UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2001
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24976
CROWN PACIFIC PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
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Delaware |
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93-1161833 |
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(State or other
jurisdiction of incorporation |
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(I.R.S. Employer Identification No.) |
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121 SW Morrison Street, Suite 1500, Portland, Oregon |
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97204 |
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(Address of principal executive offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code: 503-274-2300 |
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Title of Each Class |
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Name of Each Exchange on Which Registered |
Common Units, Representing Limited Partner Interests |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: none
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ý No o
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 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 this Form 10-K. ý
The aggregate market value of the voting Units of the Registrant held by non–affiliates of the Registrant was $192,930,830 as of March 31, 2002 based upon the last sales price as reported by the New York Stock Exchange.
As of March 31, 2002, there were 30,527,030 Common Units outstanding.
Documents Incorporated by Reference
None.
CROWN PACIFIC PARTNERS, L.P.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
General
Crown Pacific Partners, L.P. (“Crown Pacific” or the “Partnership”), a Delaware limited partnership, through its 99% owned subsidiary, Crown Pacific Limited Partnership (the “Operating Partnership”), was formed in 1994 to acquire, own and operate timberlands and wood product manufacturing facilities located in the Northwest United States. The Partnership’s business consists primarily of growing and harvesting timber for sale as logs in domestic and export markets and the manufacturing and selling of lumber and other wood products.
Crown Pacific Management Limited Partnership (the “Managing General Partner”) manages the businesses of the Partnership and the Operating Partnership. The Managing General Partner owns a 0.99% general partner interest in the Partnership and a 1% general partner interest in the Operating Partnership. Crown Pacific, Ltd. (“CPL”), through its 99.98% owned subsidiary, Crown Pacific Administrative L.P., the Special General Partner of the Partnership, and the Managing General Partner, comprise the General Partners of the Partnership. The Special General Partner owns a 0.01% general partner interest and an 8.70% limited partnership interest in the Partnership. All management decisions related to the Partnership are made by the Managing General Partner, but unitholders have voting rights for certain issues as described in the Partnership Agreement.
From inception through early 2000, we pursued a plan of growth through strategic acquisitions of timberlands and other assets. Given the downturn in the economy in the later part of 2000, which continued through 2001, we decided to pursue a strategy of preserving our timber assets until log and land prices improve. Without the strategic land sales that we had in previous years and the resulting tightening of our cash position, we curtailed our acquisition program. The following table summarizes our significant acquisitions, net of asset resales:
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Acquisition |
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Date |
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Consideration |
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Central Oregon timberlands |
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April 1988 |
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$35.6 million |
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Prineville, Oregon sawmill |
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November 1988 |
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$6.3 million |
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Hamilton timberlands |
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July 1989 |
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$237.8 million |
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Central Oregon timberlands and Gilchrist, Oregon sawmill |
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October 1991 |
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$131.5 million |
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Central Oregon timberlands |
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June 1992 |
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$8.8 million |
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Eastern Washington timberlands |
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December 1992 |
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$10.1 million |
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Redmond, Oregon plywood and remanufacturing facilities |
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September 1993 |
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$29.4 million |
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Inland Region timberlands and sawmills |
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October 1993 |
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$238.0 million |
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Western Washington, Tract 17 timberlands |
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July 1995 |
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$18.0 million |
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Olympic timberlands and Eastside timberlands |
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May 1996 |
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$205.0 million |
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Bellingham, Washington timberlands |
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October 1997 |
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$153.0 million |
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Alliance Lumber Contractor Service Yards |
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January 1998 |
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$29.5 million |
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Desert Lumber, Inc. and Reno Lumber Service, Inc. |
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March 1999 |
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$24.3 million |
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Cheshire Sales Company |
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January 2000 |
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$5.5 million |
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Idaho timberlands |
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January 2000 |
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$73.4 million |
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Dispositions
In September 2000, we closed the sale of our independently operated subsidiary Yellowstone Trucking, which resulted in a gain of $1.2 million. Under the terms of the sale agreement, we sold all of Yellowstone Trucking’s operations and assets, including its real property and terminal in Coeur d’Alene, Idaho.
On September 28, 2001, we completed a strategic alliance with Louisiana-Pacific Corporation (“LP”). The strategic alliance involved the sale of our Bonners Ferry, Idaho sawmill to LP, for net proceeds to us of approximately $8.0 million (including certain working capital accounts), the collection of receivables of approximately $9.7 million and the provision of a long-term log supply commitment from our 252,000 acre Idaho tree farm to supply LP’s mills in the northern Idaho region. In addition, LP subleased the Bonners Ferry sawmill, which had been accounted for as an operating lease, the net present value of which was approximately $18.0 million at September 30, 2001.
In February 2002, we announced plans for the sale of 252,000 acres of timberland in Idaho, in two separate transactions, for total proceeds of $189.5 million. The first transaction closed during the first quarter of 2002 for $133.8 million and the second transaction is expected to close during the third quarter of 2002 and provide $55.7 million. Following these sales, we will not own any timberland in Idaho.
We closed our Coeur d’Alene, Idaho and Prineville, Oregon sawmills in the fourth quarter of 2001. We are in the process of liquidating the remaining Coeur d’Alene sawmill related assets, primarily the property associated with the former sawmill site. The Prineville sawmill assets were written down by $3.9 million in the fourth quarter of 2001 to their estimated net realizable value and are being marketed for sale. These closures and related inventory and asset dispositions are expected to provide net proceeds in the range of $6.0 to $9.0 million during the first half of 2002 and favorably impact operating results during 2002.
Timberlands
Excluding our Idaho timberlands mentioned above, we will own or control in excess of 524,000 acres of timberland, which contain a total merchantable timber inventory of approximately 2.6 billion board feet, located in Oregon and Washington.
The following table summarizes the estimated volume and acreage of our timberlands:
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Timberlands |
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Volume |
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Acreage |
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Oregon Timberlands |
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796,137 |
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295,434 |
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Washington Timberlands |
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1,836,304 |
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228,793 |
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2,632,441 |
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524,227 |
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Our timber holdings are primarily comprised of softwood species, including Douglas-Fir, hemlock, white fir, ponderosa pine, lodgepole pine, cedar and sugar pine, but also contain a significant volume of red alder. Due to its long fiber, strength, flexibility and other characteristics, softwood species are used for construction lumber and plywood.
The timberlands are considered healthy and vigorous and are stocked with a variety of age class stands.
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Our substantial timber resources help reduce our reliance on third-party log sources to supply our manufacturing facilities, which we believe gives us a significant competitive advantage over lumber manufacturers without a supply of fee timber. During 2001, 2000 and 1999, our timberlands provided the Oregon manufacturing facilities with 30%, 26% and 48%, respectively, the Inland manufacturing facilities with 63%, 44% and 39%, respectively, and the Washington manufacturing facilities with 68%, 62% and 71%, respectively, of their log requirements.
Particular silvicultural practices vary by geographic region and depend on factors such as soil productivity, weather, terrain, tree size, age and stocking. We actively manage our timber operations based on these factors and other relevant information in order to maximize the long-term value of our timber assets. Our management practices begin with the development of harvest plans for each of our tree farms. These plans are regularly reviewed and updated to reflect forestry considerations, market conditions, contractual and financing obligations and regulatory limitations.
Consistent with prudent forestry practices, we attempt to harvest any trees that are dead, dying, downed, diseased or deformed. Prudent forestry practices also indicate that “thinning,” a process by which smaller trees are selectively removed from among larger trees or the number of trees of equal size on a tract is reduced, helps to increase the overall growth rate of the remaining stand of trees. Commercial thinning is generally performed when the trees that are harvested produce merchantable timber, but pre-commercial thinning is also practiced on our timberlands. Our commercial thinning activities typically begin when the average stand age reaches 25 years.
Our silvicultural systems are either designed to allow the timberlands to regenerate naturally, or we engage in active reforestation programs that generally exceed regulatory reforestation requirements applicable to the timberlands. These systems are designed to promote better health and growth rates and facilitate greater future harvest volume. Active reforestation is practiced primarily in the Washington timberlands due to our even aged forestry management in that region, an approach made necessary by the difficult logging conditions and uniform ages and species of trees harvested. We maintain a 40-acre seed orchard on Whidbey Island in Washington to support these programs. Uneven aged forestry management and natural regeneration is practiced on the Oregon timberlands.
Legal title to our timberlands is subject to existing easements, rights of way, flowage and flooding rights, servitudes, cemeteries, camping sites, hunting and other leases, licenses and permits, none of which materially adversely affect the value of the timberlands or materially restrict the harvesting of timber or our other operations. In addition, under the terms of our senior notes and bank credit facilities, our ability to harvest, pledge, assign or transfer our timberlands is subject to certain restrictions.
Forests are subject to a number of hazards, including damage by fire, insects and disease. These hazards, along with severe weather conditions and other natural disasters, can reduce the productivity of our timberlands. Such hazards are unpredictable and there can be no assurance that our losses, if any, will be limited. Consistent with practices of other forest products companies, we do not maintain insurance against losses to standing timber on the timberlands. Even if such insurance were available, the cost would likely be prohibitive to us.
Approximately 49% of the timber harvested by us was utilized by our manufacturing facilities for the production of lumber during 2001. The remaining timber, which was harvested primarily from the Washington timberlands, was sold in third party domestic and export log markets. Our markets are highly competitive with respect to price, quality of products, distribution and other factors. We
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expect our products to experience steady competition from engineered wood products and other substitute products. No customer accounted for 10% or more of total revenues during 2001, 2000 or 1999.
Logs
We compete in the domestic market with other log suppliers, including numerous private land and timber owners in the northwest United States, many of whom have significantly greater financial resources than us, as well as with the state of Washington and United States government agencies, such as the United States Forest Service (the “USFS”), the Bureau of Land Management (the “BLM”) and the Bureau of Indian Affairs (the “BIA”). Competitive factors with respect to the domestic log market generally include price, species and grade, proximity to wood processing facilities and ability to meet current and future delivery requirements.
We compete in the export log market with other U.S. companies, as well as those in Chile, New Zealand, Mexico, Russia and Scandinavia, many of whom have abundant timber resources. Principal competitive factors in the export market are price, quality, size and species.
Domestic log sales volumes are generally at their lowest point in the second quarter of each year during spring breakup, when warming weather thaws and softens roadbeds, restricting access to harvest sites. We expect this phenomenon to decrease for our operations during years following our planned sale of the Idaho timberlands. Export log sales are affected by economic conditions, variations in inventory both domestically and in the countries where such logs are sold and by weather conditions.
We produce an array of lumber products at our three converting mills, one located in Oregon and two located in Washington (see Item 2. Properties). Our Oregon facility primarily produces dimension lumber and some industrial grade lumber products. The dimension lumber products are considered a commodity and are sold to a wide number of regional and western states customers, primarily to home builders. The industrial lumber is primarily sold to remanufacturers who produce doors, windows and other specialty products. Our Oregon sawmill was substantially modernized during late 2000 and early 2001 to enhance its consumption of small diameter logs. While efficiency increased significantly as a result of this modernization, the value of the product mix declined significantly from prior levels. Approximately 4% of the lumber produced at the Oregon facility was sold to our wholesale marketing operations during 2001.
Our two Washington facilities primarily produce commodity-grade studs for the construction industry. Approximately 8% of the lumber produced at our Washington facilities was sold to our wholesale marketing operations during 2001.
Domestic demand for lumber and manufactured wood products is directly affected by the level of residential construction activity. In the winter, demand generally subsides, increasing in the spring as home construction activity resumes.
We compete in the domestic lumber markets primarily with other U.S. and Canadian lumber producers. Competitive factors in the commodity-grade lumber market are based on pricing strategies, while sales of industrial lumber are based on quality, species and price.
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All of our manufacturing facilities produce wood chips and other by-products during their conversion processes. Chips are typically sold to regional pulp and paper mills, while other by-products are sold to particle board manufacturers or used as fuel in our manufacturing facilities. Sales of chips and other by-products were approximately 3% of revenues in 2001.
We currently own and operate five contractor supply yards, three in the Phoenix, Arizona area, one in Las Vegas, Nevada and one in Reno, Nevada. We also operate six forest product wholesale trading operations, one in Eugene, Oregon, one in Ogden, Utah, one in St. Louis Missouri, one each in Cameron Park and Tustin, California and one in Albuquerque, New Mexico, which also operates as a wholesale distributor. We manufacture many of the products sold from our wholesale operation, however, a substantial amount of the sales are products manufactured by other parties. During the year ended December 31, 2001, external sales from the wholesale operation were approximately 63.8% of total revenues. The wholesale marketing segment generates lower margins than the other parts of our business. We compete in the wholesale sales market with other wholesale companies, forest products companies and distributors on the basis of price, product availability and delivery and service.
The supply of Pacific Northwest timber provided by the USFS has decreased significantly from the late 1980s as a result of environmental regulations and endangered species concerns by federal and state authorities (see “Federal and State Regulation”). Reductions in timber supply have resulted in a number of regional mill closures, including some of ours, during the past several years. We believe that these supply reductions are permanent and give us a competitive advantage over many smaller forest products companies due to our ability to supply our manufacturing facilities with timber harvested from our timberlands.
For the year ended December 31, 2001, logs from our timberlands, excluding pulpwood, represented 67% of all logs used in our manufacturing facilities or sold to third parties. We supplement logs from our timberlands with logs purchased from third parties, including private landowners, the states of Idaho, Montana and Washington, certain United States government agencies and foreign sources for use in our manufacturing facilities. We expect our domestic sources, excluding federal timber, to remain fairly stable. Reductions in federal timber supplies have increased demand and pricing for privately owned timber. As of December 31, 2001, we had approximately 44 MMBF of timber under contract from external sources, principally the USFS, which may be harvested primarily over the next three to four years.
In 1996, the U.S. and Canadian governments announced a five-year lumber trade agreement, which expired March 31, 2001. This agreement was intended to reduce the volume of Canadian lumber exported into the U.S. through the assessment of an export tariff on annual lumber exports to the U.S. in excess of certain base level volumes. Since the agreement, considerable negotiation has occurred between the two countries in an effort to resolve trade issues over importation of Canadian lumber to the U.S. On March 22, 2002, the U.S. Department of Commerce implemented final Canadian lumber duties totaling 29%. A ruling by the International Trade Commission to finalize this move is scheduled for May 16, 2002. We cannot predict the exact outcome of this matter, but do believe that a final ruling or a negotiated settlement will be generally favorable to the U.S. lumber industry.
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Our operations are subject to numerous federal, state and local laws and regulations, including those relating to our timberland activities, the environment, endangered species, health and safety, log exports and product liability regulations. Although the Managing General Partner believes that we are 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 our operations. We maintain appropriate compliance programs and periodically conduct internal regulatory reviews of our manufacturing facilities to monitor compliance with applicable laws and regulations. Our manufacturing facilities have been, and may in the future be, the subject of compliance or enforcement proceedings under environmental laws and regulations. Prior compliance matters have been satisfactorily resolved without any material expenditure or substantial impairment of activities or operations.
Environmental laws and regulations have changed substantially and rapidly over the last 20 years, and the Managing General Partner anticipates there will be continuing changes. The trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, such as emissions of pollutants and the generation and disposal of wastes. Increasingly strict environmental restrictions and limitations have resulted in higher operating costs for us, and it is likely that the costs of compliance with environmental laws and regulations will continue to increase.
Our activities are also subject to federal and state laws and regulations regarding forestry operations. In addition, the operations of the manufacturing facilities and 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 our employees. We conduct internal safety reviews to identify potential violations of law or unsafe conditions. The Managing General Partner believes that we are in material compliance with safety and health laws and regulations.
There can be no assurance that future legislative, administrative or judicial actions, which are becoming increasingly stringent, will not adversely affect us or our ability to continue our activities and operations as currently conducted. As of the date hereof, the Managing General Partner is not aware of any pending legislative, administrative or judicial action that could materially and adversely affect us.
In addition to federal environmental laws, the operation of the timberlands is subject to specific laws and regulations in the states of Washington and Oregon, which are intended to regulate and restrict the growing, harvesting, processing and reforestation of timber on forest lands. The state of Oregon requires prior notification before beginning harvesting activities. The state of Washington is more restrictive, requiring a rigorous regulatory review taking from 15 to 30 days or more prior to harvesting, depending upon the environmental and other sensitivities of the proposed logging site.
Other state laws and regulations control timber slash burning, operations during fire hazard periods, logging activities affecting or utilizing water courses or in proximity to certain ocean and inland shore lines, water anti-degradation and certain grading and road construction activities.
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Our manufacturing facilities emit regulated substances that are subject to the requirements of the federal Clean Air Act and comparable state statutes. Our Gilchrist, Oregon facility is required to maintain an Oregon Air Quality Permit to comply with Title V of the 1990 Clean Air Act Amendments. Title V requires that major industrial sources of air pollution obtain federally enforceable permits, which contain applicable air quality restrictions for the facility. Our other two currently operating facilities, Marysville and Port Angeles, have been determined to not require Title V permitting due to their volume of emissions. They operate under state enforceable air operating permits. When constructing a new facility, the cost of permitting is included in the capitalized construction costs. The Managing General Partner believes that additional costs associated with these requirements at existing facilities will be incidental to ongoing operating expenses.
The federal Clean Water Act and comparable state statutes regulate discharges of process wastewater, and require National Pollutant Discharge Elimination System (“NPDES”) permits for discharge of industrial wastewater and stormwater into regulated public waters. All of our lumber manufacturing facilities have secured the necessary permits and are operating in material compliance with NPDES wastewater and stormwater requirements. In cooperation with the State of Washington Department of Ecology, a water runoff problem requiring corrective action at our Port Angeles, Washington facility was satisfactorily resolved during 2001 at a capitalized cost of $358,000.
Our manufacturing facilities generate hazardous and non-hazardous solid wastes, including wood waste and boiler ash, which are subject to the federal Resource Conservation and Recovery Act and comparable state statutes. We periodically review our waste disposal practices to ensure compliance with applicable laws. Our manufacturing facilities have, in the past, utilized off-site facilities, including landfills, for the disposal of hazardous wastes. The Managing General Partner does not believe that the results of any regulatory involvement at any such disposal site will have a material adverse effect on our operations or financial position; however, there can be no assurance that we will not incur future environmental expenditures for remedial activities associated with any of these sites.
The Comprehensive Environmental Response, Compensation and Liability Act, also known as Superfund, and comparable state laws impose liability, without regard to fault or the legality of the original act, on certain classes of persons who contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of a site and companies that disposed of or arranged for the disposal of hazardous substances found at a site. Those statutes also authorize government environmental authorities such as the U.S. Environmental Protection Agency and, in some instances, third parties, to take actions in response to threats to the public health or the environment and to seek recovery of the costs incurred from the responsible persons.
In the course of our ordinary operations, our manufacturing facilities have disposed of and are expected to continue disposing of substances, consisting primarily of wood waste and boiler ash, at various off-site disposal facilities. We have not received notification that we may be potentially responsible for any cleanup costs under Superfund. Based on environmental compliance auditing programs, the Managing General Partner is not aware of any activities by us or any conditions on our timberlands or at our manufacturing facilities that would be likely to result in us being named a potentially responsible party under Superfund regulations.
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While we maintain an environmental program designed to prevent the discharge of materials that could cause contamination to air, soil or water, contamination of soil and water has occurred in the past and may occur in the future. As we become aware of contamination, we cooperate with the appropriate environmental agencies to design and implement necessary response measures. All known contamination sites at our facilities have been addressed to the extent required by applicable law.
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 (the “Owl”), marbled murrelet, mountain caribou, grizzly bear, bald eagle and various anadromous fish species.
In 1994, an independent consulting firm reviewed our timberlands with respect to certain endangered species. The results of this review indicated that only 3,500 acres of the Oregon timberlands were potentially suitable Owl habitat and that the likelihood of the Owl inhabiting these lands was very low and that only 1,640 acres of the current Hamilton timberlands were suitable habitat for the Owl. Eagle management plans were adopted for the Olympic timberlands, but these plans do not significantly affect our current operations.
During 1995, we began developing a Habitat Conservation Plan (the “HCP”) for the Hamilton timberlands in conjunction with the United States Fish and Wildlife Service and the National Marine Fisheries Service. After the passage of new environmental regulations by the State of Washington and the relative inability of various federal agencies to effectively cooperate in our planning effort, we ceased all efforts related to developing an HCP. This action resulted in a $1.4 million non-cash charge in the fourth quarter of 2001 to write off all amounts previously capitalized related to this HCP.
Anadromous fish species are being analyzed by the USFWS and the State of Washington as potentially endangered or threatened. Certain of these species are found in rivers or streams that cross or border our timberlands, particularly in Washington. Based on research and analysis performed, we do not believe that the presence of these species will materially affect our operations and related financial results even if they are considered endangered or threatened. We anticipate that the listing of anadromous or other fish species as threatened or endangered will primarily affect the availability of timber from federal lands, a resource we have already assumed will be in decline.
Based on the reports described above and management’s knowledge of our timberlands, we do not believe that there are any species protected under the Endangered Species Act that would materially and adversely affect our ability to harvest our timberlands in accordance with our 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 within our timberlands.
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Federal laws prohibit the export of unprocessed timber acquired from federal lands in the western United States, or the substitution of unprocessed federal timber from the western United States for unprocessed private timber that is exported. Persons owning timber-processing facilities may seek authorization from the United States Department of Agriculture for a “sourcing area,” within which the person may purchase federal timber while exporting unprocessed private timber originating from outside the sourcing area. A sourcing area for timber processing facilities in states other than the state of Washington must be geographically and economically separate from any geographic areas where the person or its affiliates harvest private timber for export. We were granted sourcing areas, which allow us to purchase available federal timber to supply our manufacturing facility located in Oregon, while selling logs for export from our Washington timberlands. These sourcing areas were reviewed by the federal government as a result of a November 1996 lawsuit settlement between various parties, including a competitor of the Partnership. The outcome of this review resulted in no changes to our sourcing area.
Although we expect no further review of our currently approved sourcing areas, it is impossible to predict any potential change in the regulations governing sourcing areas. However, even if a future adverse change in our previously-approved sourcing areas occurs, we believe that our ability or inability to acquire federal timber would not have a material impact on our financial position or results of operations because we have previously assumed that federal timber would not be available in significant quantities to supply our manufacturing facilities.
All of the states in the United States and many foreign jurisdictions in which we sell our products have, through some combination of legislation and judicial decision, assigned liability to the manufacturer and supplier of defective materials that result in personal injury and property damage. Our operations entail potential exposure to claims for product liability in connection with both the export and domestic sales of logs and lumber products. We have not been subject to any material litigation relating to product liability.
Beneficial owners of units in the Partnership are considered partners for federal income tax purposes. Accordingly, we pay no federal income taxes, and unitholders are required to report their share of our income, gains, losses and deductions in their federal income tax returns. Cash distributions to unitholders are taxable only to the extent that they exceed the tax basis in their units.
Limitations on Deductibility of Partnership Losses
Under the passive loss limitations, our losses are available to offset future income generated by us and cannot be used to offset income from other activities, including other passive activities or investments. Any losses unused by virtue of the passive loss rules may be deducted when the unitholder disposes of all of his or her units in a fully taxable transaction with an unrelated party.
We conduct operations in ten states, eight of which (Arizona, California, Idaho, Oregon, Minnesota, Missouri, Utah and New Mexico) have a state income tax. A unitholder may be required to file state income tax returns in Arizona, California, Idaho, Oregon, Minnesota, Missouri, New Mexico and Utah if their share of our income attributable to those states exceeds that state’s de minimis filing exceptions.
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We have made an election under Section 754 of the Internal Revenue Code (the “Code”), which generally permits a unitholder to adjust his or her share of the basis in our properties (“Inside Basis”) pursuant to Section 743(b) of the Code to fair market value (as reflected by his or her unit price), as if he or she had acquired a direct interest in our assets. A unitholder’s allocable share of our income, gains, losses and deductions is determined in accordance with the unitholder’s unique basis under this election. In the case of the Partnership units, the Section 743(b) adjustment acts in concert with the Section 704(c) allocation (and curative allocations) in providing the purchaser with a fair market value Inside Basis. Such election is irrevocable and may not be changed without the consent of the Internal Revenue Service (“IRS”). The Section 743(b) adjustment is attributed solely to a purchaser of units and is not added to the basis of our assets associated with all of the unitholders. The result of this election is an adjusted depletion deduction for public purchasers.
Certain entities otherwise exempt from federal income taxes (such as individual retirement accounts (“IRAs”), employee benefit plans and other charitable or exempt organizations) may be subject to federal income tax if their Unrelated Business Taxable Income (“UBTI”) for their taxable year exceeds $1,000. The majority of a unitholder’s allocable share of taxable income from us will be classified as UBTI.
Section 631 of the Code provides special rules by which gains from the sale of timber or cut logs, which would otherwise be taxable as ordinary income, are treated as capital gains from the sale of property used in a trade or business. Effective May 6, 1997, the maximum capital gain rate for individuals was lowered to 20% from 28% for most assets. It is estimated that substantially all of our income will qualify for Section 631, the effect of which characterizes the income generated from us as capital gain to the unitholder.
At December 31, 2001, we had 242 salaried and 496 hourly employees. The Managing General Partner believes that our employee relations are good.
Risk Factors — Cautionary Statement for Purposes of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995
This report contains forward–looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Where any forward–looking statement includes a statement of the assumptions underlying the forward–looking statement, we caution that, while such assumptions are believed to be reasonable and are made in good faith, assumed facts almost always vary from the actual results, and the differences between assumed facts and actual results can be material, depending upon the circumstances. Where, in any forward–looking statement, we or our management express an expe