Back to GetFilings.com

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, 2003
OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-23259

U.S. TIMBERLANDS KLAMATH FALLS, LLC

U.S. TIMBERLANDS FINANCE CORP.

(Exact name of registrant as specified in its charter)

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 September 30, 2003 and 2002	3
Item	1	.	Condensed Consolidated Statements of Operations for the nine months ended September 30, 2003 and 2002	4
Item	1	.	Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002	5
Item	1	.	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002	6
Item	1	.	Notes to Condensed Consolidated Financial Statements	7
Item	2	.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item	4	.	Controls and Procedures	18
Part II.			Other Information	18
Item	1		Legal Proceedings	18
Item	2	.	Changes in Securities and Use of Proceeds	19
Item	3	.	Defaults Upon Senior Securities	19
Item	4	.	Submission of Matters to a Vote of Security Holders	19
Item	5	.	Other Information	19
Item	6	.	Exhibits and Reports on Form 8-K	19

-2-

Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

See notes to the condensed consolidated financial statements

-3-

Table of Contents

See notes to the condensed consolidated financial statements

- -4-

Table of Contents

• Derived from audited Consolidated Balance Sheet as of December 31, 2002
  See notes to the condensed consolidated financial statements
  

- -5-

Table of Contents

See notes to the condensed consolidated financial statements

- -6-

Table of Contents

U.S. TIMBERLANDS KLAMATH FALLS, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except as otherwise indicated) (Unaudited)

1. Business and Basis of Presentation

Business

The accompanying condensed 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-obligor for USTK’s 9 5/8% Senior Notes due 2007 (the “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”) 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. Prior to the completion of the privatization discussed below, the MLP owned a 99% common membership interest in USTK. U.S. Timberlands Services Company, LLC (the “Manager”) manages the business of the Company and owns a 1% common membership interest in USTK.

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 privatization transaction). The definitive agreement contemplated a cash tender offer for 100% of the outstanding common limited partnership units not already owned by the acquiring entity or its affiliates for $3.00 per unit in cash, followed by a merger of the acquisition company with and into the MLP, pursuant to which each common limited partnership unit not already owned by the acquiring entity or its affiliates would be converted into the right to receive $3.00 per unit in cash. The tender offer commenced on November 19, 2002 and was completed on March 6, 2003. Pursuant to the tender offer, approximately 71% of the Company’s common units were tendered. The remaining common units not purchased in the tender offer were acquired by the acquisition group in a merger that was completed on June 26, 2003.

In July 2003, in a reorganization subsequent to the completion of the privatization transaction, the 99% non-managing member’s interest in the Company previously owned by the MLP was contributed to U.S. Timberlands Yakima, L.L.C., the Company’s investee (see Note 3), whose common interests became wholly-owned by the acquisition group as a result of the privatization transaction. Upon completion of this reorganization, the Company became an indirect subsidiary of U.S. Timberlands Yakima, L.L.C., which in turn is owned indirectly by U.S. Timberlands Holding Group, L.L.C., a company controlled by J. M. Rudey or his affiliates.

Because of the publicly-owned long-term debt which remains outstanding, the Company did not elect to adopt “push-down” accounting for the privatization transaction described above.

- -7-

Table of Contents

The primary activity of the Company is the growing of trees and the sale of logs and standing timber to third party wood processors and related party purchasers. 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 2002 Annual Report on Form 10-K. Operating results for the quarter and the nine month period ended September 30, 2003 are not necessarily indicative of the results that may be expected for the full year or any other period.

There have been no significant changes in the accounting policies of the Company during 2003.

Since October 1999, the Company has owned a redeemable preferred member interest (“Preferred Interest”) in U.S. Timberlands Yakima, L.L.C. (USTY), an affiliate accounted for under the equity method.

- -8-

Table of Contents

As described in Note 1, in July, 2003 the Company became an indirect subsidiary of USTY, as the result of the contribution to USTY of the 99% non-managing member’s interest in the Company previously owned by the MLP.

The following summarized financial information for USTY is presented on a USTY stand-alone basis without consolidation of the Company’s results of operations with those of USTY, to avoid duplication which would otherwise occur. As stated in Note 1, push-down accounting was not elected by the Company. Accordingly USTY’s results also do not reflect “push-down accounting” adjustments resulting from the privatization of the MLP.

During the first half of 2003, the Company contributed timberlands located in Central Oregon to USTY. The contributions have an aggregate agreed upon value of $12.9 million and were added to the liquidation preference of the Company’s Preferred Interest in USTY. Terms of the additional Preferred Interest acquired are the same terms as the Preferred Interest previously issued to the Company. The Company recorded its additional Preferred Interests at its aggregate costs for the timberlands of approximately $11.6 million.

4. Short-Term Debt

The Company had a credit facility with an affiliate of the Managing Member (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. While the Company continues to seek a credit facility from an unaffiliated source, affiliated lenders have made short term advances to the Company, payable on demand to the affiliates, at an annual interest rate of 10%. The affiliate has made no commitment to continue lending funds to the Company, and each request is reviewed on a case by case basis.

-9-

Table of Contents

5. Long-Term Debt and Distributions

As of September 30, 2003, the Company was not permitted to make any distributions as it had not exceeded the requisite Consolidated Fixed Charge Coverage Ratio within the restricted payments provisions of the 9 5/8% Senior Notes issued by the Company.

The Company has not made its required interest payment, due on November 17, 2003, on its Notes, which provide for a 30 day grace period. The Company is endeavoring to monetize sufficient assets to be in a position to make the interest payment by the expiration of the grace period. While the Company believes it will be able to monetize its assets, there can be no assurances it will be able do so on terms acceptable to the Company.

6. Unit-based Compensation Plans

Prior to the privatization the MLP had a Unit Option Plan which permitted the grant of unit options to employees and directors of the Company who perform services for the Company covering 857,749 Common Units. As permitted under SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which was issued in December 2002 and amended SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. There would have been no effect on net loss for the three and nine month periods ended September 30, 2003 and a negligible effect for the three and nine month periods ended September 30, 2002 if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

In connection with the privatization transaction described in Note 1, each outstanding unit option granted under the Unit Option Plan was converted into an option to receive, upon exercise, including payment of the exercise price, the $3.0 per unit merger consideration. Because the exercise price for each option is greater than the merger consideration, the Company does not expect any options to be exercised.

7. Recent Accounting Standards

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” as an amendment to SFAS No. 123 by introducing two additional conversion methods when converting to the fair value based method from the intrinsic value method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income (loss) of an entity’s accounting policy decisions with respect to stock-based employee compensation and amends APB Opinion No. 28 to require disclosure about those effects in interim financial information. The disclosure provisions are effective for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002. The Company follows the intrinsic value method of accounting for stock-based employee compensation, but will continue to evaluate the benefits of a voluntary change to the fair value based method.

- -10-

Table of Contents

In January 2003, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation of Variable Interest Entities" which is an interpretation of Accounting Research Bulletin No. 51 "Consolidated Financial Statements". FIN 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise when it has a controlling financial interest through ownership of a majority voting interest in the entity.

The provisions of FIN 46 are required to be applied by the Company no later than October 1, 2003. The Company has reconsidered the applicability of FIN 46 to its investment in its parent company, USTY, and has concluded that USTY is not a variable interest entity and therefore its financial statements are not required to be consolidated with those of the Company pursuant to the provisions of FIN 46.

8. Contribution to Capital of the Company

In May 2003, U.S. Timberlands Acquisition Co., LLC reimbursed the Company for certain expenses aggregating $1,238 incurred by the Company in connection with the privatization transaction described in Note 1. These expenses consisted principally of legal expenses of the Company and the Special Committee and a fairness opinion fee to an investment banking firm retained by the Committee, which previously had been allocated to and paid by the Company. The reimbursement has been recorded as a contribution to the capital of the Company.

9. Management Agreement

On September 1, 2003, the Company completed a new management agreement with U.S. Timberlands Services Company, LLC (“Services”). The new management agreement replaced the prior arrangement under which the Company reimbursed Services for expenses incurred on the Company’s behalf. The new management agreement, which provides for an annual fee of 2% of the assets managed, payable monthly, is similar to other management agreements used in the industry where the manager receives a monthly fee based upon assets managed. Expenses incurred to Services totaled $2,455 and $2,389, respectively for the nine months ended September 30, 2003 and 2002, including $334 for September 2003 under the new management agreement.

10. Litigation

On June 21, 2002, the Company was notified that it was named in a lawsuit filed in State Court in Oregon as a codefendant seeking medical expenses and up to $12.0 million in damages for injuries sustained by the minor child of an employee of the Manager while riding on equipment owned by the Manager. At the time, liability insurance was in place, however, the insurance underwriter has since gone bankrupt and coverage is limited and is being administered by the Oregon Guarantee Insurance Association.

Management and its counsel are still reviewing the facts of the injury claims and it is too early to assess their effect on the Company.

- -11-

Table of Contents

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.

In June 2003, a major customer and competitor of the Company, Crown Pacific, filed for relief under Chapter 11 of the Bankruptcy Code. There was no direct financial impact to the Company. It is not known at this time how this bankruptcy will impact the forest products industry in which the Company operates although it may lead to increased timber supply in the market.

Application of Critical Accounting Policies

The Company's condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Certain accounting policies have a significant impact on amounts reported in the financial statements. A summary of those significant accounting policies can be found in Note 1 to the Company's financial statements included in the Company's 2002 Annual Report on Form 10-K. The Company has not adopted any significant new accounting policies during the nine months ended September 30, 2003.

Among the significant judgments made by management in the preparation of the Company's financial statements are the determination of the allowance for doubtful accounts and the rates of depletion applicable to the Company's merchantable timber. These determinations are made periodically in the ordinary course of accounting.

Overview

The Company’s principal operations consist of growing and harvesting timber and selling logs, standing timber and related by-products to third party wood processors and related party purchasers. These logs and by-products are processed for sale as lumber, molding products,

- -12-

Table of Contents

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 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 currently not 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 2003 prices for finished wood products (e.g. lumber, plywood and engineered wood products) were lower than the second quarter 2003. Prices did start to improve slightly late in the third quarter of 2003. Ponderosa Pine prices were relatively flat during the quarter and veneer prices started to move up modestly by the end of September.

Delivered log prices for Douglas Fir and White Fir remained the same as the second quarter 2003 but down from the same quarter in 2002. Prices for veneer pine logs remained suppressed as did pine sawlog prices. Incense Cedar log prices increased by 5% over second quarter 2003 log prices.

Results of Operations

Selected operating statistics for the Company:

- -13-

Table of Contents

Quarter Ended September 30, 2003 Compared to Quarter Ended September 30, 2002

Revenues

Revenues for the quarter ended September 30, 2003 were $4.7 million, a decrease of $8.6 million or 65% from revenues of $13.3 million for the same period in 2002. The decrease in revenues during the third quarter of 2003 was caused by lower log sales volume and lower timber deed sales.

Timber deed sales for the third quarter of 2003 were $0.1 million on volume of 1.1 million board feet (“MMBF”), as compared to the same period in 2002, when timber deed sales were $3.8 million on 20.2 MMBF. The average timber deed price was $135 per thousand board feet (“MBF”) during the third quarter of 2003, as compared to $186 per MBF for the same period in 2002.

Log sales for the quarter ended September 30, 2003 were $3.9 million on volume of 12.8 MMBF, as compared to the same period in 2002 when log sales were $7.9 million on 24.0 MMBF. The average sales price was $306 per MBF for the third quarter of 2003, as compared to an average of $329 per MBF for the same period in 2002. The decrease in log prices reflects a general decrease in the market.

In addition, property sales for the 2003 third quarter were $0.0 million, as compared to $1.1 million for the same period in 2002.

- -14-

Table of Contents

Gross Profit

The Company had a gross loss of $0.6 million in the third quarter of 2003 as compared to a gross profit of $0.2 million for the same period in 2002. As a percentage of sales, the gross loss was 12% as compared to a gross profit percentage of 2% in the third quarter of 2002. The gross profit (loss) percentage in 2003 was adversely impacted compared to 2002 by lower log selling prices and lower timber deed sales which produce higher gross margin percentages.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $0.1 million from $1.7 million in the third quarter of 2002 to $1.6 million in the third quarter of 2003. The decrease was attributable to lower payroll costs and lower professional service fees, offset by increased management company service fees.

Equity in Net Loss of Affiliate

Equity in net loss of affiliate was $2.5 million for the third quarter of 2003. This amount reflects the Company’s share of the net loss of an affiliate (USTY) accounted for under the equity method. This compares to equity in net loss of affiliate of $2.6 million in the third quarter of 2002.

Nine Months Ended September 30, 2003 Compared to Nine months Ended September 30, 2002

Revenues

Revenues for the nine months ended September 30, 2003 were $26.3 million, a decrease of $4.6 million or 15% from revenues of $30.9 million for the same period in 2002. The decrease in revenues during the first nine months of 2003 was caused by generally lower sales volumes.

Timber deed sales for the first nine months of 2003 were $2.3 million on volume of 14.9 MMBF, as compared to the same period in 2002 when timber deed sales were $14.3 million on 111.0 MMBF. The average timber deed price was $156 per MBF during the first nine months of 2003, as compared to $129 per MBF for the same period in 2002.

Log sales for the nine months ended September 30, 2003 were $13.9 million on volume of 44.2 MMBF, as compared to the same period in 2002 when log sales were $14.6 million on 43.6 MMBF. The average sales price was $313 per MBF for the first nine months of 2003, as compared to an average of $335 per MBF for the same period in 2002. The decrease in log prices reflects a general decrease in the market.

In addition, property sales for the first nine months of 2003 were $8.9 million, as compared to $1.1 million for the same period in 2002.

- -15-

Table of Contents

Gross Profit

The Company had a gross loss of $1.0 million in the first nine months of 2003 as compared to a gross loss of $1.5 million for the same period in 2002. As a percentage of sales, the gross loss was 4% as compared to a gross loss percentage of 5% in the first nine months of 2002. The gross profit (loss) percentage was adversely impacted in the 2002 period by the fire loss and the sale of the Ochoco timberlands deed at a loss.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $0.1 million from $4.6 million in the nine months ended September 30, 2002 to $4.7 million in the nine months ended September 30, 2003. The increase was attributable to increased management service company fees and higher professional service fees, offset by lower payroll costs and overall lower spending in the remaining expense items.

Equity in Net Loss of Affiliate

Equity in net loss of affiliate was approximately $7.5 million for the first nine months of 2003. This amount reflects the Company’s share of the net loss of an affiliate (USTY) accounted for under the equity method. This compares to equity in net loss of affiliate of $8.3 million in the first nine months of 2002.

Financial Condition and Liquidity

Operating Activities

Cash flows provided by operating activities during the nine months ended September 30, 2003 were $0.3 million, as compared to cash provided by operating activities of $5.7 million during the same period in 2002. The $5.4 million decrease is primarily due to the Company’s decrease in sales revenue in comparison to the same period in 2002.

Investing Activities

Cash flows used in investing activities were $1.7 million during the first nine months of 2003, as compared to $5.8 million used in investing activities during the same period in 2002.

Financing Activities

Cash flows provided by financing activities for the first nine months of 2003 were $1.2 million as compared to $0.0 million for the first nine months of 2002. In the 2003 period, these cash flows were provided by a capital contribution by U.S. Timberlands Acquisition Co., LLC. There were no distributions to members in the 2003 and 2002 periods.

- -16-

Table of Contents

The Company had a credit agreement with an affiliate of the Managing Member (the “Affiliate Credit Facility”), which allowed the Company to borrow up to $12.0 million. The Affiliate Credit Facility expired on April 30, 2002. While the Company continues to seek a credit facility from an unaffiliated source, affiliated lenders have made short term advances to the Company, payable on demand to the affiliates, at an annual interest rate of 10%. The affiliate has made no commitment to continue lending funds to the Company, and each request is reviewed on a case by case basis.

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 timberland sales and purchases. The Notes also limit one-year harvest levels and average annual harvest levels for consecutive two-and-three year periods. In 2002, because of accelerated harvesting during the fourth quarter of salvage timber resulting from the Toolbox Fire, the Company exceeded the allowable four year harvest by 6.9 MMBF and the $662,000 proceeds of the excess harvesting reserve required by the Indenture governing the Notes were reinvested in assets that are of use in the business.  As of September 30, 2003, the Company was in compliance with the covenants contained in the Notes. As of September 30, 2003, the Company was not permitted to make any distributions as it had not exceeded the requisite Consolidated Fixed Charge Coverage Ratio within the Restricted Payments provisions of the Notes.

Through the first nine months of 2003, the Company funded its investing activities and met its cash requirements for debt service from operations, cash on hand, and from a capital contribution by U.S. Timberlands Acquisition Co., LLC.

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 Managing Member’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.

The Company has not made its required interest payment, due on November 17, 2003, on its Notes, which provide for a 30 day grace period. The Company is endeavoring to monetize sufficient assets to be in a position to make the interest payment by the expiration of the grace

- -17-

Table of Contents

period. While the Company believes it will be able to monetize its assets, there can be no assurances it will be able do so on terms acceptable to the Company.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management maintains an adequate system of internal controls to promote the timely identification and reporting of material, relevant information. The Company’s senior management team meets regularly to discuss significant transactions and events affecting the Company’s operations. The Company’s President and Chief Executive Officer, and Vice President and Chief Financial Officer, lead these meetings and consider whether topics discussed represent information that should be disclosed under the rules of the SEC.

The Company’s President and Chief Executive Officer, and Vice President and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures. They have designed such controls to ensure that others make all material information known to them within the organization. Management regularly evaluates ways to improve internal controls.

As of the end of the period covered by this Form 10Q, our executive officers, including our President and Chief Executive Officer and our Vice President and Chief Financial Officer, completed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and determined them to be functioning properly and effectively. They did not discover any significant deficiencies or material weaknesses within the controls and procedures that required modification. Since the completion of that evaluation, there have been no significant changes in internal controls over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal controls over financial reporting or in other factors that could significantly affect internal controls.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On June 21, 2002, the Company was notified that it was named in a lawsuit filed in State Court in Oregon as a codefendant seeking medical expenses and up to $12.0 million in damages for injuries sustained by the minor child of an employee of the Manager while riding on equipment owned by the Manager. At the time, liability insurance was in place, however, the insurance underwriter has since gone bankrupt and coverage is limited and is being administered by the Oregon Guarantee Insurance Association.

Management and its counsel are still reviewing the facts of the injury claims and it is too early to assess its effect on the Company.

- -18-

Table of Contents

ITEMS 2, 3, 4, AND 5 OF PART II are not applicable and have been omitted.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

(b)   Reports on Form 8-K
        None.

-19-

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

-20-