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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
625 Madison Avenue, Suite 10-B, New York, NY 10022
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(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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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
U.S. TIMBERLANDS COMPANY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT)
(UNAUDITED)
QUARTER ENDED
SEPTEMBER 30,
------------------------
1999 1998
--------- -----------
Revenues $ 26,175 $ 24,528
-------- --------
Costs and expenses:
Cost of goods sold 6,322 5,024
Depletion, depreciation and road amortization 8,077 7,774
Silviculture 387 200
Selling, general and administrative 1,801 2,026
-------- --------
Total costs and expenses 16,587 15,024
-------- --------
Operating income 9,588 9,504
Interest expense 5,495 5,587
Interest income (55) (70)
Financing fees 169 169
Other (income) expense - net (2) 1,248
-------- --------
Net income before general partner and
minority interest 3,981 2,570
General partner and minority interest (80) (51)
-------- --------
Net income allocable to unitholders $ 3,901 $ 2,519
======== ========
Net income per Unit - Basic
Common $ 0.30 $ 0.20
======== ========
Subordinated $ 0.30 $ 0.20
======== ========
Net income per Unit - Diluted $ 0.30 $ 0.20
======== ========
Distributions per Unit $ 0.50 $ 0.50
======== ========
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1999 1998
--------- -----------
Revenues $ 57,601 $ 50,907
-------- --------
Costs and expenses:
Cost of goods sold 10,981 11,712
Cost of timberland sales -- 5,917
Depletion, depreciation and road amortization 17,329 14,490
Silviculture 524 412
Selling, general and administrative 6,641 7,416
-------- --------
Total costs and expenses 35,475 39,947
-------- --------
Operating income 22,126 10,960
Interest expense 16,461 16,685
Interest income (405) (339)
Financing fees 506 506
Other (income) expense - net (1,143) 1,138
-------- --------
Net income (loss) before general partner and
minority interest 6,707 (7,030)
General partner and minority interest (134) 141
-------- --------
Net income (loss) allocable to unitholders $ 6,573 $ (6,889)
======== ========
Net income (loss) per Unit - Basic
Common $ 0.51 $ (0.54)
======== ========
Subordinated $ 0.51 $ (0.54)
======== ========
Net income (loss) per Unit - Diluted $ 0.51 $ (0.54)
======== ========
Distributions per Unit $ 1.50 $ 1.23
======== ========
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -----------
(UNAUDITED) *
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,743 $ 4,824
Accounts and current portion of notes receivable - net 8,189 2,706
Prepaid expenses and other current assets 72 1,539
--------- ---------
Total current assets 14,004 9,069
--------- ---------
Timber, timberlands and roads - at cost
Timber 331,112 330,244
Timberlands 43,118 43,118
Logging roads 1,828 1,803
Less accumulated depletion and road amortization (58,804) (41,848)
--------- ---------
Timber, timberlands and roads - net 317,254 333,317
--------- ---------
Seed and nursery stock 1,068 1,159
--------- ---------
Property, plant and equipment - at cost
Equipment 674 637
Building and land improvements 843 843
Less accumulated depreciation (439) (326)
--------- ---------
Property, plant and equipment - net 1,078 1,154
--------- ---------
Notes receivable 2,547 --
Deferred financing fees 5,492 5,998
--------- ---------
Total assets $ 341,443 $ 350,697
========= =========
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ 11,130 $ 6,052
Deferred revenue 257 1,614
--------- ---------
Total current liabilities 11,387 7,666
--------- ---------
Long-term debt 225,000 225,000
Minority interest 1,051 1,180
PARTNERS' CAPITAL
General partner interest 1,051 1,180
Limited partner interest 102,954 115,671
--------- ---------
Total partners' capital 104,005 116,851
--------- ---------
Total liabilities and partners' capital $ 341,443 $ 350,697
========= =========
</TABLE>
*Derived from audited Consolidated Balance Sheet as of December 31, 1998.
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1999 1998
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,707 $ (7,030)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depletion, depreciation, road amortization 17,329 14,490
Cost of timberlands sold -- 5,917
Financing fees 506 506
Other non-cash items -- 1,270
Working capital changes - net (587) 598
-------- --------
Net cash provided by operating activities 23,955 15,751
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Timber and road additions (894) (530)
Purchase of property, plant and equipment - net
(36) (32)
Capitalized seed and nursery costs - net 123 92
(Increase) decrease in notes receivable - net (2,547) 1,170
-------- --------
Net cash used in investing activities (3,354) 700
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to unitholders, general partner and minority
interest (19,682) (16,140)
-------- --------
Net cash used in financing activities (19,682) (16,140)
-------- --------
Increase in cash and cash equivalents 919 311
Cash and cash equivalents - beginning of period 4,824 10,625
-------- --------
Cash and cash equivalents - end of period $ 5,743 $ 10,936
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 10,916 $ 10,589
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS OR AS OTHERWISE INDICATED)
(UNAUDITED)
1. ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION
ORGANIZATION
The accompanying consolidated financial statements include the accounts of
U.S. Timberlands Company, L.P. (the "MLP"), a Delaware master limited
partnership, and its 99% owned subsidiary, U.S. Timberlands Klamath Falls,
L.L.C. ("USTK"), collectively referred to hereafter as the Company. All
intercompany transactions have been eliminated in consolidation. The MLP was
formed on June 27, 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, L.L.C. U.S. Timberlands Services Company, L.L.C.
(the "General Partner") manages the businesses of the Company and owns a 1%
general partner interest in the MLP. The General Partner also owns a 1% member's
interest in USTK.
NATURE OF OPERATIONS
The primary activity of the Company is growing trees and the sale of logs
and standing timber to third party wood processors. The Company's timberlands
are located in Oregon, east of the Cascade Range. Logs harvested from the
Company's timberlands are sold to unaffiliated domestic conversion facilities.
These logs 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 Company also owns and operates its own seed
orchard and nursery, which produce approximately five million genetically
selected conifer seedlings each year. Approximately half of the annual seedling
production is used by the Company for its own reforestation programs; the
balance is sold to other forest products companies.
BASIS OF PRESENTATION
These 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 consolidated 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 generally accepted accounting
principles have been condensed or omitted from these statements pursuant to such
rules and regulations and, accordingly, should be read in conjunction with the
consolidated financial statements included in the Company's 1998 Annual Report
to Unitholders. Certain reclassifications have been made to the 1998 amounts
presented for comparability purposes and have no impact on net income. Operating
results for the three, and nine month periods ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the full year.
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<PAGE>
1. SHORT-TERM DEBT
The Company has a credit facility with an affiliate of the General Partner
(the "Affiliate Credit Facility") which allows the Company to borrow up to $12.0
million. The Company's obligations under the Affiliate Credit Facility represent
unsecured general obligations. Borrowings under the Affiliate Credit Facility
bear interest at the prime lending rate as published in the Wall Street Journal
plus 1.25%. The prime lending rate was 8.25% at September 30, 1999. The
Affiliate Credit Facility expires on June 30, 2000 and all amounts borrowed
thereunder shall then be due and payable. There were no outstanding borrowings
under the Affiliate Credit Facility at September 30, 1999.
The Affiliate Credit Facility contains certain restrictive covenants,
including limiting the ability of the Company to make cash distributions, incur
certain additional indebtedness or incur certain liens. In addition, the
Affiliate Credit Facility requires the Company to maintain certain financial
ratios. The Company was in compliance with these covenants at September 30,
1999.
The Affiliate Credit Facility replaced an unsecured revolving credit
facility (The "Bank Credit Facility") with a group of banks that the Company
terminated on June 30, 1999. The Bank Credit Facility consisted of a $75.0
million acquisition facility and a $25.0 million Working Capital Facility.
2. PER UNIT INFORMATION
The Company accounts for income or loss per Unit in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, ("SFAS 128")
"Earnings Per Share." SFAS No. 128 requires the Company to present basic income
or loss per Common and Subordinated Unit ("Basic EPU"), and diluted income or
loss per Unit ("Diluted EPU") information. Basic EPU is calculated by dividing
the income or loss allocable to Common and Subordinated Units, i.e., income or
loss adjusted for the General Partner's effective 2% interest, by the weighted
average number of Common and Subordinated Units outstanding. The net income or
loss for the nine month periods ended September 30, 1999 and September 30, 1998
is allocated to the Common and Subordinated Units utilizing the book liquidation
method. Under this method, income or loss is allocated in accordance with the
liquidation preferences, as set forth in the Company's Partnership Agreement, of
the partners' capital accounts of the Common and Subordinated Unitholders.
Diluted EPU is calculated by dividing income or loss, after adjusting for the
General Partner's effective 2% interest, by the weighted average number of
Common and Subordinated Units outstanding.
The weighted average number of Units outstanding are as follows:
THREE AND
NINE MONTH
PERIOD ENDED BASIC
------------------------------
COMMON SUBORDINATED DILUTED
-------- ------------ -------
September 30, 1999 8,577,487 4,282,120 12,859,607
September 30, 1998 8,577,487 4,282,120 12,859,607
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<PAGE>
3. SUBSEQUENT EVENT
On October 19, 1999, the Board of Directors of the General Partner
authorized the Master Limited Partnership to make a distribution of $0.50 per
Unit. The total distribution will be $6,561,024 (including $131,219 to the
General Partner) and will be paid on November 15, 1999 to Unitholders of record
on October 29, 1999.
4. NEW ACCOUNTING PRONOUNCEMENT
In June of 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting for derivative
instruments and hedging activities. The statement was to be effective for all
fiscal quarters of fiscal years beginning after June 15, 1999 but has been
delayed by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--an
amendment of FASB Statement 133. SFAS No. 137 delays the effective date of SFAS
No. 133 to all fiscal quarters of fiscal years beginning after June 15, 2000.
Consistent with SFAS No. 137, the Company will adopt SFAS No. 133 as of January
1, 2001. The Company believes that adoption of this statement will not have a
material impact on the Company.
8 of 18
<PAGE>
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.
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 and logs, seasonality,
government regulations affecting the manner in which timber may be harvested,
and competition from other supplying regions and substitute products.
SEASONALITY
The Company's log and standing timber sales volumes are generally at their
lowest levels in the first and second quarter 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.
9 of 18
<PAGE>
CURRENT MARKET CONDITIONS
Prices for finished wood products such as lumber and plywood increased
significantly during the first six months of 1999, remained strong in July and
early August, then declined dramatically in late August and September. However,
log and timber prices remained strong in the third quarter due to several
factors. Late in the third quarter, a U.S. District Court judge issued an
injunction against the U.S. Forest Service (USFS), requiring the USFS to put on
hold planned timber sales totaling to 217 million board feet. In addition, dry
weather created extreme fire conditions, resulting in reduced wood deliveries
for most of the summer.
Average lumber and plywood prices during the third quarter of 1999 remained
at levels well above prices during the same period in 1998. Prices for #3
ponderosa pine shop were up 19%, lodgepole pine stud prices were up 19%, Douglas
fir #2 and Better green studs were up 29%, and white fir sheathing prices were
up 2% from the same period in 1998. These changes may differ from the Company's
actual results for the same quarter as the Company's pricing is typically agreed
to prior to actual deliveries.
RESULTS OF OPERATIONS
Selected operating statistics for the Company:
<TABLE>
<CAPTION>
Sales Volume (MBF) Price Realization (MBF)
------------------ -----------------------
Timber Timber Timberland
Period Logs Stumpage Deeds Logs Stumpage Deeds Sales ($000)
------ ---- -------- ----- ---- -------- ----- ------------
1999
<S> <C> <C> <C> <C> <C> <C> <C>
Nine Months Ended September 30 66,380 2,665 70,254 $437 $430 $385 --
Three Months Ended September 30 39,008 744 25,597 $444 $404 $334 --
Three Months Ended June 30 15,376 -- 26,898 $455 -- $484 --
Three Months Ended March 31 11,996 1,921 17,759 $395 $440 $308 --
1998
Nine Months Ended September 30 69,258 27,107 -- $429 $512 -- $6,276
Three Months Ended September 30 29,017 22,617 -- $431 $511 -- --
Three Months Ended June 30 23,832 2,506 -- $432 $570 -- $6,276
Three Months Ended March 31 16,409 1,984 -- $418 $447 -- --
</TABLE>
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
REVENUES Revenues for the quarter ended September 30, 1999 were $26.2
million, an increase of $1.7 million or 7% over revenues of $24.5 million for
the same period in 1998. This increase in revenues was attributable to a $4.8
million increase in log sales partially offset by a $2.7 million decrease in
timber deed and stumpage sales and a $0.5 million decrease in chip, by-product
and seedling sales.
Log sales for the quarter ended September 30, 1999 were $17.3 million on
volume of 39.0 million board feet ("MMBF") as compared to the same period in
1998 when log sales were $12.5 million on volume of 29.0 MMBF. The increase in
log sales volume reflects a late start for logging in the second quarter of the
current year due to a heavy snow pack that prolonged the spring break-up. As a
result, some of the planned second quarter log sales volume occurred in the
third quarter of 1999. The average log sales price was $444 per thousand board
feet ("MBF") for the third quarter of 1999, as compared to an average of $431
per MBF for the same period in 1998. This reflects a general increase in log
prices, as the species mix remained relatively unchanged. The following
explanation of changes in log sales prices may differ from those Current Market
Conditions described previously, as most pricing is agreed to prior to
10 of 18
<PAGE>
actual delivery. The increase in the average log sales price was primarily
attributable to a 4% increase in pine prices and a 10% increase in Douglas-fir
prices, partially offset by a 7% decline in white fir prices.
Timber deed and stumpage sales for the third quarter were $8.9 million on
volume of 26.3 MMBF as compared to the same period in 1998 when timber deed and
stumpage sales were $11.6 million on volume of 22.6 MMBF. The average timber
deed and stumpage sales price was $338 per MBF for the third quarter of 1999 as
compared to $511 per MBF for the same period in 1998. This price decrease
reflects a substantial change in the sales mix. Substantially all of the 1998
third quarter timber deed and stumpage sales came from older, more valuable
timber stands on the Ochoco tract. There were no timber deed or stumpage sales
from the Ochoco tract in the third quarter of 1999.
OPERATING COSTS Operating costs were $16.6 million for the quarter ended
September 30, 1999, an increase of $1.6 million or 11% from operating costs of
$15.0 million for the same period in 1998. This increase was attributable to a
$1.3 million increase in cost of goods sold ("COGS"), and a $0.3 million
increase in depreciation, depletion and amortization ("DD&A) expenses.
COGS for the quarter ended September 30, 1999 was $6.3 million, an increase
of $1.3 million or 26% from COGS of $5.0 million for the same period in 1998.
This increase was due to a 34% increase in log sales volume to 39.0 MMBF in the
third quarter of 1999 from 29.0 MMBF in the same period in 1998.
SG&A expenses for the quarter ended September 30, 1999 were $1.8 million, a
decrease of $0.2 million or 10% from $2.0 million for the same period in 1998.
The decrease was primarily due to savings from the closure of the Seattle office
in January of 1999. As a percentage of revenues, SG&A decreased to 7% in the
third quarter of 1999, as compared to 8% in the third quarter of 1998.
DD&A expense was $8.1 million for the third quarter of 1999, a $0.3 million
or 4% increase over DD&A expense of $7.8 million for the same period in 1998.
This increase was due to a 27% increase in sales volume from log, timber deed
and stumpage sales to 65.3 MMBF in the third quarter of 1999, as compared to
51.6 MMBF for the same period in 1998. This increase in sales volume was
partially offset by a decrease in the Company's timber depletion rate to $121
per MBF in the third quarter of 1999 as compared to $148 per MBF for the same
period in 1998. The timber depletion rate per MBF is recomputed annually in the
first quarter, and the computation takes into account that timber is a
regenerating asset.
OTHER INCOME & EXPENSE There was no other income in the third quarter of
1999, as compared with a $1.3 million expense recorded in the third quarter of
1998 to mark-to-market an unhedged financial instrument.
PARTNERS' CAPITAL During the three months ended September 30, 1999 the
limited partner interest in the Company declined $2.5 million from $105.5
million to $103.0 million. This decline is the result of the limited partners'
$3.9 million share of the Company's net income offset by the $6.4 million of
distributions to Unitholders during this period. The General Partner interest in
the Company also declined during the three months ended September 30, 1999
reflecting its share of the Company's net income and distributions for the
period. The Company expects to continue to make distributions to its Unitholders
in excess of its operating earnings. As a result, the Company anticipates that
partners' capital will continue to decline.
11 of 18
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUES Revenues for the nine months ended September 30, 1999 were $57.6
million, an increase of $6.7 million or 13% over revenues of $50.9 million for
the same period in 1998. This increase in revenues was attributable to a $14.3
million increase in timber deed and stumpage sales partially offset by a $0.7
million decrease in log sales, a $6.3 million decrease in timberland sales and a
$0.7 million decrease in chip, by-product and seedling sales.
Log sales for the nine months ended September 30, 1999 were $29.0 million
on volume of 66.4 MMBF as compared to the same period in 1998 when log sales
were $29.7 million on volume of 69.3 MMBF. The decrease in log sales volume was
caused by weather in the second quarter of 1999; logging operations were delayed
due to a heavy snow pack that prolonged the spring break-up. The average log
sales price for the first nine months of 1999 was $437 per MBF compared to $429
per MBF for the same period in 1998. This reflects a general increase in log
prices, as the species mix remained relatively unchanged from the same period in
1998. The following explanation of changes in log sales prices may differ from
those Current Market Conditions described previously, as most pricing is agreed
to prior to actual delivery. The increase in the average log sales price was
primarily attributable to a 2% increase in Douglas-fir prices and a 7% increase
in white fir prices. Pine log prices were essentially unchanged.
Timber deed and stumpage sales for the third quarter were $28.2 million on
volume of 72.9 MMBF as compared to the same period in 1998 when timber deed and
stumpage sales were $13.9 million on volume of 27.1 MMBF. The increase in timber
deed and stumpage volume was primarily the result of a strategy initiated in
1998 to expand the Company's use of timber deed and stumpage sales to meet
customer needs and improve margins. The average timber deed and stumpage sales
price was $387 per MBF for the third quarter of 1999 as compared to $512 per MBF
for the same period in 1998. This price decrease reflects a change in the sales
mix. Substantially all of the 1998 timber deed and stumpage sales volume came
from older, more valuable timber stands on the Ochoco tract. In 1999,
approximately 37% of the timber deed and stumpage sales came from similar timber
stands on the Ochoco tract.
There were no timberland sales in the first nine months of 1999, as
compared to a $6.3 million timberland sale during the same period in 1998.
OPERATING COSTS Operating costs were $35.5 million for the nine months
ended September 30, 1999, a decrease of $4.4 million or 11% from operating costs
of $39.9 million for the same period in 1998. This decrease was primarily due to
a $0.7 million decrease in COGS, a $5.9 million decrease in the cost of
timberland sales and a $0.8 million decrease in general and administrative
expenses. These reductions were partially offset by a $2.8 million increase in
DD&A expenses
COGS for the nine months ended September 30, 1999 was $11.0 million, a
decrease of $0.7 million or 6% from COGS of $11.7 million for the same period in
1998. This decrease was due to a 4% decrease in log sales volume to 66.4 MMBF in
the first nine months of 1999 from 69.3 MMBF in the same period in 1998.
The Company had no timberland sales during the first nine months of 1999,
as compared to a sale of 15,304 acres with a cost of $5.9 million during the
same period in 1998.
SG&A expenses for the nine months ended September 30, 1999 were $6.6
million, a decrease of $0.8 million or 11% decrease from $7.4 million for the
same period in 1998. This decrease was primarily due to a one-time expense of
$1.1 million in the first quarter of 1998 for severance and the repurchase of
member interests in the General Partner. This decrease was
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<PAGE>
partially offset by $0.7 million in severance expenses recorded in the second
quarter of 1999 related to the closure of the Seattle office. As a percentage of
revenues, SG&A decreased to 12% in the first nine months of 1999, as compared to
15% in same period of 1998.
DD&A expense was $17.3 million for the nine months of 1999, a $2.8 million
or 19% increase over DD&A expense of $14.5 million for the same period in 1998.
This increase was due to an increase in sales volume from log, timber deed and
stumpage sales to 139.3 MMBF in the first nine months of 1999, as compared to
96.4 MMBF for the same period in 1998. This increase due to sales volume was
partially offset by a decrease in the Company's depletion rate to $121 per MBF
in the first nine months of 1999 as compared to $148 per MBF for the same period
in 1998. The decrease in the depletion rate resulted from the annual
recalculation of the depletion rate in the first quarter, and the computation
takes into account that timber is a regenerating asset.
OTHER INCOME & EXPENSE Other income was $1.1 million for the first nine
months of 1999, an increase of $2.3 million from the same period in 1998. This
increase was due to a gain in 1999 from a mark-to-market adjustment on an
unhedged financial instrument. In 1998 the mark-to-market adjustment on the same
unhedged financial instrument was an expense.
PARTNERS' CAPITAL During the nine months ended September 30, 1999 the
limited partner interest in the Company declined $12.7 million from $115.7
million to $103.0 million. This decline is the result of the limited partners'
$6.6 million share of the Company's net income offset by the $19.3 million of
distributions to Unitholders during this period. The General Partner interest in
the Company also declined during the nine months ended September 30, 1999
reflecting its share of the Company's net income and distributions for the
period. The Company expects to continue to make distributions to its Unitholders
in excess of its operating income. As a result, the Company anticipates that
partners' capital will continue to decline.
FINANCIAL CONDITION AND LIQUIDITY
OPERATING ACTIVITIES Cash flows provided by operating activities during the
nine months ended September 30, 1999 were $24.0 million, as compared to cash
flows provided by operating activities of $15.8 million during the same period
in 1998. The $8.2 million increase in cash flows provided by operating
activities was primarily due to a $14.3 million increase in timber deed sales
and a $0.8 million decrease in SG&A expenses, partially offset by a $6.3 million
reduction in timberland sales.
INVESTING ACTIVITIES Cash flows used by investing activities were $3.4
million during the first nine months of 1999, as compared to cash flows provided
by investing activities of $0.7 million during the same period in 1998.
Substantially all of this difference is tied to the Company's expanded use of
timber deed sales in 1999. In the first nine months of 1999 notes receivable
from the sale of timber deeds increased $2.5 million. During the same nine month
period in 1998, notes receivable decreased $1.2 million, a source of cash.
FINANCING ACTIVITIES Cash flows used in financing activities were $19.7
million for the first nine months of 1999, as compared to $16.1 million during
the same period in 1998. These amounts represent the Company's payment of
distributions to Unitholders, General Partner and minority interest in the first
nine months of 1999. There were no cash flows from financing activities in the
first three months of 1998, as the Company's first distribution was not paid
until May 15, 1998.
13 of 18
<PAGE>
The Company has a credit agreement with an affiliate of the General Partner
(the "Affiliate Credit Facility"). The Affiliate Credit Facility allows the
Company to borrow up to $12.0 million under certain terms and covenants. The
convenants include restrictions on the Company's ability to make cash
distributions, incur certain additional indebtedness or incur certain liens. In
addition, the Company is required to maintain certain financial ratios. The
Affiliate Credit Facility will expire on June 30, 2000. At that time, amounts
borrowed will be due and payable. As of September 30, 1999 there were no
outstanding borrowings under the Affiliate Credit Facility. The Company's intent
is to replace the Affiliate Credit Facility with a bank facility, but management
does not expect this replacement to occur until the first half of 2000. The
Company also has the ability to generate cash flow through the acceleration of
planned log and timber deed sales. In addition, the Company's plan is to retain
investment and commercial banks to assist it in raising funds for acquisitions.
The agreements governing the Company's 9-5/8% senior notes (the "Notes")
and the Affiliate Credit Facility contain restrictive covenants, including
limitations on harvest levels, land sales, cash distributions and the amount of
future indebtedness. In addition, these agreements require the Company to
maintain certain financial ratios. Under the Notes, the Company's average annual
harvest volume over any period of four consecutive years cannot exceed 150 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. As of September 30, 1999 the Company was in compliance with
the covenants and ratios pertaining to the Notes and Affiliate Credit Facility.
Through the first nine months of 1999, the Company funded its operations
and met its cash obligations for distributions to its Unitholders and debt
service from cash on hand, cash generated from current operations and borrowings
under its former bank credit facility and the Affiliate Credit Facility. Cash
required to make distributions to all Unitholders at current levels and to pay
interest on the Notes is $26.2 million and $21.7 million, respectively, per
year.
Cash required to meet the Company's debt service and quarterly cash
distributions will be significant. To meet its working capital requirements, the
Company has been harvesting and selling logs, stumpage and timber deed sales at
a rate in excess of the General Partner's estimate of the long-term sustainable
annual harvest level for its existing merchantable timberlands, which excludes
the Company's approximately 180,000 acres of plantations. The General Partner
expects that the debt service and quarterly cash distributions will be funded
from operations and borrowings. Given projected harvest levels, the long term
sustainable harvest levels of 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 at current levels may be adversely affected. The Company
continues to evaluate means to improve cash flows, including the factors
mentioned above. However, there can be no assurance that prices will improve or
that the Company will be able to take any of these actions.
14 of 18
<PAGE>
YEAR 2000 ISSUES
The Company is aware of the "Year 2000" issue associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The Year 2000 issue is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of a two-digit
year value to 00. The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
recognize such information could generate erroneous data or cause a system to
fail.
Since early 1998, the company has been assessing its computer hardware and
information systems needs and upgrading its systems as appropriate. In 1998, the
Company completed the installation of several major hardware and software
upgrades: general ledger, accounts payable, accounts receivable, log accounting
and telecommunications. Along with this assessment and upgrade of its systems,
the Company is also reviewing its systems and applications to ensure its
computer and information systems will function properly at Year 2000. The
Company had substantially completed this internal review and upgrade as of
September 30, 1999. Due to changing status and ongoing recommended modifications
by vendors, system assessments and testing will continue through the end of this
year. At this time, management of the Company believes that the specific cost of
achieving Year 2000 compliance for its current systems will not have a material
effect on the Company's consolidated financial statements.
Like other companies, the Company relies on its customers for revenues and
on its vendors for products and services of all kinds; these third parties all
face the Year 2000 issue. An interruption in the ability of any of them to
provide goods or services, or to pay for goods and services provided to them, or
an interruption in the business operations of customers causing a decline in
demand for services, could have a material adverse effect on the Company.
In addition, there is a risk, the probability of which the Company is not
in a position to estimate, that the Year 2000 will cause wholesale, perhaps
prolonged, failures of electrical generation, banking, telecommunications or
transportation systems in the United States or abroad, disrupting the general
infrastructure of the economy. The effect of such disruptions on the Company
could be material.
The Company is in the process of identifying and surveying its key vendors
and customers regarding their progress on the Year 2000 issue. The Company's
efforts to determine the readiness of its key vendors and customers are expected
to be ongoing through year-end 1999. However, because so many entities are
exposed to the risk of failure not only of their own systems, but the systems of
other entities, the ultimate effect of the Year 2000 issue is subject to a high
degree of uncertainty.
The Company believes that its preparations currently underway are adequate
to assess and manage the risks presented by the Year 2000 issue, and does not
have a formal contingency plan at this time.
The statements in this section regarding the Year 2000 and the Company's
responses to it are forward-looking statements. They are based on assumptions
that the Company believes to be reasonable in light of its current knowledge and
experience. A number of events could cause actual results to differ materially
from those described in the forward-looking statements made on behalf of the
Company.
15 of 18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is no pending litigation and, to the knowledge of the Company, there
is no threatened litigation, the unfavorable resolution of which could have a
material adverse effect on the business or financial condition of the Company.
ITEMS 2, 3, 4 AND 5 OF PART II are not applicable and have been omitted.
16 of 18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A.) EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
+3.1 -- Amended and Restated Agreement of Limited Partnership of U.S. Timberlands Company, L.P.
+3.2 -- Second Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, L.L.C.
**3.3 -- Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of U.S.
Timberlands Company, L.P.
+10.2 -- Indenture among U.S. Timberlands Klamath Falls, L.L.C., U.S. Timberlands Finance Corp.
and State Street Bank and Trust Company, as trustee
+10.3 -- Contribution, Conveyance and Assumption Agreement among U.S. Timberlands Company, L.P.
and certain other parties
*10.4 -- Form of U.S. Timberlands Company, L.P. 1997 Long-Term Incentive Plan
*10.5 -- Employment Agreement for Mr. Rudey
*10.9 -- Supply Agreement between U.S. Timberlands Klamath Falls, L.L.C. and Collins Products LLC
***16 -- Letter from Arthur Andersen, LLP dated December 8, 1998
*21.1 -- List of Subsidiaries
27.1 -- Financial Data Schedule
</TABLE>
* 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
Quarterly report on Form 10-Q filed May 15, 1998.
*** Incorporated by reference to Exhibit 1 to the Registrant's Form 8-K filed on
December 8, 1998.
+ 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
Annual Report on Form 10-K filed March 31, 1998.
(B.) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended September
30, 1999.
17 of 18
<PAGE>
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.
DATE: NOVEMBER 15, 1999 U.S. TIMBERLANDS COMPANY. L.P.
By: U.S. Timberlands Services Company, L.L.C.
as General Partner
By: : /s/ Greg G. Byrne
-------------------------
Greg G. Byrne
Chief Financial Officer
(Chief Financial Officer, Principal Accounting
Officer and Duly Authorized Officer)
18 of 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
FINANCIAL STATEMENTS OF U.S. TIMBERLANDS COMPANY, L.P. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,743
<SECURITIES> 0
<RECEIVABLES> 8,389
<ALLOWANCES> 200
<INVENTORY> 0
<CURRENT-ASSETS> 14,004
<PP&E> 1,517
<DEPRECIATION> 439
<TOTAL-ASSETS> 341,443
<CURRENT-LIABILITIES> 11,387
<BONDS> 225,000
0
0
<COMMON> 0
<OTHER-SE> 104,005
<TOTAL-LIABILITY-AND-EQUITY> 341,443
<SALES> 57,601
<TOTAL-REVENUES> 57,601
<CGS> 10,981
<TOTAL-COSTS> 35,475
<OTHER-EXPENSES> (637)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,461
<INCOME-PRETAX> 6,573
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,573
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,573
<EPS-BASIC> .51
<EPS-DILUTED> .51
</TABLE>
