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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 KLAMATH FALLS, LLC
U.S. TIMBERLANDS FINANCE CORP.
(Exact name of registrant as specified in its charter)
Delaware 93-1217136
Delaware 91-1851612
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
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Form 10-Q
Table of Contents
Part I. Financial Information Page
Item 1. Condensed Consolidated Statements of Operations
for the three months ended September 30, 2002 and 2001 .. . . . 3
Item 1. Condensed Consolidated Statements of Operations
for the nine months ended September 30, 2002 and 2001. . . . . . 4
Item 1. Condensed Consolidated Balance Sheets
at September 30, 2002 and December 31, 2001 . . . . . . . . . . .5
Item 1. Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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
Item 4. Controls and Disclosures . . . . . . . . . . . . . . . . . . . . . 15
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . 16
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . .16
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . .16
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . .17
Page 2 of 22
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. TIMBERLANDS KLAMATH FALLS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
(UNAUDITED)
Three Months Ended September 30,
-----------------------------------------
2002 2001
------------------ ------------------
Revenues $ 13,323 $ 24,299
Cost of timber harvested (5,664) (5,935)
Depletion, depreciation and road amortization (5,935) (17,600)
Cost of timber and property sales (863) -
Fire loss (657) -
-------- --------
Gross profit 204 764
Selling, general and administrative expenses (1,723) (1,811)
Equity in net loss of affiliate (2,566) (1,884)
-------- --------
Operating loss (4,085) (2,931)
Interest expense (5,414) (5,585)
Interest income 4 2
Amortization of deferred financing fees (169) (169)
Other income, net 6 13
-------- --------
Net loss $ (9,658) $ (8,670)
See accompanying notes to the condensed consolidated financial statements
Page 3 of 22
U.S. TIMBERLANDS KLAMATH FALLS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
(UNAUDITED)
Nine Months Ended September 30,
---------------------------------------
2002 2001
---------------- ------------------
Revenues (including $9,900 to an affiliate in 2002) $ 30,939 $ 41,093
Cost of timber harvested (9,963) (12,926)
Depletion, depreciation and road amortization (20,930) (27,787)
Cost of timber and property sales (863) 0
Fire loss (657) 0
-------- --------
Gross profit (loss) (1,474) 380
Selling, general and administrative expenses (4,619) (6,246)
Equity in net loss of affiliate (8,302) (3,575)
-------- --------
Operating loss (14,395) (9,441)
Interest expense (16,213) (16,532)
Interest income 9 85
Amortization of deferred financing fees (506) (506)
Other income, net 112 133
-------- --------
Net loss $(30,993) $(26,261)
See accompanying notes to the condensed consolidated financial statements
Page 4 of 22
U.S. TIMBERLANDS KLAMATH FALLS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30 December 31
2002 2001
------------------ ------------------
(Unaudited) *
ASSETS
Current assets:
Cash and cash equivalents $ 950 $ 1,070
Accounts receivable, net 1,589 311
Due from managing member 81
Other receivables 73 280
Notes receivable 459 1,153
Prepaid expenses and other current assets 10 225
--------- ---------
Total current assets 3,162 3,039
Timber and timberlands, net 197,978 214,511
Investment in affiliate 23,307 31,609
Property, plant and equipment, net 772 811
Notes receivable, less current portion 130 428
Deferred financing fees, net 3,468 3,973
--------- ---------
Total assets $ 228,817 $ 254,371
========= =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable 1,179 1,334
Accrued liabilities 8,967 3,331
Payable to managing member - 41
--------- ---------
Total current liabilities 10,146 4,706
--------- ---------
Long-term debt 225,000 225,000
--------- ---------
Members' equity:
Managing member's interest (126) 247
Nonmanaging member's interest (6,203) 24,418
--------- ---------
(6,329) 24,665
--------- ---------
Total liabilities and members' equity $ 228,817 $ 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 22
U.S. TIMBERLANDS KLAMATH FALLS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended September 30,
---------------------------------------------
2002 2001
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 5,681 $ 12,864
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Timber, timberlands and road additions (5,792) (6,864)
Purchase of property, plant and equipment - net (9) -
Proceeds from sale of assets - 15
------------ ------------
Net cash used in investing activities (5,801) (6,849)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to the members - (6,561)
------------ ------------
Net cash used in financing activities - (6,561)
------------ ------------
Decrease in cash and cash equivalents (120) (546)
Cash and cash equivalents - beginning of period 1,070 3,168
------------ ------------
Cash and cash equivalents - end of period $ 950 $ 2,622
============ ============
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 $ 11,158,300
See accompanying notes to the condensed consolidated financial statements
Page 6 of 22
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
The accompanying consolidated financial statements include the accounts of U.S.
Timberlands Klamath Falls, LLC ("USTK"), a Delaware limited liability company,
and its wholly owned subsidiary, U.S. Timberlands Finance Corp. ("Finance
Corp"), collectively referred to hereafter as the Company. Finance Corp. serves
as the co-obligator for USTK's notes. It has nominal assets and does not conduct
operations. All intercompany transactions have been eliminated in consolidation.
U.S. Timberlands Company, LP (the "MLP") owns a 99% non-managing member interest
in USTK. The MLP was formed in 1997 to acquire and own substantially all of the
equity interests in USTK and to acquire and own the business and assets of U.S.
Timberlands Management Company, LLC, formerly known as U.S. Timberlands Services
Company, LLC. U.S. Timberlands Services Company (the "Manager") manages the
business of the Company and owns a 1% managing member interest in USTK.
The primary activity of the Company is the growing of trees and the sale of logs
and standing timber 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.
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 nine month period ended September 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 22
2. Timber and Timberlands
Timber and Timberlands consisted of the following:
September 30, December 31,
2002 2001
---- ----
Timber and logging roads $312,133 $309,759
Timberlands 35,165 34,566
Seed orchard and nursery stock 1,823 1,437
-------- --------
349,121 345,762
Less accumulated depletion and road amortization 151,143 131,251
-------- --------
$197,978 $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 Nine Months Ended Nine Months Ended
September 30 September 30 September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 11,940 $ 993 $ 22,636 $ 6,852
Gross profit (loss) 792 30 (372) 3,230
Net income (loss) (2,704) (2,081) (8,480) (2,459)
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. On August 30, 2002 the Company purchased timber cutting rights for
approximately 12.0 million board feet from USTY for $1.3 million. These timber
cutting rights expire in August 2003. On September 13, 2002 the Company
purchased timberland for approximately 8.1 million board feet from USTY for $2.6
million. In addition to the preceding, on July 15, 2002 the Company purchased
timber cutting rights for approximately 7.7 million board feet from USTY
Services for $0.8 million. These timber cutting rights expire in July 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
Page 8 of 22
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 annual rate of 10%.
5. Long-Term Debt and Distributions
As of September 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 95/8% Senior
Notes.
6. Other Matters
On October 17, 2002, the MLP 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
entity or its affiliates for $3.00 per unit in cash, followed by a merger of the
acquisition company with and into the MLP, pursuant to which each common limited
partnership unit not already owned by the entity or its affiliates would be
converted into the right to receive $3.00 per unit in cash. Consummation of the
transaction is subject to receipt of financing and other customary conditions,
as well as the dismissal or satisfactory settlement of any outstanding
litigation.
On April 25, 2002, the MLP 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 Company, the general partner of the MLP, the
MLP and the board of directors of the Manager alleging, among other things,
breach of fiduciary duty and self-dealing by the general partner and the board
in connection with the going private transaction.
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.
On July 12, 2002, the MLP 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 MLP announced that it had reached a tentative
settlement of the purported class action lawsuits, subject to court approval and
other customary conditions.
On June 21, 2002, the Company was notified that it was named in a lawsuit filed
in State Court in Oregon as a codefendant seeking medical expenses and up to
$12.0 million in damages for injuries sustained by the minor child of an
employee of the Manager while riding on equipment owned by the Manager. At the
time, liability insurance was in place, however, the insurance underwriter has
since gone bankrupt and coverage is limited and is being administered by the
Oregon Guarantee Insurance Association.
Page 9 of 22
In the opinion of management, after consultation with outside counsel, the
pending lawsuits are not expected to have a material adverse effect on the
Company's financial position or results of operations. Management and its
counsel are still reviewing the facts of the injury claims and it is still 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 Statements
Certain information contained in this report may constitute forward-looking
statements within the meaning of the federal securities laws. Although the
Company believes that expectations reflected in such forward-looking statements
are based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved. Forward-looking information is subject to certain
risks, trends and uncertainties that could cause actual results to differ
materially from those projected. Such risks, trends and uncertainties include
the highly cyclical nature of the forest products industry, general economic
conditions, competition, price conditions or trends for the Company's products,
the possibility that timber supply could increase if governmental, environmental
or endangered species policies change, and limitations on the Company's ability
to harvest its timber due to adverse natural conditions or increased
governmental restrictions. These and other risks are described in the Company's
other reports and registration statements, which are available from the United
States Securities and Exchange Commission.
Application of Critical Accounting Policies
The Company's condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Certain accounting policies have a significant impact on amounts
reported in the financial statements. A summary of those significant accounting
policies can be found in Note 1 to the Company's financial statements included
in the Company's 2001 Annual Report on Form 10-K. The Company has not adopted
any significant new accounting policies during the nine months ended September
30, 2002.
Among the significant judgments made by management in the preparation of the
Company's financial statements are the determination of the allowance for
doubtful accounts and the rates of depletion applicable to the Company's
merchantable timber. These determinations are made periodically in the ordinary
course of accounting.
Overview
The Company's principal operations consist of growing and harvesting timber and
selling logs, standing timber and related by-products to third party wood
processors. These logs and by-products are processed for sale as lumber, molding
Page 10 of 22
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
members 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 members (see Financial
Condition and Liquidity).
Seasonality
The Company's log and standing timber sales volumes are generally at their
lowest levels in the first and second quarters of each year. In the first
quarter, heavy snowfalls in higher elevations prevent access to many areas of
the Company's timberlands. This limited access, along with spring break-up
conditions (when warming weather thaws and softens roadbeds) in March or April,
restricts logging operations to lower elevations and areas with rockier soil
types. As a result of these constraints, the Company's sales volumes are
typically at their lowest in the first quarter, improving in the second quarter
and at their highest during the third and fourth quarters. Most customers in the
region react to this seasonality by carrying sufficiently high log inventories
at the end of the calendar year to carry them to the second quarter of the
following year.
Current Market Conditions
Third Quarter 2002 prices for finished wood products (e.g. lumber, plywood and
engineered wood products) were flat to lower than Second Quarter 2002 prices.
Third Quarter 2002 prices for finished wood products were also lower than the
same period in 2001.
Log prices for the Third Quarter 2002 remained fairly flat. Some downward
pressure on prices resulted due to burned logs from the Toolbox Fire.
Results of Operations
Selected operating statistics for the Company:
Page 11 of 22
Sales Volume (MBF) Price Realization (MBF)
------------------ -----------------------
Timber Timber
Period Logs Stumpage Deeds Logs Stumpage Deeds
------ ---- -------- ----- ---- -------- -----
2002
Three Months Ended September 30 23,998 - 20,189 $ 329 $ - $ 186
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 September 30 27,984 - 83,899 $ 347 $ - $ 173
Three Months Ended June 30 9,890 - 28,624 $ 313 $ - $ 138
Three Months Ended March 31 20,939 - 14,744 $ 357 $ - $ 133
Quarter Ended September 30, 2002 Compared to Quarter Ended September 30, 2001
Revenues
Revenues for the quarter ended September 30, 2002 were $13.3 million, a decrease
of $11.0 million or 45% from revenues of $24.3 million for the same period in
2001. The significant decrease in revenues during the third quarter of 2002 was
caused by planned lower volumes.
Timber deed sales for the third quarter of 2002 were $3.8 million on volume of
20.2 million board feet ("MMBF"), as compared to the same period in 2001, when
timber deed sales were $14.5 million on 83.9 MMBF. The average timber deed price
was $186 per thousand board feet ("MBF") during the third quarter of 2002, as
compared to $173 per MBF for the same period in 2001.
Log sales for the quarter ended September 30, 2002 were $7.9 million on volume
of 24.0 MMBF, as compared to the same period in 2001 when log sales were $9.7
million on 28.0 MMBF. The average sales price was $329 per MBF for the third
quarter of 2002, as compared to an average of $347 per MBF for the same period
in 2001. The decrease in log prices reflects a general decrease in the market
caused by a high volume of fire-damaged logs.
Gross Profit
The Company had a gross profit of $0.2 million in the third quarter of 2002 as
compared to a gross profit of $0.8 million for the same period in 2001. As a
percentage of sales the gross profit was 2% as compared to a gross profit
percentage of 3% in the third quarter of 2001. The decrease in gross profit as a
percentage of sales is a result of the fire loss of $0.7 million in 2002 and
higher logging costs, offset by decreases in depletion rates and increased
profits from by-product sales over the same period in 2001.
Page 12 of 22
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $0.1 million from $1.8
million in the third quarter of 2001 to $1.7 million in the third quarter of
2002. The decrease was attributable to lower wage and wage related expenses of
$0.1 million and lower property taxes of $0.1 million, offset by higher
professional service expenses of $0.1 million.
Equity in Net Loss of Affiliate
Equity in net loss of affiliate was approximately $2.6 million for the third
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 $1.9 million in the third quarter of 2001.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
Revenues
Revenues for the nine months ended September 30, 2002 were $30.9 million, a
decrease of $10.2 million or 25% from revenues of $41.1 million for the same
period in 2001. The decrease in revenues during the first nine months of 2002
was caused by planned lower volumes.
Timber deed sales for the first nine months of 2002 were $14.3 million on volume
of 111.0 million board feet ("MMBF"), as compared to the same period in 2001,
when timber deed sales were $20.4 million on 127.3 MMBF. The average timber deed
price was $129 per thousand board feet ("MBF") during the first nine months of
2002, as compared to $160 per MBF for the same period in 2001.
Log sales for the nine months ended September 30, 2002 were $14.6 million on
volume of 43.6 MMBF, as compared to the same period in 2001 when log sales were
$20.3 million on 58.8 MMBF. The average sales price was $335 per MBF for the
first nine months of 2002, as compared to an average of $345 per MBF for the
same period in 2001. The decrease in log prices reflects a general decrease in
the market.
Gross Profit
The Company had a gross loss of $1.5 million in the first nine months of 2002 as
compared to a gross profit of $0.4 million for the same period in 2001. As a
percentage of sales the gross loss was 5% as compared to a gross profit
percentage of 1% in the first nine months of 2001. The increase in gross loss as
a percentage of sales is a result of the fire loss of $0.7 million in 2002 and
higher logging costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $1.6 million from $6.2
million in the first nine months of 2001 to $4.6 million in the first nine
months of 2002. The decrease was primarily attributable to lower wage and wage
related expenses of $0.3 million and lower professional service expenses of $0.8
million.
Page 13 of 22
Equity in Net Loss of Affiliate
Equity in net loss of affiliate was approximately $8.3 million for the first
nine months 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 $3.6 million in the first nine months of 2001.
Financial Condition and Liquidity
Operating Activities
Cash flows provided by operating activities during the nine months ended
September 30, 2002 were $5.7 million, as compared to cash provided by operating
activities of $12.9 million during the same period in 2001. The $7.2 million
decrease is due primarily to the Company's decrease in sales revenue in
comparison to the same period in 2001.
Investing Activities
Cash flows used in investing activities were $5.8 million during the first nine
months of 2002, as compared to $6.8 million during the same period in 2001.
Financing Activities
Cash flows used in financing activities for the first nine months of 2002 were
$0.0 million as compared to cash used in financing activities of $6.6 million
for the same period in 2001. There were no distributions to members in the 2002
period as compared to $6.6 million in distributions to members 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 September 30, 2002, the Company was in compliance with the
covenants requirements pertaining to the Notes. As of September 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.
Page 14 of 22
Through the first nine months of 2002, the Company funded its operations and met
its cash requirements for debt service from cash on hand.
Cash required to meet the Company's debt service and any cash distributions will
be significant. To meet its working capital requirements, the Company for the
past several years has been selling logs and making timber sales at a rate in
excess of the Manager's estimate of the current annual board footage growth on
the Company's timberlands. The debt service and, prior to April 2001, quarterly
cash distributions have been funded from operations and borrowings. Given
projected volumes for sales of logs and timber, estimated current board footage
growth on the timberlands and the harvest restrictions in the Notes, unless
prices improve, costs are reduced, new markets are developed or the Company
makes accretive acquisitions, the Company's ability in the future to make
distributions will be adversely affected. On May 10, 2001 the Company announced
an indefinite suspension of distributions. The Company continues to evaluate
means to improve cash flows, including the factors mentioned above. There can be
no assurance that prices will improve or that the Company will be able to take
any of these actions and it is unlikely prices will improve or any of these
actions will take effect within a short-term horizon. The Company will continue
to look to log and timber deed sales as well as the sale of excess timberlands,
and short-term advances from an affiliated lender, to meet its short term cash
needs.
ITEM 4. CONTROLS AND DISCLOSURES
Within 90 days prior to the date of this Form 10-Q, the Company carried out an
evaluation under the supervision and with the participation of management of the
Company's Manager, including the Manager's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Manager's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic Securities and Exchange Commission filings.
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date that the Company carried out its evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 25, 2002, the MLP 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 Company, the general partner of the MLP, the
MLP and the board of directors of the Manager alleging, among other things,
breach of fiduciary duty and self-dealing by the general partner and the board
in connection with the going private transaction.
Page 15 of 22
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.
On July 12, 2002 the MLP 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 October 17, 2002 the MLP announced that it had reached a tentative settlement
of the purported class action lawsuits, subject to court approval and other
customary conditions.
On June 21, 2002 the Company was notified that it was named in a lawsuit filed
in State Court in Oregon as a codefendant seeking medical expenses and up to
$12.0 million in damages for injuries sustained by the minor child of an
employee of the Manager while riding on equipment owned by the Manager. At the
time, liability insurance was in place, however, the insurance underwriter has
since gone bankrupt and coverage is limited and is being administered by the
Oregon Guarantee Insurance Association.
In the opinion of management, after consultation with outside counsel, the
pending lawsuits are not expected to have a material adverse effect on the
Company's financial position or results of operations. Management and its
counsel are still reviewing the facts of the injury claims and it is still 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 16 of 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
T3.1 - Amended and Restated Agreement of Limited Partnership of
U.S. Timberlands Company, LP
T3.2 - Second Amended and Restated Operating Agreement of U.S.
Timberlands Klamath Falls, LLC
T10.2 - Indenture among U.S. Timberlands Klamath Falls, LLC, U.S.
Timberlands Finance Corp. and State Street Bank and Trust
Company, as trustee
T10.3 - Contributions, Conveyance and Assumption Agreement among
U.S. Timberlands Company, LP and certain other parties
*10.4 - Form of U.S. Timberlands Company, LP 1997 Long-Term
Incentive Plan
*10.5 - Employment Agreement for Mr. Rudey
*10.9 - Supply Agreement between U.S. Timberlands Klamath Falls,
LLC and Collins Products, LLC
++10.10 - Operating Agreement of U.S. Timberlands Yakima, LLC
*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.
T Incorporated by reference to the same numbered Exhibit to the Registrant's
Current Report on Form 8-K filed January 15, 1998.
++ Incorporated by reference to the same numbered exhibit to the Registrant's
Form 10-Q filed on May 15, 2000.
(b.) Reports on Form 8-K
On October 17, 2002, the Company filed a Form 8-K containing a news release
relating to the execution of a definitive agreement with respect to a
privatization and the tentative settlement of certain purported class action
lawsuits.
Page 17 of 22
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: November 14, 2002 U.S. TIMBERLANDS KLAMATH FALLS, LLC
By: U.S. Timberlands Services Company, LLC
as Managing Member
By: /s/ Thomas C. Ludlow
--------------------
Thomas C. Ludlow
Chief Financial Officer
(Chief Financial Officer,
Duly Authorized Officer,
And Principal Accounting Officer)
Page 18 of 22
CERTIFICATION
I, John M. Rudey, certify that:
I have reviewed this quarterly report on Form 10-Q of U.S. Timberlands Klamath
Falls, LLC.
1. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
2. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
3. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures ( as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
4. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal control; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
5. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ John M. Rudey
-----------------
John M. Rudey
Chairman, Chief Executive Officer
and President
Page 19 of 22
CERTIFICATION
I, Thomas Ludlow, certify that:
I have reviewed this quarterly report on Form 10-Q of U.S. Timberlands Klamath
Falls, LLC.
1. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
2. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
3. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures ( as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
4. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal control; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
5. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /S/ Thomas C Ludlow
-------------------
Thomas C. Ludlow
Chief Financial Officer
Page 20 of 22