absorbed a loss of approximately $146 from its allocable
share of the effect of adoption of SFAS 133 by its affiliate, 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 $310,546 $317,651
Timberlands 34,566 39,111
Seed orchard and nursery stock 1,437 1,364
-------- --------
346,549 358,126
Less accumulated depletion and road amortization 131,251 93,017
-------- --------
$215,298 $265,109
======== ========
3. Investment in Affiliate: Following is summarized financial information for
U.S. Timberlands Yakima, LLC, the MLP's equity basis affiliate (See Note 9), as
of and for the years ended December 31:
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
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 Manager
(the "Affiliate Credit Facility"), which allows the Company to borrow up to
$12.0 million. The Company's obligations under the Affiliate Credit Facility
represent unsecured general obligations. Borrowings under the Affiliate Credit
Facility bear interest at the prime lending rate as published in the Wall Street
Journal plus applicable margin (1.25% at December 31, 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 Company and its wholly owned subsidiary Finance Corp.
(collectively, the "Issuers"). The Issuers serve as co-obligors of the Notes.
The Notes represent unsecured general obligations of the Company and bear
interest at 9-5/8% payable semiannually in
F-11
7. Long-Term Debt (Continued)
arrears on May 15 and November 15, and mature on November 15, 2007 unless
previously redeemed. The Notes are redeemable at the option of the Issuers in
whole or in part, on or after November 15, 2002 at predetermined redemption
prices plus accrued interest to the redemption date.
The Notes contain certain restrictive covenants, including limiting the ability
of the 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 Company is presently
prohibited from making distributions to the members.
8. Members' Equity:
Allocation of Income (Loss)
As provided in the Company's Operating Agreement, income and losses are
allocated 99% to the MLP and 1% to the Manager.
Cash Distributions
The MLP is required to make quarterly cash distributions from Available Cash, as
defined in the MLP's Partnership Agreement if cash is available for
distributions. The Company distributes cash to the MLP to fund such
distributions in accordance with the Company's Operating Agreement. The Company
is presently prohibited from making cash distributions to the members (see note
7). If made, cash distributions are paid by the MLP in order of preferences:
first, the minimum quarterly distribution of $.50 per unit (the "MQD") to Common
Unitholders and the Manager, and second, to the extent cash remains available,
to Subordinated Unitholders.
The MLP Agreement sets forth certain cash distribution target rates for the
Company to meet in order for the Manager's share of Available Cash to increase
(such increases referred to as "Incentive Distributions"). To the extent that
the quarterly distributions exceed $.550 per Common and Subordinated Unit, the
Manager receives 15% of the excess Available Cash rather than the base amount of
2%. To the extent that the quarterly distributions exceed $.633 per Common and
Subordinated Unit, the Manager receives 25% of the excess Available Cash and to
the extent that the quarterly distributions exceed $.822 per Common and
Subordinated Unit, the Manager receives 50% of the excess Available Cash. Since
the quarterly distributions did not exceed the minimum quarterly distributions
for 2001, 2000 or 1999, the Manager did not receive any such Incentive
Distributions for those years.
9. Certain Relationships and Related Party Transactions:
Manager
The Manager has the ability to control management of the Company and the MLP and
has all voting rights of the Company and the MLP except for certain matters set
forth in The Company's Operating Agreement and in the MLP's Partnership
Agreement, as amended. The ownership of Subordinated and Common Units by certain
affiliates of the Manager effectively gives the Manager the ability to prevent
its removal.
The Manager does not receive any management fee or other compensation in
connection with its management of the Company. The Manager and its affiliates
perform services for the Company and are reimbursed for all expenses incurred on
behalf of the Company, including the costs of employee, officer and director
compensation properly allocable to the Company, and all other expenses necessary
or appropriate to the conduct of the business of, and allocable to, the Company.
The Company's Operating Agreement provides that the Manager will determine the
expenses that are allocable to the Company in any reasonable manner determined
by the Manager in its sole discretion. Related non-interest bearing receivables
and payables between the Manager 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 Manager 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.
F-12
9. Certain Relationships and Related Party Transactions (Continued): Certain
conflicts of interest could arise as a result of the relationships described
above. The Board of Directors and management of the Manager have a duty to
manage the Company 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 Manager has consulting agreements with affiliates
of certain Directors of the Manager, pursuant to which each such person or firm
has provided and/or will provide consulting services to the Manager. The
agreements provide for an annual retainer of $25 to $50, plus an hourly rate for
services rendered at the request of the Manager. Payments by the Manager related
to consulting agreements in 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 Master Limited Partnership contributed to USTY $294
of cash for 49% of USTY's common interests (the "Common LLC Interests"). The
remaining Common LLC Interests were acquired for $306 in cash by U.S.
Timberlands Holding Group, LLC, a Delaware limited liability company in which
John Rudey and George Hornig, respectively, the Chairman of the Board and a
director of the Company's Manager, hold a controlling interest. The Company also
acquired all of the senior preferred interests in USTY (the "Senior or Preferred
LLC Interests") for its contribution to USTY of timberlands consisting primarily
of non-income producing, pre-merchantable pine plantations having an agreed upon
value of $22,000 and any subsequent contributions. 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 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 Master Limited
Partnership accounts for its Common LLC Interest by the equity method.
On September 14, 2001, management of USTY was taken over by US Timberlands
Yakima Services, LLC ("Yakima Services"), a wholly owned subsidiary of the
Manager of the Company. Yakima Services is paid a fee equal to 2% of agreed upon
valuation of the assets under management. Prior thereto, the Manager 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 Master Limited Partnershp and 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
F-13
9. Certain Relationships and Related Party Transactions (Continued):
and any related liabilities. The Manager's Conflicts Committee reviewed and
approved the structure of the Company's investment in the affiliate.
In June 2000, the Company purchased timber cutting rights for approximately 4.2
million board feet from USTY for $1.3 million. These timber cutting rights
expire in June 2003
In December 2000, the Company sold approximately 8,000 acres of timberland
located in Central Oregon to USTY for $2,900.
During 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 cost for
the cutting rights and timberland of approximately $16.3 million. All property
that has been contributed for the the Company's preferred interest in USTY has
been pledged as collateral by USTY under its credit facility with its lender.
In March of 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.
In September of 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 of 2001 the Company 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.
Gross profits realized on the Company'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 affiliate has
been adjusted to eliminate its share of gross profits realized by USTY on sales
of timber cutting rights to the Company, until the Company sells the timber to
third parties.
Payments to Affiliate
See Note 6 regarding interest and commitment fees paid to an affiliate of the
Manager under the Affiliate Credit Facility.
Severance and Settlement
Selling, general and administrative expenses in 1999 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.
F-14
10. Management Incentive Plans:
Unit Option Plans
The MLP maintains a Unit Option Plan, which provides for the granting of options
(the "Unit Options") to employees and directors of the Manager who perform
services for the Company. The plan permits the grant of Unit Options covering
857,749 of the MLP's Common Units. Unit Options granted under the MLP's Unit
Option Plan are determined by the Long-Term Incentive Plan Committee of the
MLP's Board of Directors (the "LTIP Committee") and are granted at fair market
value at the date of the grant. 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, provided that the minimum quarterly
distributions (as defined in the MLP Agreement) has been made. Once the
performance criteria are achieved, the Company will record compensation expense
for the difference between the exercise price and fair value of the Common
Units, with a corresponding increase to Members' Equity. Although the
performance criteria were met for the years ended December 31, 2000 and 1999,
and 25% of the outstanding Subordinated Units were converted into Common in
February 2001, 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 7, distributions have been suspended and accordingly the
performance criteria had not been met as of December 31, 2001. Since no
distributions have been made by MLP since February 2001 and the MLP has
indefinitely suspended further distributions, conversion of the remaining
Subordinated Units is unlikely in the foreseeable future.
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 by the MLP under the Unit Option
Plan. These computations were made using the Black-Scholes option-pricing model,
as prescribed by SFAS 123, with the following weighted average assumptions for
2000 and
F-15
10. Management Incentive Plans (Continued):
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.
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 $ (36,249) $ (3,933) $ 6,651
Net income (loss) pro forma (36,572) (4,470) 6,204
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 MLP authorized the establishment of a restricted unit plan (the
"Restricted Unit Plan"), which allows it to grant units (the "Restricted Units")
to employees at the discretion of the LTIP Committee. No consideration will be
payable by the plan participants upon vesting and issuance of the Restricted
Units. Restricted Units granted during the subordination period would vest
automatically upon and in the same proportion as the conversion of Subordinated
Units to Common Units. Restricted Units granted subsequent to the subordination
period are the equivalent of Common Units. No Restricted Units have been granted
as of December 31, 2001.
Income Interests of the Manager
In connection with the Common Units offering and the related formation of the
MLP's General Partner, the Manager issued income interests to certain officers
and directors of the General Partner at no cost. Such income interests
participate pro rata in cash distributions from the Company and the MLP. Under
certain circumstances, the MLP's General Partner is required to repurchase the
income interests from officers and directors upon termination of their
employment at fair market value as determined by independent appraisal (see Note
9, severance and settlement).
F-16
11. Fair Value of Financial Instruments:
A summary of the fair value of the Company's significant financial instruments
and the methods and significant assumptions used to estimate those values is as
follows:
(a) Short-term financial instruments - The fair value of short-term
financial instruments, including cash and cash equivalents, trade and
other receivables, notes receivable, trade accounts payable and
certain
F-17
11. Fair Value of Financial Instruments (Continued):
(b) accrued liabilities, approximates their carrying amounts in the
financial statements due to the short maturities of such items.
(c) 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 March 31 Total Year
2001
Revenues $ 13,471 $ 24,229 $ 7,327 $ 9,467 $ 54,564
Gross profit 245 764 (252) (132) 625
Net income (loss) (10,251) (8,583) (8,600) (8,815) (36,249)
2000
Revenues $ 25,791 $ 14,064 $ 23,960 $ 11,924 $ 75,739
Gross profit 4,598 2,716 12,881 4,234 24,429
Net income (loss) (2,306) (5,229) 5,559 (1,957) (3,933)
(a) The quarter ended December 31, 2000 includes revenues of $2,773 and related
costs of $2,641 from a property sale.
13. 401(K) Defined Contribution Plan:
The Company sponsors a 401(k) defined contribution plan which covers
substantially all full-time employees. Company contributions to the plan totaled
$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.
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.
F-18
14. Commitments, Contingencies and Other(Continued):
Litigation
In November 2000, six purported class action lawsuits were filed against the
Manager and the Board of Directors of the Manager (the "Board") alleging breach
of fiduciary duty and self-dealing by the Manager and the Board in connection
with an announcement on November 2, 2000 that a group led by senior management
has begun the process to explore taking the MLP private (the "Going-Private
Transaction").
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
MLP).
All six lawsuits were filed in the Court of Chancery of the State of Delaware
for the County of New Castle. Each lawsuit was filed by a unitholder of the MLP,
on behalf of all other Unitholders of the MLP who are similarly situated, and
seeks to have the class certified and the unitholder bringing the lawsuit named
as representative of the class. In addition, the lawsuits seek to enjoin the
Going-Private Transaction, to rescind the
Going-Private Transaction if it is consummated, and to recover damages and
attorneys' fees. In addition to naming the Manager and the Board as defendants,
all six lawsuits name the MLP as a defendant.
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