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, 2002 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) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class: Name of Each Exchange on Which Registered:
9-5/8% Senior Notes New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during then preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes[X] No[__]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
Yes [X]
No [ ]
Documents incorporated by reference: See item 15. Exhibit Index
U.S. TIMBERLANDS COMPANY, LLC
U.S. TIMBERLANDS FINANCE CORP.
TABLE OF CONTENTS
Page
TABLE OF CONTENTS
Page
PART I
Item 1. Business......................................................................................1
Item 2. Properties................................................................................... 9
Item 3. Legal Proceedings............................................................................10
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.......................................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................30
Item 13. Certain Relationships and Related Transactions...............................................30
Item 14. Controls and Procedures......................................................................32
PART IV
Item 15. Exhibits, Financial Statements, and Reports on Form 8-K......................................33
ii
PART I
Item 1. Business.
General
The business of U.S. Timberlands Company, 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
364,000 fee acres of timberland and cutting rights on approximately 13,000 acres
of timberland (collectively the "Timberlands") containing total merchantable
timber volume estimated as of January 1, 2003 to be approximately 0.9 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 four 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 44%) 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 121,000 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 42 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. During the 4th quarter of 2002, the
Company sold the Ochoco property to an affiliate. During October 1999, the first
and second quarters of 2001, the third quarter of 2002 and the first quarter of
2003 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 log sales are made
to unaffiliated third parties. Concurrent with the Company's acquisition of the
Klamath Falls Timberlands, the Company arranged for Collins Products LLC
("Collins"), a privately owned forest products company located within the
Klamath Falls Timberlands area, to purchase
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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 20 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 9 5/8% unsecured senior notes due 2007 (the
"Notes). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - 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.
On October 17, 2002, the Master Limited Partnership 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 about 87% of the outstanding common units.
The remaining common units not purchased in the tender offer will be
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acquired by the acquisition group in a merger that is expected to be completed
in the second quarter of 2003.
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.
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, age, and class distribution of the
Timberlands and the economic maturity of each
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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 205 million board feet (MMBF) in 2002 and plans to
harvest, or commit to harvest, approximately 108 MMBF in 2003. The Company sold
3.5 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. Although the Company's debt obligations place certain
limitations on the harvest plans which may limit the cash flow available for
unrestricted use in the future, the Company believes that it, generally has
sufficient flexibility to permit modifications in response to fluctuations in
the market for logs and lumber and the other factors described above. 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. 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 were 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 2002, sawlogs, stumpage sales and timber
deed sales accounted for approximately 47%, 0% and 34%, respectively, of the
Company's revenue. Chips, which can be used to make hardboard or pulp, and
seedlings combined accounted for 3% of the Company's revenues in 2002. There
were property sales in 2002 of $5.8 million, compared to 2001 property sales of
$0.0 million.
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 2002, sales to Boise
Cascade, Crown Pacific, Timber Products, and Scott Timber accounted for
approximately 55% of the Company's revenue. No other single non-affiliated
customer accounted for more than 6% of the Company's net revenues for 2002.
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 is in balance with the supply and that,
therefore, such customers could be replaced with some additional freight costs.
There are currently more than 20 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.
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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, 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 although this price has
been adversely affected by international competition. 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 0.9 BBF of merchantable, good
quality timber, approximately 121,000 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 33% 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
2002, the Company planted approximately 3.9 million seedlings and expects to
plant 4.3 million seedlings in 2003. 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, setting forth
the characteristics, including age, species, size and other characteristics for
the timber growing on each stand. Using the data in the GIS, the Company can use
a computer model to "grow" the timber over time, enabling it to generate
long-term harvest plans and to update its inventory annually. To maintain the
integrity of the data in the GIS, the Company performs a detailed ground survey
of the remaining timber inventory on a tract after each harvest and updates the
data in the GIS for that tract. With the aid of the GIS, the Company is able to
actively manage the Timberlands, track its inventory and develop site-specific
harvest plans on multiple scales, adding additional layers of detail, such as
the location of roadways or wildlife nesting areas, as required. The GIS also
permits the Company to analyze the impact that new legislation may have on its
Timberlands by inputting the proposed constraints imposed by such legislation in
light of the particular field characteristics of its Timberlands. The Company
believes the GIS may be used to the Company's advantage to evaluate potential
acquisition opportunities.
Federal and State Regulation
Endangered Species
The Federal Endangered Species Act and counterpart state legislation
protect species threatened with possible extinction. Protection of endangered
species may include restrictions on timber harvesting, road building and other
silvicultural activities in areas containing the affected species. A number of
species indigenous to the Pacific Northwest have been protected under the
Endangered Species Act, including the northern spotted owl, marbled murrelet,
Columbian white-tail deer, mountain caribou, grizzly bear, bald eagle and
various anadromous fish species. Currently, the Company has identified several
spotted owl and bald eagle nesting areas affecting the
7
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 2002 survey year, there were approximately 71 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 2002, and
identified approximately 29 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.
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
8
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.
Employees
As of March 15, 2003, the Company had 29 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 364,000 fee
acres of timberland and cutting rights on approximately 13,000 acres of
timberland containing total merchantable timber volume estimated as of January
1, 2003 to be approximately 0.9 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
9
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 121,000
acres of the 364,000 acre total consist of actively managed Pine Plantations
with stands ranging in age from one to 42 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 volume estimates are
based on information developed by Company personnel. As of January 1, 2003, the
total timber inventory amounted to 0.9 BBF. The Company's combined timber
inventory by MMBF and percentage is Ponderosa Pine (383 (44%)), Lodgepole Pine
(170 (20%)), White Fir (157 (18%)), Douglas Fir (124 (14%)) and other species
(35 (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, 2003, approximately 211
MMBF, or 24%, 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, 2003, the Plantations
totaled 121,000 acres. Of the total acreage, 64,000 acres range from 1 to 15
years of age, 27,000 acres range from 16 to 25 years of age, and 30,000 acres
are 26 years of age or older.
Item 3. 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
10
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.
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 2002.
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.
Issuance of Unregistered Securities
The Company did not conduct any unregistered offering of its
securities in 2002.
12
Item 6: Selected Financial Data
The financial information set forth below for each of the indicated
years is derived from the Company's audited consolidated financial statements.
This information should be read in conjunction with the consolidated financial
statements and related notes included with this report and previously filed with
the Securities and Exchange Commission.
U.S. Timberlands
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
CASH FLOWS AND OTHER DATA
(IN MILLIONS):
Modified EBITDDA (2) $ 12.8 $ 23.2 $ 49.3 $ 50.6 $ 44.2
Additions to timber and timberlands 3.1 5.6 2.3 1.0 0.6
Cash flow from operating activities 3.2 9.2 28.9 25.5 18.5
Cash flow (used in) investing
activities (3.3) (4.7) (2.3) (1.3) (0.6)
Cash flow from (used in) financing
activities -- (6.6) (26.2) (26.2) (23.7)
OPERATING STATEMENT DATA
(IN MILLIONS EXCEPT PER
UNIT AMOUNTS):
Revenues (1) 49.5 54.6 75.6 77.0 71.3
Depreciation, depletion and road
amortization (1) 27.5 37.3 28.8 23.3 21.9
Fire loss 0.6 -- -- -- --
Cost of timber and property sales (1) 7.3 -- 2.6 -- 5.9
Operating income (loss) (1) (21.9) (14.1) 17.9 27.2 16.3
Income (loss) before extraordinary
items (44.1) (36.6) (4.1) 6.4 (6.4)
Net income (loss) (44.1) (36.6) (4.1) 6.4 (6.4)
BALANCE SHEET DATA (AT
PERIOD END, IN MILLIONS):
Working capital (1.6) (1.7) 2.0 2.4 1.4
Total assets 211.0 254.4 300.9 327.7 350.7
Long-term debt (3) 225.0 225.0 225.0 225.0 225.0
Equity (deficiency) (19.4) 24.4 67.1 97.2 116.9
OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
volumes (MMBF) (1) 204.8 250.7 243.7 187.3 144.5
Property sales volumes (MMBF) (1) 3.5 -- 13.6 -- 26.6
(1) Revenues in 2002 consist of $42.3 million of log, stumpage and deed
sales, $5.8 million of timber and property sales and $1.5 million of
by-products and other sales. 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.
13
(2) 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."
(3) See discussion of long-term debt at Note 7 of the Notes to
Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Certain information contained in this report may constitute
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Forward-looking information is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected. Such risks, trends and
uncertainties include the highly cyclical nature of the forest products
industry, general economic conditions, competition, price conditions or trends
for the Company's products, the possibility that timber supply could be affected
if governmental, environmental or endangered species policies change, and
limitations on the Company's ability to harvest its timber due to adverse
natural conditions or increased governmental restrictions. The results of the
Company's operations and its ability to pay quarterly distributions to its
Unitholders depend upon a number of factors, many of which are beyond its
control. These factors include general economic and industry conditions,
domestic and export prices, supply and demand for logs, seasonality, government
regulations affecting the manner in which timber may be harvested, and
competition from other supplying regions and substitute products. These and
other risks are described in the Company's other reports and registration
statements, which are available from the United States Securities and Exchange
Commission.
General
The Company's primary business is the growing and harvesting of
timber (see Item 1. Business).
The Company's results of operations are affected by various factors,
many of which are beyond its control, including general industry conditions,
domestic and international prices and supply and demand for logs, lumber and
other wood products, seasonality and competition from other domestic and
international supplying regions and substitute products.
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
14
contributed to the general downward trend of prices. Certain market conditions
for finished products have also negatively impacted stumpage and log prices in
2002.
Industry participants do not expect environmental restrictions to
ease materially within any reasonable planning horizon. Consequently, many
producers of lumber and wood products are attempting to adapt to the new supply
environment by increasing their emphasis on raw material yields, entering into
long-term timber supply arrangements and value added manufacturing, and
accessing previously untapped supplies (such as private wood lot owners, timber
with difficult access, alternative species and imports). These factors have
tended to maintain supply of domestic produced logs and have kept prices from
increasing.
In response to an increase in domestic timber prices in the early
1990s, imports of logs and lumber from abroad (from countries such as Canada and
New Zealand) increased. These imports, however, only partially offset the lost
volume of timber from public timberlands and did not replace the mature,
high-quality timber found in greater quantities on public timberlands. Imports
are likely to continue to increase over the next few years and could
significantly affect the raw material supplies in the domestic lumber and wood
products industry.
Demand
Changes in general economic and demographic factors, including the
strength of the economy, unemployment rates and interest rates for home
mortgages and construction loans, have historically caused fluctuations in
housing starts and, in turn, demand and prices for lumber and commodity wood
products. United States housing starts for 2002 were up slightly from 2001
levels, however, lumber prices were generally depressed by an increase in
imported lumber. 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 a 30% tariff has been 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.
Application of Critical Accounting Policies
The Company's 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
herein.
Company has not adopted any new accounting policies during the year ended
December 31, 2002 that significantly impact its financial statements.
15
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.
Current Market Conditions
Log prices in the first quarter of 2002 were down 3% from the fourth
quarter of 2001. During the second quarter prices improved by 2% and remained at
these levels during the third and fourth quarters.
The average log price in 2002 was down by 8% from 2001 to $321/MBF
from $349/MBF. This downward trend has continued for three years with average
prices decreasing from $393/MBF to $321/MBF. In 2002, realizations from Timber
Deeds decreased to $152/MBF from $160/MBF in 2001.
Results of Operations
The following table sets forth sales volume for each of 2002, 2001
and 2000 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)
------ ---- -------- ----- ---- -------- ----- ------------
2002
Year ended 12/31 74,612 -- 130,161 $ 330 -- $ 135 $ 5,763
4th Quarter 31,015 -- 19,159 $ 324 -- $ 174 $ 4,700
3rd Quarter 23,998 -- 20,189 $ 329 -- $ 186 $ 1,063
2nd Quarter 14,575 -- 88,480 $ 341 -- $ 114 --
1st Quarter 5,024 -- 2,333 $ 349 -- $ 169 --
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 --
16
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues. Revenues decreased $5.1 million, or 9%, from $54.6 million
in 2001 to $49.5 million in 2002. The decrease is primarily attributable to a
decrease in log sales of $1.4 million and a $10.5 million decrease in stumpage
sales and deed sales. These decreases were offset by property sales in 2002 of
$5.8 million, compared to $0.0 million in 2001. Chip and by-product revenues
were also higher by $1.0 million in 2002 compared to 2001. To meet its working
capital requirements, the Company harvested and sold logs and timber deeds in
2002 at rates in excess of the estimated current annual board footage growth on
the Timberlands.
Log sales for 2002 were $24.7 million on volumes of 74,612 MBF,
compared to log sales of $26.0 million on volumes of 74,640 in 2001. The average
log sales price for 2002 was $330 compared to an average log sales price of $349
in 2001, a 5% decrease, reflecting weaker markets for the Company's log sales.
Timber deed sales for 2002 were $17.6 million on volumes of 130,162
MBF, compared to timber deed revenue of $28.1 million on volumes of 176,105 MBF
in 2001. The average timber deed sales price per MBF for 2002 was $135 compared
to an average timber deed sales price of $160 in 2001, a 16% 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 2002 and 2001. 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 revenue from two property sales in 2002 of $5.8
million, compared to $0.0 million in revenue from timber and property sales
during 2001.
Gross Profit. Gross profit decreased along with revenues by $3.9
million from $0.6 million in 2001 to -$3.3 million in 2002 and gross margin
decreased from 1% in 2001 to -6% in 2002. The decrease in gross margin was
primarily from four factors. First, contracted log and haul costs on a per MBF
basis were higher during 2002 as compared to 2001 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 2001. Third, in 2002 the Company
incurred a fire loss of $0.6 million. Finally, continued declines in the timber
markets have resulted in lower realizations on delivered log and stumpage
values. Depletion, depreciation and road amortization decreased from $37.3
million in 2001 to $27.5 million in 2002 due primarily to decreased volume of
timber sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $7.5 million in 2002, compared to selling, general
and administrative expenses of $8.3 million in 2001. Within selling, general and
administrative, most categories of expenses were down. Salaries, wages and
benefits were down $0.3 million due to positions that were vacant for a portion
of the year and professional services were down $0.2 million compared to 2001.
Those decreases were partly offset by increases in insurance expense of $0.1
million.
Equity in Net Income (Loss) of Affiliate. The equity in net loss of
affiliate was $11.0 million during 2002 as compared to equity in net loss of
affiliate of $6.4 million in 2001. The losses in 2002 and 2001 reflect the
Company's share of losses absorbed from its common and preferred investment in
U.S. Timberlands Yakima, LLC. 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 $21.7 million in 2002 and
$22.0 million in 2001 consisting primarily of interest expense on the Company's
$225.0 million of Senior Notes.
Other Income (Expense), net. Other income, net, was $0.2 million for
2002, compared to $0.1 million for 2001, representing an increase in income of
$0.1 million.
Cash Flow From Operations. During 2002, cash flow from operations
decreased $5.9 million or 65% compared to 2001, primarily because of a $7.6
million increase in net loss.
17
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 timber deeds in 2001 at
rates in excess of the estimated current annual board footage growth on the
Timberlands.
Log sales for 2001 were $26.0 million on volumes of 74,640 MBF,
compared to log sales of $37.8 million on volumes of 96,112 in 2000. The average
log sales price for 2001 was $349 compared to an average log sales price of $393
in 2000, an 11% decrease, reflecting weaker markets for the Company's log sales.
Timber deed sales for 2001 were $28.1 million on volumes of 176,105
MBF, compared to timber deed revenue of $34.3 million on volumes of 147,083 MBF
in 2000. The average timber deed sales price per MBF for 2001 was $160 compared
to an average timber deed sales price of $246 in 2000, a 35% decrease. The
significant decrease in timber deed sales realization is due to overall declines
in market conditions, as well as a change in the timber mix being sold in timber
sales.
There were no stumpage sales for 2001, compared with stumpage sales
of $0.2 million on volumes of 503 MBF in 2000. The reduction in stumpage volumes
is a result of the Company's strategic decision to utilize log sales and timber
deed sales as its primary source of revenue.
The Company had no revenue from timber and property sales in 2001
compared to $2.8 million in revenue from timber and property sales during 2000.
Gross Profit. Gross profit decreased along with revenues by $23.7
million from $24.3 million in 2000 to $0.6 million in 2001 and gross margin
decreased from 32% in 2000 to 1% in 2001. The decrease in gross margin was
primarily from three factors. First, contracted log and haul costs on a per MBF
basis were higher during 2001 as compared to 2000 due to longer hauls for
delivered logs. Second, the Company's timber deed sales were composed of a
different value grade mix as compared to 2000. Finally, continued declines in
the timber markets have resulted in lower realizations on delivered log and
stumpage values. Depletion, depreciation and road amortization increased from
$28.8 million in 2000 to $37.3 million in 2001 due to increased volume of timber
sales, increases in depletion rates effective January 1, 2001 and increased
volume of timber sold from a separate pool with a higher depletion rate.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $8.3 million in 2001, consistent with selling,
general and administrative expenses of $8.4 million in 2000. Within selling,
general and administrative, most categories of expenses were down. Salaries and
wages were down $1.0 million due to the elimination of the annual bonuses of
$0.6 million, management positions that were vacant for a portion of the year of
$0.2 million, and a settlement with previous employee of $0.2 million in 2000.
Those decreases were offset by increases in professional services of $1.2
million over 2000, relating to the cost of advisors retained by the independent
committee formed to evaluate the going private transaction.
Equity in Net Income (Loss) of Affiliate. The equity in net loss of
affiliate was $6.4 million during 2001 as compared to equity in net income of
affiliate of $2.0 million in 2000. The loss in 2001 reflects the Company's share
of losses absorbed from its common and preferred investment in U.S. Timberlands
Yakima, LLC and the income in 2000 reflects the recapture of $0.6 million in
losses previously absorbed by its preferred investment in U.S. Timberlands
Yakima, LLC and the Company's accrued return of $1.4 million on its preferred
investment See "Investment in Affiliate" included in Note 9 of the Financial
Statements for an explanation of the preferred and common investments in U.S.
Timberlands Yakima, LLC.
18
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% compared to 2000, primarily because of a $32.1
million decrease in net income.
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, 2002, the Company had a cash balance of $1.0 million and had $1.6 million
working capital deficit.
Operating Activities. Cash flows provided by operating activities in
2002 were $3.2 million, compared to cash flows provided by operating activities
of $9.2 million in 2001. The $5.9 million decrease in cash flows provided by
operating activities was primarily attributable to a $7.6 million increase in
net loss.
Investing Activities. Cash flows used in investing activities were
$3.3 million in 2002, as compared to cash flows used in investing activities of
$4.7 million during 2001 principally for reforestation, timber acquisitions and
road additions in each year.
Financing Activities. Cash flows used in financing activities were
$0.0 and $6.6 million in 2002 and 2001. During 2002 and 2001, the Company paid
$0.0 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 Unitholders.
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,
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
19
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 did not meet the fixed charge coverage tests at December 31, 2002 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.
The Indenture also contains restrictions on the amount of timber
that may be harvested based on a limit of 150%, 140%, 130% and 120% of 125 MMBF,
adjusted for various acquisitions, dispositions and adjustments, averaged over a
one, two, three and four year period, respectively. In 2002, because of the
accelerated harvesting during the fourth quarter 2002 of salvage timber
resulting from the Toolbox Fire, the 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.
Affiliate Credit Facility
The Company had a credit facility with an affiliate of the Manager
(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 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.
Capital Expenditures/Cash Distributions
Capital expenditures in 2002 totaled $3.3 million. The Company
purchased timber cutting rights from its affiliate for approximately 12.0 MMBF
of timber for $1.3 million. The remaining $2.0 million in capital expenditures
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 $1.4 million in 2003 consisting
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 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
20
prices will improve or any of these actions will take effect within a short-term
horizon. Although the Company has been approached recently regarding certain
debt restructuring scenarios, discussions have been very preliminary and it is
premature to access the likelihood of pursuing any such scenario or other
material transaction.
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
On October 17, 2002, the Master Limited Partnership 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 acquisition 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
acquisition 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 about 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.
Recent Accounting Standards
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as of January 1,
2001. SFAS 133 requires the Company to recognize all derivatives in the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through earnings. If the derivative is a hedge, depending upon the nature
of the hedge, changes in fair value of the derivative will either be offset
against the changes in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Although the Company had no outstanding derivative positions at December 31,
2001, it absorbed a loss of approximately $146 from its allocable share of the
effect of the adoption as of January 1, 2001 of SFAS 133 by its affiliate, U.S.
Timberlands Yakima, LLC, to reduce the carrying value of an interest rate cap
agreement to its fair value.
In August 2001, the Financial Accounting Standards Board, (FASB), issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, for the disposal of a segment of a business. Adoption of SFAS
No. 144 by the Company as of January 1, 2002 did not significantly impact its
financial position, results of operations, or cash flows.
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
21
1. Business and Significant Accounting Policies (continued):
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
which is presently being accounted for on the equity method (see Notes 3 and 9).
If the Company had consolidated USTY beginning January 1, 2002, there would have
been no effect on the Company's net loss for the year ended December 31, 2002,
however revenues would have increased by $6,157, expenses would have increased
by $17,203 and the $11,046 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 $106,000,
principally representing timber and timberlands, and total liabilities would
increase by approximately $106,000 including $96,053 of long-term debt at
December 31,2002. Such long-term debt is collateralized by all of the USTY
asssts 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 $38,881 at December 31, 2002.
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 general, the management of the General Partner manages and operates
the Company's business as officers and employees of the General Partner and its
affiliates. The Unitholders do not directly or indirectly participate in the
management or operation of the Company.
In January 1999, the General Partner appointed William A. Wyman and
Alan B. Abramson, two members of the 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.
None of the listed directors or executive officers, to the best
knowledge of the foregoing, has been convicted in a criminal proceeding or is
named subject of a pending criminal proceeding (including traffic violations and
other minor offenses) or has been party to any judicial or administrative
proceeding during the past five years that resulted in a judgment, decree or
final order enjoining the person from future violations of, or prohibiting
activities subject to federal or state securities laws, or a finding of any
violation of federal or state securities laws.
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 General Partner, 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 59 Chairman, Chief Executive Officer, President
and Director (1)
Aubrey L. Cole 79 Director (2)
George R. Hornig 48 Director (3)
William A. Wyman 64 Director (4)
Alan B. Abramson 57 Director (5)
Robert F. Wright 77 Director (6)
Thomas C. Ludlow 56 Vice President and Chief Financial Officer
Martin Lugus 62 Vice President, Timberland Operations
Robert B. Longo 49 Corporate Controller
Walter L. Barnes 60 Assistant Vice President, Harvesting
Robert A. Broadhead 51 Assistant Vice President, Acquisitions &
Development
Christopher J. Sokol 53 Assistant Vice President, Forestry
Travis A. Huntley 56 Assistant Vice President, Marketing
(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, having been elected to the Board in September
1996. Mr. Rudey also serves as the Chairman and Chief Executive Officer of
Holdings since September 1997. 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, having been
elected to the Board in September 1996. 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
24
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).
From 1998 to 2001, Mr. Cole served as a Director of Deotexas Inc. (a development
stage company).
George R. Hornig serves as a Director of the Manager, having been
elected to the Board in September 1996. Since 1999, Mr. Hornig has been Managing
Director and Chief Operating Officer 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, Forrester Research, Inc., and
Veridian Corporation, a defense technology company traded on the New York Stock
Exchange.
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, having been
elected to the Board in September 1996. 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 was a Director of Hanover Direct, Inc. until August 2001, a
Director of Quadlogic Controls Corporation until 2001, and a Director of
Deotexis, Inc. until mid-2001. Mr. Wright is currently 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), CDG Technology Inc.
(growth stage systems and suppliers to water utilities), GVA Williams Real
Estate Co., Inc. (a real estate company), and U.S.I. Holdings Corporation (a
distributor of insurance products).
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 - Acquisition
& Development of the Manager, a newly created position in 2002 to identify and
evaluate properties From 1996 through 2001, Mr. Broadhead served as Assistant
Vice President- Marketing of the Manager. 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.
Travis A. Huntley serves as Assistant Vice President - Marketing of
the Manager, responsible for all log and stumpage sales transactions. Prior to
joining the Manager in 2000, Mr. Huntley was Log Coordinator for Collins
Products LLC. Before Collins Products Mr. Huntley was Timber Manager for Medite
Corporation and managed 170,000 acres of Timberlands in South Central Oregon.
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 OTC Bulletin Board. 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 2002, all filings
required were properly made.
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
$100,000 (the "Named Executive Officers") for services rendered during the
fiscal year ended December 31, 2002:
26
SUMMARY COMPENSATION TABLE
--------------------------
Long-Term
Annual Compensation
Compensation Awards
Securities
Name and Principal Fiscal Underlying All Other
Position Year Salary ($) Bonus ($) Options/SARs(#) Compensation
- -------- ---- ---------- --------- --------------- ------------
John M . Rudey 2002 $463,500 $ -- -- --
Chairman and 2001 463,500 -- -- --
Chief Executive Officer 2000 463,500 256,750 -- --
Thomas C. Ludlow 2002 225,000 --
Vice President and 2001 225,000 --
Chief Financial Officer 2000 80,208 75,000 50,000 --
Martin Lugus 2002 123,600 --
Vice President - Timberland 2001 123,600 --
2000 123,600 30,900 -- --
Walter L. Barnes 2002 97,850 --
Assistant Vice President 2001 97,850 --
- Harvesting 2000 97,850 24,463 -- --
Robert A. Broadhead 2002 92,700 --
Assistant Vice President 2001 92,700 --
- Acquisitions & Development 2000 92,700 23,175 -- --
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
27
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 2002.
The following table sets forth certain information with respect to
the aggregate number and value of options at the fiscal year-end 2002:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FIS CAL YEAR ENDED OPTION/SAR VALUES
Number of Securities
Underlying/Unexercised Value of Unexercised
Options/S ARs at In-the-Money Options/S ARs at
Shares December 31, 2002 December 31, 2002
------ ----------------- -----------------
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, 2002, the market value of
the Common Units was $2.76 per common unit. Since the Unit Options,
once exercisable, would be exercisable at a range of $9.813 to
$14.750 per unit, the in-the-money computation is inapplicable.
Restricted Unit Plan. A Restricted Unit is a "phantom" unit that
entitles the grantee to receive a Common Unit upon the vesting of the phantom
unit. No grants have been made under the Restricted Unit Plan. The LTIP
Committee may, in the future, determine to make grants under such plan to key
employees and directors containing such terms as the Committee shall determine.
Restricted Units granted during the Subordination Period will vest automatically
upon, and in the same proportions as, the conversion of the Subordinated Units
to Common Units. Common Units to be delivered upon the "vesting" of rights may
be Common Units acquired by the 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
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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.
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. The independent directors
receive $50,000 to $100,000 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 co