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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-23259
________
U.S. TIMBERLANDS COMPANY, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1842156
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
625 Madison Avenue, Suite 10-B, New York, NY 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-755-1100
________
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
the 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
requirements for the past 90 days.
Yes [X] No [_]
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Form 10-Q
Table of Contents
Part I. Financial Information Page
Item 1. Condensed Consolidated Statements of Operations
for the three months ended March 31, 2003 and 2002 ..... 3
Item 1. Condensed Consolidated Balance Sheets
at March 31, 2003 and December 31, 2002 ................ 4
Item 1. Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2003 and 2002...... 5
Item 1. Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 11
Item 4. Controls and Disclosures................................... 15
Part II. Other Information
Item 1. Legal Proceedings.......................................... 16
Item 2. Changes in Securities and Use of Proceeds ................. 16
Item 3. Defaults Upon Senior Securities ........................... 16
Item 4. Submission of Matters to a Vote of Security Holders ....... 16
Item 5. Other Information ......................................... 16
Item 6. Exhibits and Reports on Form 8-K .......................... 17
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. TIMBERLANDS COMPANY, LP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------------------
2003 2002
------------------ ------------------
Revenues $ 6,831 $ 2,155
Cost of timber harvested (3,468) (1,037)
Depletion, depreciation and road amortization (2,883) (1,066)
Cost of timber and property sales (474) --
------------ ------------
Gross profit 6 52
Selling, general and administrative expenses (1,657) (1,381)
Equity in net loss of affiliate (2,228) (2,327)
------------ ------------
Operating loss (3,879) (3,656)
Interest expense (5,385) (5,384)
Interest income 4 3
Amortization of deferred financing fees (169) (169)
Other income, net 33 43
------------ ------------
Loss before general partner and minority interest (9,396) (9,163)
Minority interest -- 92
------------ ------------
Net loss (9,396) (9,071)
General partner interest 95 92
------------ ------------
Net loss applicable to common and subordinated units $ (9,301) $ (8,979)
============ ============
Net loss per each common and subordinated unit-
basic and diluted $ (0.72) $ (0.70)
============ ============
Distributions per Unit $ -- $ --
============ ============
Weighted average units outstanding 12,859,607 12,859,607
============ ============
See notes to the consolidated financial statements
-3-
U.S. TIMBERLANDS COMPANY, LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2003 2002
----------------- ------------------
(UNAUDITED) *
ASSETS
Current assets:
Cash and cash equivalents $ 1,981 $ 965
Accounts receivable, net 466 1,028
Due from general partner -- 6
Other receivables 432 211
Notes receivable 1,191 1,344
Prepaid expenses and other current assets 255 331
--------- ---------
Total current assets 4,325 3,885
Timber and timberlands, net 150,304 163,980
Investment in affiliate 47,118 38,881
Property, plant and equipment, net 889 905
Notes receivable, less current portion 10 10
Restricted cash 91 82
Deferred financing fees, net 3,130 3,298
--------- ---------
Total assets $ 205,867 $ 211,041
========= =========
LIABILITIES AND PARTNERS' CAPITAL/(DEFICIENCY)
Current liabilities:
Accounts payable 503 1,454
Accrued liabilities 9,049 3,990
Payable to general partner 115 --
--------- ---------
Total current liabilities 9,667 5,444
--------- ---------
Long-term debt 225,000 225,000
--------- ---------
Minority interest -- --
--------- ---------
Partners' capital (deficiency)
General partner interest (291) (196)
Limited partner interest
(12,859,607 units issued and outstanding as of March 31, 2003 and 2002) (28,509) (19,207)
--------- ---------
Total partners' capital (deficiency) (28,800) (19,403)
--------- ---------
Total liabilities and partners' capital (deficiency) $ 205,867 $ 211,041
========= =========
* Derived from audited Consolidated Balance Sheet as of December 31, 2002
See notes to the consolidated financial statements
-4-
U.S. TIMBERLANDS COMPANY, LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $ 1,118 $ (473)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Timber, timberlands and road additions (102) (102)
Purchase of property, plant and equipment - net -- (4)
-------- --------
Net cash used in investing activities (102) (106)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES: -- --
-------- --------
Increse (decrease) in cash and cash equivalents 1,016 (579)
Cash and cash equivalents - beginning of period 965 1,070
-------- --------
Cash and cash equivalents - end of period $ 1,981 $ 491
======== ========
NONCASH ACTIVITIES:
Contribution of timberlands for investment in affiliate $ 10,466 $ --
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest expense $ 505 $ --
See notes to the consolidated financial statements
-5-
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per Unit amounts or as otherwise indicated)
(Unaudited)
1. Business and Basis of Presentation
Business
U.S. Timberlands Company, LP (the "MLP"), a Delaware limited partnership, was
formed in 1997 to acquire and own 99% of the equity interests in U.S.
Timberlands Klamath Falls, LLC (the "Operating Company") and through the
Operating Company to acquire and own the business and assets of U.S. Timberlands
Management Company, LLC, formerly known as U.S. Timberlands Services Company,
LLC. As used herein, "Company" refers to the consolidated entities of the MLP
and the Operating Company.
The primary activity of the Company is the growing of trees and the sale of logs
and standing timber primarily to third party wood processors. The Company's
timber is primarily located in Oregon, east of the Cascade Range. Logs harvested
from the timberlands are sold to unaffiliated domestic conversion facilities.
These logs are processed for sale as lumber, plywood and other wood products,
primarily for use in new residential home construction, home remodeling and
repair and general industrial applications.
U.S. Timberlands Services Company, LLC (the "General Partner") manages the
businesses of the MLP and the Operating Company. The General Partner owns a 1%
general partner interest in the MLP and a 1% managing member interest in the
Operating Company.
Basis of Presentation
These condensed consolidated financial statements have been prepared by the
Company, without audit by independent public accountants, pursuant to the rules
and regulations of the United States Securities and Exchange Commission. In the
opinion of management, the accompanying unaudited financial statements include
all normal recurring adjustments necessary to present fairly the information
required to be set forth therein. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted from these statements pursuant to such rules and
regulations and, accordingly these condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
included in the Company's 2002 Annual Report on Form 10-K. Operating results for
the quarter ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the full year or any other period.
There have been no significant changes in the accounting policies of the
Company.
-6-
2. Timber and Timberlands
Timber and Timberlands consisted of the following:
March 31, December 31,
2003 2002
--------------- ------------
Timber and logging roads $288,534 $294,208
Timberlands 20,781 26,043
Seed orchard and nursery stock 1,475 1,375
-------- --------
310,790 321,626
Less accumulated depletion and road amortization 160,486 157,646
-------- --------
$150,304 $163,980
======== ========
3. Investment In Affiliate
The following is summarized financial information for U.S. Timberlands Yakima,
LLC (USTY), an affiliate of the Company accounted for under the equity method:
Quarter Ended Quarter Ended
March 31 March 31
2003 2002
-------------------- --------------------
Net sales $ 2,576 $ 5,656
Gross profit (loss) 36 (535)
Net income (loss) (2,228) (2,338)
In February 2003, the Company contributed timberlands located in Central Oregon
to USTY. The contributions have an aggregate agreed upon value of $12.9 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 interests at its aggregate costs for the timberlands of
approximately $10.5 million.
4. Short-Term Debt
The Company had a credit facility with an affiliate of the General Partner (the
"Affiliate Credit Facility") consisting of a revolving line of credit of up to
$12.0 million. Borrowings under the Affiliate Credit Facility bore interest at
the prime lending rate as published in the Wall Street Journal plus applicable
margin, which was based on the Company's leverage ratio. The Affiliate Credit
Facility expired, by its terms, at the end of April 2002. The Company is seeking
to replace the Affiliate Credit Facility with a working capital facility from an
unaffiliated third party. However, there can be no assurance that the Company
-7-
will be able to obtain a working capital credit facility in amounts sufficient
to fund its working capital needs from a traditional commercial lender. The
Company and the affiliated lender have also initiated discussions with respect
to a further extension of the credit facility on terms comparable to those that
would be obtained from an unaffiliated financing source. While the Company
continues to seek a credit facility from an unaffiliated source, affiliated
lenders have made short term advances to the Company, payable on demand to the
affiliates, at an annual interest rate of 10%. The affiliate has made no
commitment to continue lending funds to the Company, and each request is
reviewed on a case by case basis.
5. Long-Term Debt and Distributions
As of March 31, 2003, the Company was not permitted to make any distributions as
it had not exceeded the requisite Consolidated Fixed Charge Coverage Ratio
within the Restricted Payments provisions of the 9 5/8% Senior Notes issued by
the Operating Company.
6. Per Unit Information
The Company accounts for income (loss) per unit in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128") "Earnings Per Share".
Under SFAS No. 128, the Company is required to present basic income per common
and subordinated unit, and diluted income per unit information. The weighted
average number of common and subordinated units outstanding for each period
presented totaled 12,859,607, consisting of 9,648,017 common units and 3,211,590
subordinated units.
Net income (loss) per unit is calculated using the weighted average number of
common and subordinated units outstanding divided into net income (loss), after
adjusting for the 1% General Partner interest in the MLP. Unit options will be
included in calculating diluted net income (loss) per unit, assuming the results
would be dilutive, upon achievement of the performance criteria which, if
maintained for the required period, would result in the options becoming
exercisable. Unit options have not been included in the diluted calculation as
the effect is anti-dilutive.
7. Unit-based Compensation Plans
The Company has a Unit Option Plan which permits the grant of unit options to
employees and directors of the Company who perform services for the Company
covering 857,749 Common Units. As permitted under SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, which was issued in December
2002 and amended SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation arrangements as defined by
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. The following table illustrates the
effect on net loss if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation.
-8-
Three Months Ended
March 31, March 31,
2003 2002
Net (loss) as reported $(9,396) $ (9,071)
Unit-based employee compensation determined
under the intrinsic value method -- --
Unit-based employee compensation determined
under the fair value method 80
Net income (loss) pro forma $(9,396) $(9,151)
Basic and diluted net (loss) per unit
-as reported $ (0.72) $ (0.70)
-pro forma $ (0.72) $ (0.70)
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.
8. Recent Accounting Standards
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" as an amendment to SFAS No. 123 by
introducing two additional conversion methods when converting to the fair value
based method from the intrinsic value method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects on reported net income (loss)
of an entity's accounting policy decisions with respect to stock-based employee
compensation and amends APB Opinion No. 28 to require disclosure about those
effects in interim financial information. The disclosure provisions are
effective for fiscal years ending after December 15, 2002 and for interim
periods beginning after December 15, 2002. The Company follows the intrinsic
value method of accounting for stock-based employee compensation, but will
continue to evaluate the benefits of a voluntary change to the fair value based
method.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation
of Variable Interest Entities" which is an interpretation of Accounting Research
Bulletin No. 51 "Consolidated Financial Statements". FIN 46 requires the
consolidation of entities in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity. Currently, entities are generally consolidated by an
enterprise when it has a controlling financial interest through ownership of a
majority voting interest in the entity.
The provisions of FIN 46 are required to be applied by the Company no later than
July 1, 2003, and would require the Company to consolidate the financial
statements of U.S. Timberlands Yakima, LLC ("USTY"} its unconsolidated affiliate
-9-
which is presently being accounted for on the equity method. If the Company had
consolidated USTY beginning January 1, 2003, there would have been no effect on
the Company's net loss for the three months ended March 31, 2003, however
revenues would have increased by $2,576, expenses would have increased by $4,804
and the $2,228 equity in net loss of affiliate would be eliminated. In addition,
although there would be no change in Partners Capital/(Deficiency), total assets
would increase by approximately $139,000, principally representing timber and
timberlands, and total liabilities would increase by approximately $139,000
including $129,000 of long-term debt at March 31, 2003. Such long-term debt is
collateralized by all of the USTY assets and the debt holder does not have
recourse to the Company. The Company's maximum exposure to loss as a result of
its involvement with USTY is limited to its investment in USTY, which amounts to
$47,118 at March 31, 2003.
9. Other Matters
On October 17, 2002, the Company announced that it had signed a definitive
agreement to be acquired by an acquisition company formed by a group led by
senior management. The definitive agreement contemplates a cash tender offer for
100% of the outstanding common limited partnership units not already owned by
the acquiring entity or its affiliates for $3.00 per unit in cash, followed by a
merger of the acquisition company with and into the Company, pursuant to which
each common limited partnership unit not already owned by the acquiring entity
or its affiliates would be converted into the right to receive $3.00 per unit in
cash. The tender offer commenced on November 19, 2002 and was completed on March
6, 2003. Pursuant to the tender offer, approximately 71% of the Company's common
units were tendered. The acquisition group therefore controls approximately 87%
of the outstanding common units. The remaining common units not purchased in the
tender offer will be acquired by the acquisition group in a merger that is
expected to be completed in the second quarter of 2003.
On April 25, 2002, the Company announced that several purported class action
lawsuits were filed in the Court of Chancery of the State of Delaware for the
County of New Castle against the Manager and the board of directors of the
General Partner alleging, among other things, breach of fiduciary duty and
self-dealing by the Manager and the board in connection with the going private
transaction. The lawsuits sought to enjoin the going private transaction, to
rescind the going private transaction if it is consummated, and to recover
damages and attorney's fees. The lawsuits also named the Company as a defendant.
On July 12, 2002, the Company was notified that all of the purported class
action lawsuits were consolidated into one class action lawsuit by the Court of
Chancery of the State of Delaware. On October 17, 2002, the Company announced
that it had reached a tentative settlement of the purported class action
lawsuits, subject to court approval and other customary conditions. The
settlement provided, among other things, for an increase in the consideration
provided in the offer to purchase the common units to $3.00 per unit. On
December 12, 2002 the parties executed a Stipulation of Settlement which the
Court of Chancellery approved at a settlement at a hearing on January 30, 2003.
On June 21, 2002, the Company was notified that it was named in a lawsuit filed
in State Court in Oregon as a codefendant seeking medical expenses and up to
$12.0 million in damages for injuries sustained by the minor child of an
employee of the Manager while riding on equipment owned by the Manager. At the
time, liability insurance was in place, however, the insurance underwriter has
since gone bankrupt and coverage is limited and is being administered by the
Oregon Guarantee Insurance Association.
-10-
Management and its counsel are still reviewing the facts of the injury claims
and it is too early to assess their effect on the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain information contained in this report may constitute forward-looking
statements within the meaning of the federal securities laws. Although the
Company believes that expectations reflected in such forward-looking statements
are based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved. Forward-looking information is subject to certain
risks, trends and uncertainties that could cause actual results to differ
materially from those projected. Such risks, trends and uncertainties include
the highly cyclical nature of the forest products industry, general economic
conditions, competition, price conditions or trends for the Company's products,
the possibility that timber supply could increase if governmental, environmental
or endangered species policies change, and limitations on the Company's ability
to harvest its timber due to adverse natural conditions or increased
governmental restrictions. 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.
Application of Critical Accounting Policies
The Company's condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Certain accounting policies have a significant impact on amounts
reported in the financial statements. A summary of those significant accounting
policies can be found in Note 1 to the Company's financial statements included
in the Company's 2002 Annual Report on Form 10-K. The Company has not adopted
any significant new accounting policies during the three months ended March 31,
2003.
Among the significant judgments made by management in the preparation of the
Company's financial statements are the determination of the allowance for
doubtful accounts and the rates of depletion applicable to the Company's
merchantable timber. These determinations are made periodically in the ordinary
course of accounting.
Overview
The Company's principal operations consist of growing and harvesting timber and
selling logs, standing timber and related by-products to third party wood
processors. These logs and by-products are processed for sale as lumber, molding
products, doors, mill work, commodity, specialty and overlaid plywood products,
-11-
laminated veneer lumber, engineered wood I-beams, particleboard, hardboard,
paper and other wood products. These products are used in residential,
commercial and industrial construction, home remodeling and repair, general
industrial applications and a variety of paper products. 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 timber logs, seasonality,
government regulations affecting the manner in which timber may be harvested,
and competition from other supplying regions and substitute products. The
Company is not currently permitted to make any distributions to Unitholders (see
Financial Condition and Liquidity).
Seasonality
The Company's log and standing timber sales volumes are generally at their
lowest levels in the first and second quarters of each year. In the first
quarter, heavy snowfalls in higher elevations prevent access to many areas of
the Company's timberlands. This limited access, along with spring break-up
conditions (when warming weather thaws and softens roadbeds) in March or April,
restricts logging operations to lower elevations and areas with rockier soil
types. As a result of these constraints, the Company's sales volumes are
typically at their lowest in the first quarter, improving in the second quarter
and at their highest during the third and fourth quarters. Most customers in the
region react to this seasonality by carrying sufficiently high log inventories
at the end of the calendar year to carry them to the second quarter of the
following year.
Current Market Conditions
First quarter 2003 prices for finished wood products (e.g. lumber, plywood and
engineered wood products ) were lower than the fourth quarter 2002 and lower
than the same period in 2002. Prices for all species were down in the first
quarter. Ponderosa Pine prices led the decline with #3 shop falling more than
$100/mbf. Delivered log prices also fell in the first quarter and were down more
than 10% from the prior quarter.
-12-
RESULTS OF OPERATIONS
Selected operating statistics for the Company:
- ----------------------------------------------------------------------------------------------------------------
Sales Volume (MBF) Price Realization (MBF)
- ----------------------------------------------------------------------------------------------------------------
Timber Timber
Period Logs Stumpage Deeds Logs Stumpage Deeds
- ----------------------------------------------------------------------------------------------------------------
2003
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended March 31 17,098 - 2,886 $ 313 $ - $ 236
- ----------------------------------------------------------------------------------------------------------------
2002
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended March 31 5,024 - 2,333 $ 349 $ - $ 169
- ----------------------------------------------------------------------------------------------------------------
Quarter Ended March 31, 2003 Compared to Quarter Ended March 31, 2002
Revenues
Revenues for the quarter ended March 31, 2003 were $6.8 million, an increase of
$4.6 million or 209% from revenues of $2.2 million for the same period in 2002.
The significant increase in revenues during the first quarter of 2003 was caused
by favorable weather conditions that allowed for an extended harvest before the
annual break-up period and accelerated harvesting of "salvage" wood relating to
the 2002 fires.
Timber deed sales for the first quarter of 2003 were $0.7 million on volume of
2.9 million board feet ("MMBF"), as compared to the same period in 2002, when
timber deed sales were $0.4 million on 2.3 MMBF. The average timber deed price
was $236 per thousand board feet ("MBF") during the first quarter of 2003, as
compared to $169 per MBF for the same period in 2002.
Log sales for the quarter ended March 31, 2003 were $5.4 million on volume of
17.1 MMBF, as compared to the same period in 2002 when log sales were $1.8
million on 5.0 MMBF. The average sales price was $313 per MBF for the first
quarter of 2003, as compared to an average of $349 per MBF for the same period
in 2002. The decrease in log prices reflects a general decrease in the market
caused by a high volume of fire-damaged logs.
In addition, property sales for the first quarter were $0.6 million, as compared
to $0.0 million for the same period in 2002.
Gross Profit
The Company had a gross profit of $0.0 million in the first quarter of 2003 as
compared to a gross profit of $0.1 million for the same period in 2002. As a
percentage of sales the gross profit was 0% as compared to a gross profit
percentage of 2% in the first quarter of 2002. The decrease in gross profit as a
percentage of sales is a result of lower prices and higher logging costs, offset
in part by increased profits from by-product sales over the same period in 2002.
-13-
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $0.3 million from $1.4
million in the first quarter of 2002 to $1.7 million in the first quarter of
2003. The increase was principally attributable to higher wage and wage related
expenses of $0.2 million and higher professional service expenses of $0.1
million related to the privatization transaction.
Equity in Net Loss of Affiliate
Equity in net loss of affiliate was approximately $2.2 million for the first
quarter of 2003. This amount reflects the Company's share of the net loss of an
affiliate (USTY) accounted for under the equity method. This compares to equity
in net loss of affiliate of $2.3 million in the first quarter of 2002.
Partners' Capital
During the quarter ended March 31, 2003, the limited partner interests in the
Company declined $9.3 million from negative $19.2 million to negative $28.5
million. This decline is the result of the limited partners' $9.3 million share
of the Company's net loss. The General Partner interest in the Company also
declined during the quarter ended March 31, 2003 reflecting its share of the
Company's net loss for the period.
Financial Condition and Liquidity
Operating Activities
Cash flows provided by operating activities during the three months ended March
31, 2003 were $1.1 million, as compared to cash used in operating activities of
$0.5 million during the same period in 2002. The $1.6 million increase is due
primarily to the Company's increase in sales revenue in comparison to the same
period in 2002.
Investing Activities
Cash flows used in investing activities were $0.1 million during the first three
months of 2003, as compared to $0.1 million during the same period in 2002.
Financing Activities
Cash flows used in financing activities for the first three months of 2003 and
2002 were $0.0 million. There were no distributions to unitholders in the 2003
and 2002 periods respectively.
The Company had a credit agreement with an affiliate of the General Partner (the
"Affiliate Credit Facility"), which allowed the Company to borrow up to $12.0
million. The Affiliate Credit Facility expired on April 30, 2002. While the
Company continues to seek a credit facility from an unaffiliated source,
affiliated lenders have made short term advances to the Company, payable on
demand to the affiliates, at an annual interest rate of 10%. The affiliate has
made no commitment to continue lending funds to the Company, and each request is
reviewed on a case by case basis.
-14-
The agreement governing the Operating Company's 9-5/8% Senior Notes (the
"Notes") contains restrictive covenants, including limitations on harvest
levels, land sales, cash distributions and the amount of future indebtedness.
Under the Notes, the Company's average annual adjusted harvest volume over any
period of four consecutive years cannot exceed a volume of approximately 147
MMBF as adjusted for timberland sales and purchases. The Notes also limit
one-year harvest levels and average annual harvest levels for consecutive
two-and-three year periods. In 2002, because of the accelerated harvesting,
during the fourth quarter, of salvage timber resulting from the Toolbox Fire,
the operating company exceeded the allowable four year harvest by 6.9 MMBF and,
as required under the Indenture has placed $662 thousand in a restricted account
only to be used in ways prescribed in the Indentures. As of March 31, 2003, the
Operating Company was in compliance with the covenants contained in the Notes.
As of March 31, 2003, the Company was not permitted to make any distributions as
it had not exceeded the requisite Consolidated Fixed Charge Coverage Ratio
within the Restricted Payments provisions of the Indenture.
Through the first three months of 2003, the Company funded its operations and
met its cash requirements for debt service from cash on hand.
Cash required to meet the Company's debt service and any cash distributions will
be significant. To meet its working capital requirements, the Company for the
past several years has been selling logs and making timber sales at a rate in
excess of the General Partner's estimate of the current annual board footage
growth on the Company's timberlands. The debt service and, prior to April 2001,
quarterly cash distributions have been funded from operations and borrowings.
Given projected volumes for sales of logs and timber, estimated current board
footage growth on the timberlands and the harvest restrictions in the Notes,
unless prices improve, costs are reduced, new markets are developed or the
Company makes accretive acquisitions, the Company's ability in the future to
make distributions will be adversely affected. On May 10, 2001 the Company
announced an indefinite suspension of 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. The Company will
continue to look to log and timber deed sales as well as the sale of excess
timberlands, and short-term advances from an affiliated lender, to meet its
short term cash needs.
ITEM 4. CONTROLS AND DISCLOSURES
The Company's management maintains an adequate system of internal controls to
promote the timely identification and reporting of material, relevant
information. The Company's senior management team meets regularly to discuss
significant transactions and events affecting the Company's operations. The
Company's President and Chief Executive Officer, and Vice President and Chief
Financial Officer, lead these meetings and consider whether topics discussed
represent information that should be disclosed under the rules of the SEC. The
Board of Directors of the General Partner includes an Audit Committee. The Audit
Committee reviews the earnings release and all reports on Form 10-Q and 10-K
prior to their filing. The Audit Committee is responsible for hiring the
Company's external auditors and meets with those auditors at least three times
each year.
-15-
The Company's President and Chief Executive Officer, and Vice President and
Chief Financial Officer are responsible for establishing and maintaining
disclosure controls and procedures. They have designed such controls to ensure
that others make all material information known to them within the organization.
Management regularly evaluates ways to improve internal controls.
On February 28, 2003, our executive officers completed an evaluation of the
disclosure controls and procedures and has determined them to be functioning
properly and effectively. They did not discover any significant deficiencies or
material weaknesses within the controls and procedures that required
modification. Since the completion of that evaluation, there have been no
significant changes in internal controls or in other factors that could
significantly affect internal controls. PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 25, 2002, the Company announced that several purported class action
lawsuits were filed in the Court of Chancery of the State of Delaware for the
County of New Castle against the Manager and the board of directors of the
General Partner alleging, among other things, breach of fiduciary duty and
self-dealing by the Manager and the board in connection with the going private
transaction. The lawsuits sought to enjoin the going private transaction, to
rescind the going private transaction if it is consummated, and to recover
damages and attorney's fees. The lawsuits also named the Company as a defendant.
On July 12, 2002, the Company was notified that all of the purported class
action lawsuits were consolidated into one class action lawsuit by the Court of
Chancery of the State of Delaware. On October 17, 2002, the Company announced
that it had reached a tentative settlement of the purported class action
lawsuits, subject to court approval and other customary conditions. The
settlement provided, among other things, for an increase in the consideration
provided in the offer to purchase the common units to $3.00 per unit. On
December 12, 2002 the parties executed a Stipulation of Settlement which the
Court of Chancellery approved as a settlement at a hearing on January 30, 2003.
On June 21, 2002, the Company was notified that it was named in a lawsuit filed
in State Court in Oregon as a codefendant seeking medical expenses and up to
$12.0 million in damages for injuries sustained by the minor child of an
employee of the Manager while riding on equipment owned by the Manager. At the
time, liability insurance was in place, however, the insurance underwriter has
since gone bankrupt and coverage is limited and is being administered by the
Oregon Guarantee Insurance Association.
Management and its counsel are still reviewing the facts of the injury claims
and it is too early to assess its effect on the Company.
ITEMS 2, 3, 4, AND 5 OF PART II are not applicable and have been omitted.
-16-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
T3.1 - Amended and Restated Agreement of Limited Partnership of U.S. Timberlands Company, LP
T3.2 - Second Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, LLC
T10.2 - Indenture among U.S. Timberlands Klamath Falls, LLC, U.S. Timberlands
Finance Corp. and State Street Bank and Trust Company, as trustee
T10.3 - Contributions, Conveyance and Assumption Agreement among U.S. Timberlands
Company, LP and certain other parties
*10.4 - Form of U.S. Timberlands Company, LP 1997 Long-Term Incentive Plan
*10.5 - Employment Agreement for Mr. Rudey
*10.9 - Supply Agreement between U.S. Timberlands Klamath Falls, LLC and Collins
Products, LLC
++10.10 - Operating Agreement of U.S. Timberlands Yakima, LLC
10.11- Agreement and Plan of Merger by and among U.S. Timberlands Holdings Group, LLC,
U.S. Timberlands Acquisition Co., LLC and U.S. Timberlands Company, L.P.
Dated as of October 16, 2002
*21.1 - List of Subsidiaries
99.1 - Sarbanes-Oxley Certification of CEO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 - Sarbanes-Oxley Certification of CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form S-1 filed November 13,
1997.
T Incorporated by reference to the same numbered Exhibit to the
Registrant's Current Report on Form 8-K filed January 15, 1998.
++ Incorporated by reference to the same numbered exhibit to the
Registrant's Form 10-Q filed on May 15, 2000.
-17-
(b.) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on it behalf by the
undersigned thereunto duly authorized.
Date: May 20, 2003 U.S. TIMBERLANDS COMPANY, LP
By: U.S. Timberlands Services Company, LLC
as General Partner
By: /s/ Thomas C. Ludlow
-----------------------
Thomas C. Ludlow
Chief Financial Officer
(Chief Financial Officer,
Duly Authorized Officer,
And Principal Accounting Officer)
-18-
CERTIFICATION
I, John M. Rudey, certify that:
I have reviewed this quarterly report on Form 10-Q of U.S. Timberlands Company,
LP.
1. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
2. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
3. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures ( as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
4. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal control; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
5. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ John M. Rudey
Date: May 20, 2003 ---------------------------
John M. Rudey
Chairman, Chief Executive
Officer and President
-19-
CERTIFICATION
I, Thomas Ludlow, certify that:
I have reviewed this quarterly report on Form 10-Q of U.S. Timberlands Company,
LP.
1. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
2. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
3. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures ( as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
4. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal control; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
5. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Thomas C. Ludlow
Date: May 20, 2003 ----------------------------------
Thomas C. Ludlow
Chief Financial Officer