UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-Q
--------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-23259
--------------------------------------
U.S. TIMBERLANDS COMPANY, L.P.
(Exact name of registrant as specified in its charter)
Delaware 91-1842156
------------------------------------------- ---------------
(State or other jurisdiction of incorporation (I.R.S. Employer
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Form 10-Q
Table of Contents
Part I. Financial Information Page
----
Item 1. Condensed Consolidated Statements of Operations
for the three months ended June 30, 2002 and 2001 . . . . . . . . . . . . . . . . 3
Item 1. Condensed Consolidated Statements of Operations
for the six months ended June 30, 2002 and 2001 . . . . . . . . . . . . . . . . . 4
Item 1. Condensed Consolidated Balance Sheets
at June 30, 2002 and December 31, 2001 . . . . . . . . . . . . . . . . . . . . . 5
Item 1. Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2002 and 2001 . . . . . . . . . . . . . . . . . 6
Item 1. Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 10
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . 15
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . 15
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Page 2 of 19
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. TIMBERLANDS COMPANY, LP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
(UNAUDITED)
Three Months Ended June 30,
--------------------------------------
2002 2001
------------ --------------
Revenues (including $9,900 to an affiliate in 2002) $ 15,460 $ 7,327
Cost of timber harvested (3,263) (2,299)
Depletion, depreciation and road amortization (13,928) (5,280)
----------- -------------
Gross profit (loss) (1,731) (252)
Selling, general and administrative expenses (1,515) (1,882)
Equity in net loss of affiliate (3,409) (928)
----------- -------------
Operating loss (6,655) (3,062)
Interest expense (5,415) (5,544)
Interest income 1 9
Amortization of deferred financing fees (169) (169)
Other income, net 62 79
----------- -------------
Loss before general partner and minority interest (12,176) (8,687)
Minority interest 122 87
----------- -------------
Net loss (12,054) (8,600)
General partner interest 122 87
----------- -------------
Net loss applicable to common and subordinated units $ (11,932) $ (8,513)
=========== =============
Net loss per each common and subordinated unit-
basic and diluted $ (0.93) $ (0.66)
=========== =============
Distributions per Unit $ - $ -
=========== =============
Weighted average units outstanding 12,859,607 12,859,607
=========== =============
See accompanying notes to the condensed consolidated financial statements
Page 3 of 19
U.S. TIMBERLANDS COMPANY, LP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
(UNAUDITED)
Six Months Ended June 30,
---------------------------------------
2002 2001
--------------- ------------
Revenues (including $9,900 to an affiliate in 2002) $ 17,615 $ 16,794
Cost of timber harvested (4,300) (6,991)
Depletion, depreciation and road amortization (14,994) (10,187)
----------- ------------
Gross profit (loss) (1,679) (384)
Selling, general and administrative expenses (2,896) (4,435)
Equity in net loss of affiliate (5,736) (1,691)
----------- ------------
Operating loss (10,311) (6,510)
Interest expense (10,799) (10,947)
Interest income 4 83
Amortization of deferred financing fees (338) (337)
Other income, net 105 120
----------- ------------
Loss before general partner and minority interest (21,339) (17,591)
Minority interest 213 176
----------- ------------
Net loss (21,126) (17,415)
General partner interest 213 176
----------- ------------
Net loss applicable to common and subordinated units $ (20,913) $ (17,239)
=========== ============
Net loss per each common and subordinated unit-
basic and diluted $ (1.63) $ (1.34)
=========== ============
Distributions per Unit $ - $ 0.50
=========== ============
Weighted average units outstanding 12,859,607 12,859,607
=========== ============
See accompanying notes to the condensed consolidated financial statements
Page 4 of 19
U.S. TIMBERLANDS COMPANY, LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30 December 31
2002 2001
----------- ------------
(Unaudited) *
ASSETS
Current assets:
Cash and cash equivalents $ 402 $ 1,070
Accounts receivable, net 1,527 311
Other receivables 247 280
Notes receivable 303 1,153
Prepaid expenses and other current assets 120 225
-------- --------
Total current assets 2,599 3,039
Timber and timberlands, net 200,542 214,511
Investment in affiliate 25,873 31,609
Property, plant and equipment, net 788 811
Notes receivable, less current portion 340 428
Deferred financing fees, net 3,636 3,973
-------- --------
Total assets $233,778 $254,371
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable 913 1,334
Accrued liabilities 3,176 3,331
Advances from affiliates 1,225 --
Payable to general partner and affiliate 136 41
-------- --------
Total current liabilities 5,450 4,706
-------- --------
Long-term debt 225,000 225,000
-------- --------
Minority interest 33 247
-------- --------
Partners' capital
General partner interest 33 247
Limited partner interest (12,859,607 units issued and outstanding) 3,261 24,171
-------- --------
3,294 24,418
-------- --------
Total liabilities and partners' capital $233,778 $254,371
======== ========
* Derived from audited Consolidated Balance Sheet as of December 31, 2001
See accompanying notes to the condensed consolidated financial statements
Page 5 of 19
U.S. TIMBERLANDS COMPANY, LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended June 30,
--------------------------------
2002 2001
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used in) provided by operating activities $ (915) $ 156
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Timber, timberlands and road additions (969) (6,628)
Purchase of property, plant and equipment - net (9) --
Proceeds from sale of assets -- 15
------------ ------------
Net cash used in investing activities (978) (6,613)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under affiliate credit facility 1,225 10,470
Distributions to unitholders, general partner,
and minority interest -- (6,561)
------------ ------------
Net cash provided by financing activities 1,225 3,909
------------ ------------
Decrease in cash and cash equivalents (668) (2,548)
Cash and cash equivalents - beginning of period 1,070 3,168
------------ ------------
Cash and cash equivalents - end of period $ 402 $ 620
============ ============
Noncash activities:
Contribution of timber cutting rights for investment in affiliate $ -- $ 12,987
Contribution of timberlands for investment in affiliate $ -- $ 3,302
Supplemental cash flow information:
Cash paid for interest expense $ 10,828,125 $ 11,031,649
See accompanying notes to the condensed consolidated financial statements
Page 6 of 19
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (In thousands, except per
Unit amounts or as otherwise indicated)
(Unaudited)
1. Business and Basis of Presentation
Business
U.S. Timberlands Company, LP (the "MLP"), a Delaware limited partnership, was
formed in 1997 to acquire and own 99% of the equity interests in U.S.
Timberlands Klamath Falls, LLC (the "Operating Company") and through the
Operating Company to acquire and own the business and assets of U.S. Timberlands
Management Company, LLC, formerly known as U.S. Timberlands Services Company,
LLC. As used herein, "Company" refers to the consolidated entities of the MLP
and the Operating Company.
The primary activity of the Company is the growing of trees and the sale of logs
and standing timber primarily to third party wood processors. The Company's
timber is primarily located in Oregon, east of the Cascade Range. Logs harvested
from the timberlands are sold to unaffiliated domestic conversion facilities.
These logs are processed for sale as lumber, plywood and other wood products,
primarily for use in new residential home construction, home remodeling and
repair and general industrial applications.
U.S. Timberlands Services Company, LLC (the "General Partner") manages the
businesses of the MLP and the Operating Company. The General Partner owns a 1%
general partner interest in the MLP and a 1% managing member interest in the
Operating Company.
Basis of Presentation
These condensed consolidated financial statements have been prepared by the
Company, without audit by independent public accountants, pursuant to the rules
and regulations of the United States Securities and Exchange Commission. In the
opinion of management, the accompanying unaudited financial statements include
all normal recurring adjustments necessary to present fairly the information
required to be set forth therein. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted from these statements pursuant to such rules and
regulations and, accordingly these condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
included in the Company's 2001 Annual Report on Form 10-K. Operating results for
the quarter and the six month period ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the full year or any other
period.
There have been no significant changes in the accounting policies of the
Company.
Page 7 of 19
2. Timber and Timberlands
Timber and Timberlands consisted of the following:
June 30, December 31,
2002 2001
----------- -----------
Timber and logging roads $ 309,412 $ 309,759
Timberlands 34,566 34,566
Seed orchard and nursery stock 1,719 1,437
----------- -----------
345,697 345,762
Less accumulated depletion and road amortization 145,155 131,251
----------- -----------
$ 200,542 $ 214,511
=========== ===========
3. Investment In Affiliate
The following is summarized financial information for U.S. Timberlands Yakima,
LLC (USTY), an affiliate of the Company accounted for under the equity method:
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
June 30 June 30 June 30 June 30
2002 2001 2002 2001
-------------------- -------------------- --------------------- -------------------
Net sales $ 5,041 $ 1,209 $ 10,696 $ 5,859
Gross profit (loss) (628) 263 (1,163) 3,199
Net income (loss) (3,438) (1,607) (5,776) (378)
On June 12, 2002 the Company sold timber cutting rights for approximately 87.3
million board feet to USTY for $9.9 million. These timber cutting rights expire
in May 2005.
4. Short-Term Debt
The Company had a credit facility with an affiliate of the General Partner (the
"Affiliate Credit Facility") consisting of a revolving line of credit of up to
$12.0 million. Borrowings under the Affiliate Credit Facility bore interest at
the prime lending rate as published in the Wall Street Journal plus applicable
margin, which was based on the Company's leverage ratio. The Affiliate Credit
Facility expired, by its terms, at the end of April 2002. The Company is seeking
to replace the Affiliate Credit Facility with a working capital facility from an
unaffiliated third party. However, there can be no assurance that the Company
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 and
potential lenders are in negotiations, affiliated lenders have agreed to make
short term advances to the Company, payable on demand to the affiliates, at an
interest rate of 10%. The Company had $1.225 million in outstanding borrowings
with the affiliates at June 30, 2002.
Page 8 of 19
5. Long-Term Debt and Distributions
As of June 30, 2002, the Company was not permitted to make any distributions as
it had not exceeded the requisite Consolidated Fixed Charge Coverage Ratio
within the Restricted Payments provisions of the Senior Notes. An interest
payment of $10.828 million was due under the Notes on May 15, 2002. The Company
completed a timber deed sale on June 12, 2002 to pay the interest due with the
proceeds of such sale, within the 30 day grace period provided in the Notes.
6. Per Unit Information
The Company accounts for income (loss) per unit in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128") "Earnings Per Share".
Under SFAS No. 128, the Company is required to present basic income per common
and subordinated unit, and diluted income per unit information. The weighted
average number of common and subordinated units outstanding for each period
presented totaled 12,859,607, consisting of 9,648,017 common units and 3,211,590
subordinated units.
7. Other Matters
On April 23, 2002, the Company announced the receipt of a revised offer from a
group led by senior management to take the Company private. The revised offer
contemplates a cash tender offer for 100% of the outstanding common limited
partnership units not already owned by the entity or its affiliates for $2.75
per unit in cash. This offer is subject to receipt of financing, the execution
of the definitive agreements and other customary conditions, as well as the
dismissal or satisfactory settlement of any outstanding litigation.
On April 25, 2002, the Company announced that several purported class action
lawsuits were filed against the general partner of the Company and the board of
directors of the general partner alleging, among other things, breach of
fiduciary duty and self-dealing by the general partner and the board in
connection with the receipt by the Company of a revised offer, dated April 23,
2002, from a group led by senior management of the Company to take the Company
private.
The lawsuits were filed in the Court of Chancery of the State of Delaware for
the County of New Castle. The lawsuits were filed by the purported unitholders
of the Company, on behalf of all other similarly situated unitholders, and seek
to have the class certified and the purported unitholders bringing the action
named as a representative of the class. In addition, the lawsuits seek to enjoin
the going private transaction, to rescind the going private transaction if it is
consummated, and to recover damages and attorneys' fees. The lawsuits also name
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.
Page 9 of 19
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 General Partner while riding on equipment owned by the General
Partner. At the time, liability insurance was in place, however, the insurance
underwriter has since gone bankrupt and coverage is limited and is being
administered by the Oregon Guarantee Insurance Association.
In the opinion of management, after consultation with outside counsel, the
pending class action lawsuit is not expected to have a material adverse effect
on the Company's financial position or results of operations. Management and its
counsel are reviewing the facts of the injury claims and it is too early to
assess its effect on the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statement
Certain information contained in this report may constitute forward-looking
statements within the meaning of the federal securities laws. Although the
Company believes that expectations reflected in such forward-looking statements
are based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved. Forward-looking information is subject to certain
risks, trends and uncertainties that could cause actual results to differ
materially from those projected. Such risks, trends and uncertainties include
the highly cyclical nature of the forest products industry, general economic
conditions, competition, price conditions or trends for the Company's products,
the possibility that timber supply could increase if governmental, environmental
or endangered species policies change, and limitations on the Company's ability
to harvest its timber due to adverse natural conditions or increased
governmental restrictions. These and other risks are described in the Company's
other reports and registration statements, which are available from the United
States Securities and Exchange Commission.
Overview
The Company's principal operations consist of growing and harvesting timber and
selling logs, standing timber and related by-products to third party wood
processors. These logs and by-products are processed for sale as lumber, molding
products, doors, mill work, commodity, specialty and overlaid plywood products,
laminated veneer lumber, engineered wood I-beams, particleboard, hardboard,
paper and other wood products. These products are used in residential,
commercial and industrial construction, home remodeling and repair, general
industrial applications and a variety of paper products. The results of the
Company's operations and its ability to pay quarterly distributions to its
Unitholders depend upon a number of factors, many of which are beyond its
control. These factors include general economic and industry conditions,
domestic and export prices, supply and demand for timber logs, seasonality,
government regulations affecting the manner in which timber may be harvested,
and competition from other supplying regions and substitute products. The
Company is not currently permitted to make any distributions to Unitholders (see
Financial Condition and Liquidity).
Page 10 of 19
Seasonality
The Company's log and standing timber sales volumes are generally at their
lowest levels in the first and second quarters of each year. In the first
quarter, heavy snowfalls in higher elevations prevent access to many areas of
the Company's timberlands. This limited access, along with spring break-up
conditions (when warming weather thaws and softens roadbeds) in March or April,
restricts logging operations to lower elevations and areas with rockier soil
types. As a result of these constraints, the Company's sales volumes are
typically at their lowest in the first quarter, improving in the second quarter
and at their highest during the third and fourth quarters. Most customers in the
region react to this seasonality by carrying sufficiently high log inventories
at the end of the calendar year to carry them to the second quarter of the
following year.
Current Market Conditions
Second quarter 2002 prices for finished wood products (e.g. lumber, plywood and
engineered wood products) were lower than first quarter 2002 and lower than the
same period in 2001.
Average log prices for all species with the exception of Ponderosa Pine were up
in the second quarter 2002 over the first quarter 2002. Pine was down 2%,
Douglas Fir was up 5%, White Fir was up 7% and Lodgepole Pine was up 9%. Average
log prices in the second quarter 2002 were up over the same quarter in 2001 with
the exception of White Fir which remained the same. Pine was up 9%, Douglas Fir
was up 5% and Lodgepole Pine was up 4%.
Results of Operations
Selected operating statistics for the Company:
Sales Volume (MBF) Price Realization (MBF)
---------------------------- -----------------------------
Timber Timber
Period Logs Stumpage Deeds Logs Stumpage Deeds
------ ---- -------- ------ ---- -------- -----
2002
Three Months Ended June 30 14,575 - 88,480 $ 341 $ - $ 114
Three Months Ended March 31 5,024 - 2,333 $ 349 $ - $ 169
2001
Three Months Ended June 30 9,890 - 28,624 $ 313 $ - $ 138
Three Months Ended March 31 20,939 - 14,744 $ 357 $ - $ 133
Quarter Ended June 30, 2002 Compared to Quarter Ended June 30, 2001
Revenues
Revenues for the quarter ended June 30, 2002 were $15.4 million, an increase of
$8.1 million or 111% from revenues of $7.3 million for the same period in 2001.
The significant increase in revenues during the second quarter of 2002 was
caused by higher log prices and log volumes, and higher timber deed sales.
Page 11 of 19
Timber deed sales for the second quarter of 2002 were $10.1 million on volume of
88.5 million board feet ("MMBF"), as compared to the same period in 2001, when
timber deed sales were $4.0 million on 28.6 MMBF. The average timber deed price
was $114 per thousand board feet ("MBF") during the second quarter of 2002, as
compared to $138 per MBF for the same period in 2001.
Log sales for the quarter ended June 30, 2002 were $5.0 million on volume of
14.6 MMBF, as compared to the same period in 2001 when log sales were $3.1
million on 9.9 MMBF. The average sales price was $341 per MBF for the second
quarter of 2002, as compared to an average of $313 per MBF for the same period
in 2001. The increase in log prices reflects a general increase in log prices.
Gross Profit
The Company had a gross loss of $1.7 million in the second quarter of 2002 as
compared to a gross loss of $0.3 million for the same period in 2001. As a
percentage of sales the gross loss was 11% as compared to a gross loss
percentage of 3% in the second quarter of 2001. The increase in gross loss as a
percentage of sales is a result of increases in depletion rates over the same
period in 2001.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $0.4 million from $1.9
million in the second quarter of 2001 to $1.5 million in the second quarter of
2002. The decrease was part of the Company's cost reduction plans.
Equity in Net Loss of Affiliate
Equity in net loss of affiliate was approximately $3.4 million for the second
quarter of 2002. This amount reflects the Company's share of the net loss of an
affiliate accounted for under the equity method. This compares to equity in net
loss of affiliate of $0.9 million in the second quarter of 2001.
Partners' Capital
During the quarter ended June 30, 2002, the limited partner interests in the
Company declined $11.9 million from $15.2 million to $3.3 million. This decline
is the result of the limited partners' $11.9 million share of the Company's net
loss. The General Partner interest in the Company also declined during the
quarter ended June 30, 2002 reflecting its share of the Company's net loss for
the period.
Page 12 of 19
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Revenues
Revenues for the six months ended June 30, 2002 were $17.6 million, an increase
of $0.8 million or 5% from revenues of $16.8 million for the same period in
2001. The increase in revenues during the first half of 2002 was caused by
higher timber deed sales.
Timber deed sales for the first half of 2002 were $10.5 million on volume of
90.8 million board feet ("MMBF"), as compared to the same period in 2001, when
timber deed sales were $5.9 million on 43.4 MMBF. The average timber deed price
was $116 per thousand board feet ("MBF") during the first half of 2002, as
compared to $136 per MBF for the same period in 2001.
Log sales for the six months ended June 30, 2002 were $6.7 million on volume of
19.6 MMBF, as compared to the same period in 2001 when log sales were $10.6
million on 30.8 MMBF. The average sales price was $343 per MBF for the first
half of 2002, as compared to an average of $343 per MBF for the same period in
2001.
Gross Profit
The Company had a gross loss of $1.7 million in the first half of 2002 as
compared to a gross loss of $0.4 million for the same period in 2001. As a
percentage of sales the gross loss was 10% as compared to a gross loss
percentage of 2% in the first half of 2001. The increase in gross loss as a
percentage of sales is a result of increases in depletion rates over the same
period in 2001.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $1.5 million from $4.4
million in the first half of 2001 to $2.9 million in the first half of 2002. The
decrease was primarily attributable to decreases in professional services of
$0.9 million and wage and wage related expenses of $0.2 million which were part
of the Company's cost reduction plans.
Equity in Net Loss of Affiliate
Equity in net loss of affiliate was approximately $5.7 million for the first
half of 2002. This amount reflects the Company's share of the net loss of an
affiliate accounted for under the equity method. This compares to equity in net
loss of affiliate of $1.7 million in the first half of 2001.
Partners' Capital
During the six months ended June 30, 2002, the limited partner interests in the
Company declined $20.9 million from $24.2 million to $3.3 million. This decline
is the result of the limited partners' $20.9 million share of the Company's net
loss. The General Partner interest in the Company also declined during the six
months ended June 30, 2002 reflecting its share of the Company's net loss for
the period.
Page 13 of 19
Financial Condition and Liquidity
Operating Activities
Cash flows used in operating activities during the six months ended June 30,
2002 were $0.9 million, as compared to cash provided by operating activities of
$0.2 million during the same period in 2001. The $1.1 million decrease is due
primarily to the Company's decreases in payables and increases in receivables.
Investing Activities
Cash flows used in investing activities were $1.0 million during the first six
months of 2002, as compared to $6.6 million, related to the purchase of a timber
deed, during the same period in 2001.
Financing Activities
Cash flows provided by financing activities for the first six months of 2002
were $1.2 million as compared to cash provided by financing activities of $3.9
million for the same period in 2001. Cash flows were provided by borrowings and
were offset in part by distributions to unitholders in the 2001 period.
The Company had a credit agreement with an affiliate of the General Partner (the
"Affiliate Credit Facility"), which allowed the Company to borrow up to $12.0
million. The Affiliate Credit Facility expired on April 30, 2002. The Company
has endeavored to replace the Affiliate Credit Facility with a new credit
facility.
The agreement governing the Company's 9-5/8% senior notes (the "Notes") contains
restrictive covenants, including limitations on harvest levels, land sales, cash
distributions and the amount of future indebtedness. Under the Notes, the
Company's average annual adjusted harvest volume over any period of four
consecutive years cannot exceed a volume of approximately 147 MMBF as adjusted
for timberlands sales and purchased. The Notes also limit one-year harvest
levels and average annual harvest levels for consecutive two-and-three year
periods. As of June 30, 2002, the Company was in compliance with the covenants
requirements pertaining to the Notes. As of June 30, 2002, the Company was not
permitted to make any distributions as it had not exceeded the requisite
Consolidated Fixed Charge Coverage Ratio within the Restricted Payments
provisions of the Indenture.
Through the first six months of 2002, the Company funded its operations and met
its cash requirements for debt service from cash on hand. An interest payment of
$10,828,125 was due under the Notes on May 15, 2002. The Company completed a
timber deed sale on June 12, 2002 to pay the interest due with the proceeds for
such sale, within the 30 day grace period provided in the Notes.
Page 14 of 19
Cash required to meet the Company's debt service and any cash distributions will
be significant. To meet its working capital requirements, the Company has been
selling logs and making timber sales at a rate in excess of the General
Partner's estimate of the current annual board footage growth on the Company's
timberlands. The debt service and, prior to April 2001, quarterly cash
distributions have been funded from operations and borrowings. Given projected
volumes for sales of logs and timber, estimated current board footage growth on
the timberlands and the harvest restrictions in the Notes, unless prices
improve, costs are reduced, new markets are developed or the Company makes
accretive acquisitions, the Company's ability in the future to make
distributions will be adversely affected. On May 10, 2001 the Company announced
an indefinite suspension of distributions. The Company continues to evaluate
means to improve cash flows, including the factors mentioned above. There can be
no assurance that prices will improve or that the Company will be able to take
any of these actions and it is unlikely prices will improve or any of these
actions will take effect within a short-term horizon. The Company will continue
to look to log and timber deed sales as well as the sale of excess timberlands,
and short-term advances from an affiliated lender, to meet its short term cash
needs.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 25, 2002 the Company announced that several purported class action
lawsuits were filed against the general partner of the Company and the board of
directors of the general partner alleging, among other things, breach of
fiduciary duty and self-dealing by the general partner and the board in
connection with the receipt by the Company of a revised offer, dated April 23,
2002, from a group led by senior management of the Company to take the Company
private.
The lawsuits were filed in the Court of Chancery of the State of Delaware for
the County of New Castle. The lawsuits were filed by purported unitholders of
the Company, on behalf of all other similarly situated unitholders, and seek to
have the class certified and the purported unitholders bringing the action named
as a representative of the class. In addition, the lawsuits seek to enjoin the
going private transaction, to rescind the going private transaction if it is
consummated, and to recover damages and attorney's fees. The lawsuits also name
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 Deleware.
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 General Partner while riding on equipment owned by the General
Partner. At the time, liability insurance was in place, however, the insurance
underwriter has since gone bankrupt and coverage is limited and is being
administered by the Oregon Guarantee Insurance Association.
In the opinion of management, after consultation with outside counsel, the
pending class action lawsuit is not expected to have a material adverse effect
on the Company's financial position or results of operations. Management and its
counsel are reviewing the facts of the injury claims and it is too early to
assess its effect on the Company.
ITEMS 2, 3, 4, AND 5 OF PART II are not applicable and have been omitted.
Page 15 of 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
+3.1 - Amended and Restated Agreement of Limited Partnership of U.S. Timberlands Company, LP
+3.2 - Second Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, LLC
+10.2 - Indenture among U.S. Timberlands Klamath Falls, LLC, U.S. Timberlands Finance Corp. and
State Street Bank and Trust Company, as trustee
+10.3 - Contributions, Conveyance and Assumption Agreement among U.S. Timberlands Company, LP and
certain other parties
*10.4 - Form of U.S. Timberlands Company, LP 1997 Long-Term Incentive Plan
*10.5 - Employment Agreement for Mr. Rudey
*10.9 - Supply Agreement between U.S. Timberlands Klamath Falls, LLC and Collins Products, LLC
++10.10 - Operating Agreement of U.S. Timberlands Yakima, LLC
*21.1 - List of Subsidiaries
99.1 - Sarbanes-Oxley Certification of CEO
99.2 - Sarbanes-Oxley Certification of CFO
* Incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form S-1 filed November 13,
1997.
+ Incorporated by reference to the same numbered Exhibit to the
Registrant's Current Report on Form 8-K filed January 15, 1998.
++ Incorporated by reference to the same numbered exhibit to the
Registrant's Form 10-Q filed on May 15, 2000.
(b.) Reports on Form 8-K
On May 2, 2002, the Company filed a Form 8-K containing the revised
privatization offer and the related news release as well as the news release
relating to the filing of new purported class action lawsuits.
Page 16 of 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on it behalf by the
undersigned thereunto duly authorized.
Date: August 16, 2002 U.S. TIMBERLANDS COMPANY, LP
By: U.S. Timberlands Services Company, LLC
as General Partner
By: /s/ Thomas C. Ludlow
--------------------------------------
Thomas C. Ludlow
Chief Financial Officer
(Chief Financial Officer,
Duly Authorized Officer,
And Principal Accounting Officer)
Page 17 of 19