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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file nos.: 1-13573-01
1-13573
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
U.S. TIMBERLANDS FINANCE CORP.
(Exact names of co-registrants as specified in their charters)
DELAWARE 93-1217136
DELAWARE 91-1851612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Nos.)
1301 Fifth Avenue, Suite 3725, Seattle, Washington 98101-2636
(Address of principal executive offices) (Zip code)
Co-Registrants' telephone number, including area code: 206-652-5000
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Name of Each Exchange on Which Registered:
9 5/8% Senior Notes New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether each registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during then 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 requirement for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K.
The co-registrants have not issued any common equity held by
non-affiliates of the co-registrants.
Documents incorporated by reference: None
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U.S. TIMBERLANDS COMPANY, L.P.
TABLE OF CONTENTS
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<S> <C> <C>
Page
No.
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PART I
Item 1. Business............................................................................ 1
Item 2. Properties.......................................................................... 17
Item 3. Legal Proceedings................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................................. 18
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder Matters.......... 18
Item 6. Selected Financial Data............................................................. 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 20
Item 8. Financial Statements................................................................ 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................... 27
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant...... 28
Item 11. Executive Compensation.............................................................. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 36
Item 13. Certain Relationships and Related Transactions...................................... 36
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K............................. 37
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PART I
Item 1. Business
General
The business of U.S. Timberlands Klamath Falls, L.L.C., a Delaware
limited liability company formed in 1996 (the "Company"), consists of the
growing of trees and the sale of logs and standing timber. The Company owns
approximately 633,000 fee acres of timberland and cutting rights on
approximately 3,000 acres of timberland containing total merchantable timber
volume estimated as of January 1, 1998 to be approximately 2.1 billion board
feet ("BBF") in Oregon east of the Cascade Range (the "Timberlands"). 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. The Company also owns
and operates its own seed orchard and produces approximately five million
conifer seedlings annually from its nursery, approximately half of which are
used for its own internal reforestation programs, with the balance sold to other
forest products companies. Except as the context otherwise requires, references
herein to, or descriptions of, assets and operations of the Company include the
assets and operations of U.S. Timberlands Company, L.P. (the "Master
Partnership") and the predecessors of the Company and the Master Partnership.
The Timberlands' merchantable timber consists of Ponderosa Pine
(approximately 44%) and Douglas fir (approximately 13%), species which have
historically commanded premium prices over other softwood species, with the
balance consisting of Lodgepole Pine, White Fir and other softwood species. The
Timberlands have stands of varying ages and are unique in the forests east of
the Cascade Range in Oregon in that approximately 180,000 acres are actively
managed tree farms (the "Plantations"). The Plantations were first established
by Weyerhaeuser Company ("Weyerhaeuser") in the early 1960s and acreage has been
planted each year since then. Currently, the Plantations contain age classes
ranging generally from two to 36 years old. Initial thinning of the Plantation
stands is expected to begin within the next five years. Because the timber on
the Plantations is generally not yet considered merchantable, volumes of timber
on the Plantations are not included in the Company's estimated merchantable
timber volume. The balance of the Timberlands are composed of natural stands.
For a more complete description of the Company's properties, see "Properties."
In August 1996, the Company and U.S. Timberlands Management Company,
L.L.C., formerly known as U.S. Timberlands Services Company, L.L.C. ("Old
Services"), acquired approximately 604,000 fee acres of timberland (the "Klamath
Falls Timberlands"), containing an estimated merchantable timber volume of
approximately 1.9 BBF and related assets from Weyerhaeuser (the "Weyerhaeuser
Acquisition"). In July 1997, the Company (which is now the Master Partnership's
subsidiary operating company) acquired approximately 42,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland (the
"Ochoco Timberlands"), containing an estimated merchantable timber volume of
approximately 280 million board feet ("MMBF") from Ochoco Lumber Company
("Ochoco") (the "Ochoco Acquisition"). Over 45% of the merchantable timber on
the Ochoco Timberlands is at least 80 years old. The Company believes that the
age classes and species mix of the Ochoco Timberlands fit well with the Klamath
Falls Timberlands and provide the Company flexibility in developing its harvest
plans. In October 1997, the Company sold approximately 13,000 acres from the
Klamath Falls Timberlands.
During the period from January 1, 1994 through the acquisition of the
Klamath Falls Timberlands by the Company, approximately 58% of the logs
harvested from the Klamath Falls Timberlands were delivered to a plywood mill
owned by Weyerhaeuser at Klamath Falls, Oregon. In recent years, substantially
all of the timber harvested from the Ochoco Timberlands was delivered to
Ochoco's mills. The Company does not currently own any conversion facilities nor
does it presently intend to own any such facilities on a long-term basis;
consequently all of the Company's sales are made to unaffiliated third parties.
Concurrent with the Company's acquisition of the Klamath Falls Timberlands, the
Company arranged for Collins Products LLC ("Collins"), a privately owned forest
products company located within the Klamath Falls Timberlands area, to purchase
Weyerhaeuser's Klamath Falls mill facilities. The Company has entered into a
10-year log supply agreement with Collins (the "Collins Supply Agreement")
providing
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for the purchase by the plywood mill and delivery by the Company of a minimum of
34 MMBF of logs each year (approximately 20-25% of the Company's estimated
annual harvest in the next three years) at market prices. The Collins Supply
Agreement is extendable by Collins for two additional five-year terms. In
addition to its sales under the Collins Supply Agreement, the Company sells logs
to conversion facilities located in the area surrounding the Timberlands. There
are currently more than 50 primary conversion facilities located within a 150
mile radius of the Company's base of operations in Klamath Falls, Oregon.
Formation of the Company
On November 19, 1997, the Master Partnership acquired substantially all
of the equity interests in the Company and the business and assets of Old
Services (the "Acquisition") and completed its initial public offering (the "MLP
Offering") of common units representing limited partner interests ("Common
Units"). Upon the closing of the Acquisition, Old Services contributed all of
its assets, including its timber operations, to U.S. Timberlands Services
Company, L.L.C., a newly formed Delaware limited liability company and the
Company's manager (the "Manager" or "New Services"), in exchange for interests
therein. Immediately thereafter, the Company assumed certain indebtedness (the
"Holdings Debt") of U.S. Timberlands Holdings, L.L.C., an affiliate of the
Company ("Holdings"), and the Manager contributed its timber operations to the
Company in exchange for a member interest in the Company. Then the Manager
contributed all but a 1% member interest in the Company to the Master
Partnership in exchange for a general partner interest in the Master
Partnership, the right to receive Incentive Distributions (as defined in the
Glossary of Certain Terms) and 1,387,963 subordinated units representing limited
partner interests in the Master Partnership ("Subordinated Units"), and Holdings
contributed all of its interest in the Company to the Master Partnership in
exchange for 2,894,157 Subordinated Units. The Manager then distributed the
Subordinated Units to Old Services. Approximately 143,398 Subordinated Units
were used by Old Services to redeem interests in Old Services held by certain
founding directors of the Manager (the "Founding Directors"). As a result of
such transactions, the Company became the operating company and the Manager owns
an aggregate 2% interest in the Master Partnership and the Company on a combined
basis, and the right to receive Incentive Distributions; Old Services owns
1,244,565 Subordinated Units; Holdings owns 2,894,157 Subordinated Units; and
the Founding Directors own an aggregate of 143,398 Subordinated Units. The
4,282,120 Subordinated Units owned by Old Services, Holdings and the Founding
Directors represent an aggregate 32.6% interest in the Master Partnership. The
Common Units and the Subordinated Units are referred to herein collectively as
"Units" and the holders of Units are referred to herein as "Unitholders."
Concurrent with the closing of the Master Partnership's MLP Offering,
the Company and its wholly-owned subsidiary, U.S. Timberlands Finance Corp.
("Finance Corp."), consummated the public offering (the "Public Note Offering")
of $225.0 million aggregate principal amount of unsecured senior notes (the
"Notes") and obtained a $25.0 million revolving credit facility to be used for
working capital purposes (the "Working Capital Facility") and a $75.0 million
revolving credit facility to be used for acquisitions and capital improvements
(the "Acquisition Facility" and, together with the Working Capital Facility, the
"Bank Credit Facility"). As of March 15, 1998, no amounts were outstanding under
the Bank Credit Facility.
Finance Corp., a Delaware corporation, was formed on August 18, 1997,
and is a wholly-owned subsidiary of the Company. Finance Corp. serves or co-
obligor for the Notes. It has nominal assets and does not conduct any
operations. Accordingly, a discussion of the results of operations, liquidity
and capital resources of Finance Corp. is not presented.
Company Structure and Management
The operations of the Master Partnership are conducted through, and the
operating assets are owned by, the Company, as the Master Partnership's
operating subsidiary. The Master Partnership owns a 98.9899% member interest in
the Company and the Manager owns a 1% general partner interest in the Master
Partnership and a 1.0101% managing member interest in the Company. The Manager
therefore owns an aggregate 2% interest in the Master Partnership and the
Company on a combined basis.
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The Company's business is managed by the senior executives of the
Manager. The Manager does not receive any management fee or other compensation
in connection with its management of the Company, but is reimbursed for all
direct and indirect expenses incurred on behalf of the Company (including wages
and salaries of employees, officers and directors of the Manager) and all other
necessary or appropriate expenses allocable to the Company or otherwise
reasonably incurred by the Manager in connection with the operation of the
Company's business.
Conflicts of interest may arise between the Manager and its affiliates,
on the one hand, and the Master Partnership, the Company and the Unitholders, on
the other, including conflicts relating to the compensation of the directors,
officers and employees of the Manager and the determination of fees and expenses
that are allocable to the Company. The Manager has a conflicts committee (the
"Conflicts Committee"), consisting of two independent members of its Board of
Directors, that is available at the Manager's discretion to review matters
involving conflicts of interest.
The principal executive offices of the Company and Finance Corp. are
located at 1301 Fifth Avenue, Suite 3725, Seattle, Washington 98101-2636. The
telephone number at such offices is (206) 652-5000. The principal executive
offices of the Manager are located at 625 Madison Avenue, Suite 10-B, New York,
New York 10022. The telephone number at such offices is (212) 755-1100.
The following chart depicts the organization and ownership of the
Master Partnership and the Company as of March 15, 1998. The percentages
reflected represent the approximate ownership interest in each of the Master
Partnership and the Company individually and not on an aggregate basis. Except
in the following chart, the ownership percentages referred to in this Annual
Report reflect the approximate effective ownership interest of the Unitholders
in the Master Partnership and the Company on a combined basis. The 2% ownership
percentage of the Manager referred to in this Annual Report reflects the
approximate effective ownership interest of the Manager in the Master
Partnership and the Company on a combined basis.
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Effective Aggregate Ownership
of the Company and the
Master Partnership
Public Common Unitholders ..............................65.4%
U.S. Timberlands Management Company, L.L.C................9.5%
U.S. Timberlands Holdings, L.L.C.........................22.0%
Founding Directors........................................1.1%
Manager's Combined Interest...............................2.0%
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[ORGANIZATIONAL CHART DEPICTING COMPANY
STRUCTURE AND OWNERSHIP APPEARS HERE]
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THE TIMBERLANDS
Timber Growth
Timber growth rates reflect timberland productivity and the rate of
return on a timber investment. Growth rate is an important factor in determining
when to harvest timber and the harvest potential of timberlands over the long
term. Merchantable timber is economically mature for harvesting when its current
growth rate falls below the desired rate of return on the investment in the
standing trees. The average growth rate from regeneration to economic maturity
measures the capacity of the land for timber production. The Company's older and
natural stands on the Timberlands that are expected to provide the near term
harvest have a current average growth rate of approximately 160 board feet per
acre per annum. The younger Plantations are growing at a rate that is expected
to average at least 315 board feet per acre per annum to economic maturity in 50
to 60 years. This growth rate is based on calculated volumes at the time of
maturity. The Company has achieved higher growth rates on the Plantations by
planting seedlings which are able to begin growing immediately as compared to
the slower natural regeneration process, by eliminating competing non-timber
growth from the Timberlands and by applying modern forestry practices to assist
the growth of the timber. Management does take action to enhance the growth rate
in the natural stands as well. For example, selective harvesting in the slower
growing natural stands opens up the timber stand allowing for more vigorous
growth of the remaining trees. When it is no longer possible to maintain
acceptable growth rates in these stands they will be harvested entirely and
converted to faster growing plantations.
Harvest Plans
The Company strives to manage all of its Timberlands, including the
Plantations, in an economically prudent and environmentally sensitive manner in
order to maximize their value over time. Integral to this management process are
the Company's long-term harvest plans. The Company prepares its harvest plans
annually based on analyses of the size and age class distribution of the
Timberlands and the economic maturity of each harvest tract. A tract is
considered ready to be harvested when the expected value of future tree growth
on such tract falls below a target rate of return. The factors the Company
considers in determining its long-term harvest plans include, among other
things, current and expected market conditions, competition, customer
requirements, the age, size and species distribution of the Company's timber,
assumptions about timber growth rates which are improving over time as a result
of technological, biological and genetic advances that improve forest management
practices, expected acquisitions and dispositions, access to the Timberlands,
availability of contractors, sales contracts and environmental and regulatory
constraints. The Company's harvest plans reflect the Company's expectations for
each year's harvest, including the sites to be harvested, the manner of
harvesting such sites, the volume of each species to be harvested, the prices
expected to be received for the Company's timber, the amount of stumpage sales,
logging and other costs, thinning operations and other relevant information. The
Company has the flexibility to update its harvest plans during the year to take
into consideration changes in these factors. The Company harvested 139 MMBF in
1997 and plans to harvest approximately 146 MMBF in 1998. Under the current
harvest plans, the Company intends to harvest aggressively over approximately
the next eleven years after which time the harvest level is expected to decline
to a level which the Company considers to be more sustainable over the long
term. The Company believes these harvest plans can be achieved; however, since
harvest plans are based on certain assumptions, many of which are beyond the
Company's control, there can be no assurance that the Company will be able to
harvest the volumes projected in its harvest plans. While the Company's debt
obligations place certain limitations on the harvest plans, the Company believes
that it has sufficient flexibility to permit modifications in response to
fluctuations in the market for logs and lumber and the other factors described
above. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." If the Company's current harvest plans are pursued
unaltered for the next 12 years, if it consummates the land sales contemplated
by its strategic plan and if its other strategic assumptions prove to be
accurate, the Company expects that its timber inventory would decline by the end
of 2009 and that its more valuable species of timber would decline as a
percentage of its total timber inventory by such date. The Company expects that
its inventory would remain relatively stable thereafter. Long term harvest
plans, growth rates and forest inventory levels will be reviewed during 1998 and
1999. Such harvest plans, land sales and other strategic assumptions do not take
into account any acquisition that the Company may consummate during such period.
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Access
The Timberlands are accessible by a system of approximately 5,000 miles
of Company-owned and established roadways or low-maintenance roads. The Company
uses third-party road crews to conduct construction and maintenance on the
Timberlands. The Company regularly enters into reciprocal road-use agreements
with the United States Department of Agriculture - Forest Service ("USFS") and
the United States Department of Interior Bureau of Land Management ("BLM") and
cooperates with such agencies in numerous cost-sharing arrangements regarding
jointly used roads.
Sales and Markets
Once a block of timberland is ready to be harvested, the Company
solicits offers from its customers for delivery of logs. After a price and
volume have been agreed to among the parties, the Company either (i) contracts a
third party to harvest the acreage and deliver to a roadside site on the
Timberlands, where a contracted trucking company picks up the logs and delivers
them to the customer, or (ii) sells the timber on a stumpage basis where the
customer arranges to harvest and deliver the logs. When the Company sells timber
on a stumpage basis, depending on the length of the contract, it may either
receive payment in full upon the execution of the contract, or may receive a
portion of the payment upon execution of the contract and the balance of payment
when the timber is cut. In a stumpage sale, the Company generally retains the
risk of loss on the timber until such time as it has been harvested by the
buyer. The Company may also occasionally sell timber to customers pursuant to
timber deeds. In a timber deed sale, the Company may receive a portion of the
payment for the timber at the time of execution of the contract and the balance
of payment at various intervals throughout the duration of the contract, and the
risk of loss on the timber covered by the contract passes immediately to the
buyer, regardless of when the buyer harvests the timber. The Company currently
sells its sawlogs or stumpage directly to unaffiliated wood products
manufacturers and sells its chips to unaffiliated pulp mills or hardboard
plants. The percentage of logs which are sold as sawlogs/stumpage or pulp logs
is dependent upon, among other things, the species mix and quality of the
inventory harvested and the market dynamics affecting the region. Sawlogs and
stumpage sales accounted for approximately 78% of the Company's revenues in
1997. Timber deeds and timber and timberland sales accounted for approximately
19.8% of the Company's revenues for 1997.
Most of the timber on the Timberlands is softwood which, due to its
long fiber, strength, flexibility and other characteristics, is generally
preferred over hardwood for construction lumber and plywood. Once processed,
sawlogs are suitable for use as structural grade lumber, appearance grade
boards, plywood and laminated veneer and can also be manufactured for such end
uses as window trim, molding and door jambs. Chips, which can be used to make
hardboard or pulp, accounted for approximately 1.9% of the Company's revenues in
1997. The market price of chips has historically been volatile, rising and
falling with the price of pulp. Sales of seedlings accounted for the remaining
0.3% of the Company's revenues in 1997.
The Company's customers include numerous unaffiliated operators of
conversion facilities. Since its acquisition of the Klamath Falls Timberlands in
August 1996, the Company has sold logs and chips from such timberlands to 22
different customers. Concurrent with the Weyerhaeuser Acquisition, the Company
arranged for Collins, a privately owned forest products company located within
the Klamath Falls Timberlands, to purchase Weyerhaeuser's Klamath Falls mill
facilities. At such time, the Company entered into the Collins Supply Agreement,
a 10-year log supply agreement with Collins providing for purchase by the
plywood mill and delivery by the Company of a minimum of 34 MMBF of logs each
year at market prices. The Collins Supply Agreement is extendable by Collins for
two additional five-year terms. In 1997, timber sales to Collins, Crown Pacific
Partners and Boise Cascade Corporation accounted for approximately 23%, 21% and
15%, respectively, of the Company's revenue. Collins made its purchases pursuant
to the Collins Supply Agreement, while the other purchases were made pursuant to
short-term arrangements. Although the loss of one or more of such customers or
other significant customers could have a material adverse effect on the
Company's results of operations, the Company believes that the capacity for
processing wood fiber in the Company's markets currently exceeds the supply and
that, therefore, such customers could readily be replaced. Prior to the
Company's acquisition of the Ochoco Timberlands, virtually all of the logs sold
from such timberlands were sold to Ochoco's own facilities. Since the Ochoco
Acquisition in July 1997, all of the sales from the Ochoco
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Timberlands have been and will be made to unaffiliated customers. There are
currently more than 50 primary conversion facilities located within a 150-mile
radius of the Company's base of operations in Klamath Falls, Oregon.
Seasonality
Log and stumpage sales volumes are generally at their lowest levels in
the first and second quarters of each year. Heavy snowfalls in higher elevations
prevent access to many areas of the Company's timberlands in the first quarter.
This limited access, along with spring break-up conditions in March or April
(when warming weather thaws and softens roadbeds) restricts logging operations
to lower elevations and areas with rockier soil types. The result of these
constraints is that sales volumes are typically at their lowest in the first
quarter, improving in the second quarter and at their high during the third and
fourth quarters. Most customers in the region react to this seasonality by
carrying high log inventories at the end of the calendar year at a level that
provides sufficient inventory to carry them to the second quarter of the of the
following year.
Contributing to this seasonality of log volumes is the market demand
for lumber and related products which is typically lower in the first or winter
quarter when activity in the construction industry is slow, but increasing
during the spring, summer and fall quarters. Log and stumpage prices generally
increase in the spring with this build up of construction activity matching the
timing of re-entry to all foreseted areas and increased logging activity.
Competition
Due to transportation costs, domestic conversion facilities in the
Pacific Northwest tend to purchase raw materials within relatively confined
geographic areas, generally within a 200-mile radius. It is generally recognized
that log suppliers such as the Company provide their market with a commodity
product. The Company and its competitors all benefit from the same competitive
advantages in the region--namely, excess of demand, close proximity to numerous
mills, and positive demographic trends of the Pacific Northwest and the West
Coast. Therefore, the Company and its competitors are currently able to sell all
the logs they are able to produce. Additional competitive factors within a
market area generally will include species and grade, quality, ability to supply
logs which consistently meet the customers' specifications and ability to meet
delivery requirements. The Company believes that it has a reputation as a stable
and consistent supplier of well merchandised, high-quality logs. The Company has
no conversion facilities and therefore does not compete with its customers for
logs. The Company believes that this gives it an advantage over certain of its
competitors that also own conversion facilities.
The Company competes with numerous private land and timber owners in
the northwestern United States and the state agencies of Oregon, as well as
immaterial amounts of foreign imports, primarily from Canada and New Zealand. In
addition, the Company competes with the USFS, the BLM and the Bureau of Indian
Affairs. Certain of the Company's competitors have significantly greater
financial resources than the Company.
The Company believes that it competes successfully in the timber
business for the following reasons: (i) the Company has substantial holdings of
timber properties which include over 2.1 BBF of merchantable, good quality
timber, approximately 180,000 acres of plantation timberland and a full-scale
seed orchard and nursery operation located in a region where conversion
facilities have been experiencing shortages in the supply of wood fiber; (ii)
the Company focuses on owning timberlands rather than operating conversion
facilities, which minimizes the Company's cost structure and capital
expenditures, allows the Company to seek the most favorable markets for its
timber rather than being committed to supply its own facilities, and ensures
that the Company will not compete with its customers; (iii) the Company's senior
operating management team has an average of more than 29 years of experience in
the forest products industry, including experience in identifying, evaluating,
completing and integrating acquisitions of timber properties; (iv) the Company's
lean operating structure allows it to efficiently manage its Timberlands, and
should enable it to acquire additional timberlands without commensurate
increases in overhead; and (v) the Company's computerized geographic information
system ("GIS") enables the Company to evaluate the optimal timing and patterns
of the harvest of its Timberlands and evaluate and integrate acquisitions of
additional timberlands.
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RESOURCE MANAGEMENT
Timber Resource Management
All of the silvicultural activities on the Timberlands and the
harvesting and delivery of logs are conducted by independent contractors who are
not employees of the Company. The Company's operations involve intensive timber
management and harvesting operations, which include road construction and
reforestation, as well as wildlife and watershed management, all of which are
carefully monitored using the Company's GIS. See "--Geographic Information
System." The Company employs a number of traditional and recently developed
harvesting techniques on its lands based on site-specific characteristics and
other considerations. Due to the topography of the Timberlands, over 95% of the
Timberlands can be harvested using lower-cost mechanical methods as opposed to
higher-cost cable systems.
Harvesting on the Timberlands is conducted using both selective and
regeneration harvesting. In selective harvesting, a partial harvest provides
merchantable timber and opens up the stand for supplemental growth on the
remaining stand. Harvest entries are separated by approximately 10 to 15 years
and each entry is prescribed for volume to be removed, spacing to be provided,
and diameter limits to be harvested. In regeneration harvesting, which is used
to harvest approximately 30% of the Company's timber, all merchantable volume is
removed in a single harvest. After an area has been regeneration harvested, the
Company employs a reforestation contractor to plant two-year-old seedlings at a
density of approximately 350 trees per acre. The Company also attempts to
protect and maintain the ecosystem within the Timberlands while providing for a
reasonable harvest. For example, the Company typically leaves a mix of green and
dead trees at the harvest site, including some large trees, snags and downed
logs to provide habitats for a variety of wildlife species and enrich and
protect the soil for successive generations of trees.
Particular forestry practices vary by geographic region and depend upon
factors such as soil productivity, weather, terrain, tree size, age and
stocking. The rain, site and soil conditions on the east side of the Cascade
Range, for example, permit management to harvest on an optimal rotation, or
harvest cycle, of 50 to 60 years. Forest stands are thinned periodically to
improve growth and stand quality until harvested. The Company actively utilizes
commercial thinning as a timber management practice. Pre-commercial thinning,
which occurs only in the Plantation stands, is utilized when the timber
harvested is not merchantable. The Company believes that such thinning improves
the overall productivity of the Timberlands by enhancing the growth of the
remaining trees. Occasionally, revenues are generated from pre-merchantable
thinning due to strong markets for wood chips.
The Company's policy is to ensure that every acre harvested is
reforested in order to enhance the long-term value of its timberlands. Based on
the geographic and climatic conditions of a given harvest site, harvested areas
may be regenerated naturally, by leaving mature trees to reseed the area, or
replanted with seedlings. Natural regeneration methods are widely used on
approximately 70% of the Company's harvested land. Approximately 28% of the
Timberlands acreage currently consist of Plantations. The Company expects to
convert approximately 3,000 to 6,000 acres of natural stands to Plantations
annually. During 1997, the Company planted approximately 2.7 million seedlings.
The Company uses genetically improved seedlings (representing approximately 90%
to 95% of seedlings planted) to grow trees with desirable traits such as
superior growth characteristics, good form and disease resistance, resulting in
greater wood volume over a rotation than that generated by naturally regenerated
seedlings. The seedlings are grown in the Company's nursery, which uses seeds
from the Company's seed orchard, which was established in 1973. Such seeds are
generated by trees that are created by grafting selected superior genetic stock
to mature root stock.
Geographic Information System
The GIS is a computer software program that the Company acquired from
Weyerhaeuser as part of the acquisition of the Klamath Falls Timberlands. The
GIS data, which has been compiled over a period of at least four years, includes
detailed topographical field maps for every stand within the Timberlands
including data for the Ochoco Timberlands which was recently added by the
Company, setting forth the characteristics, including age, species, size and
other characteristics for the timber growing on each such stand. Using the data
in the GIS, the Company can use a computer model to "grow" the timber over time,
enabling it to generate long-term harvest plans and to update its
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inventory annually. To maintain the integrity of the data in the GIS, the
Company performs a detailed ground survey of the remaining timber inventory on a
tract after each harvest and updates the data in the GIS for that tract. With
the aid of the GIS, the Company is able to actively manage the Timberlands,
track its inventory and develop site-specific harvest plans on multiple scales,
adding additional layers of detail, such as the location of roadways or wildlife
nesting areas, as required. The GIS also permits the Company to analyze the
impact that new legislation may have on its timberlands by inputting the
proposed constraints imposed by such legislation in light of the particular
field characteristics of its Timberlands. For example, the Company has recently
analyzed the impact on its Timberlands of the potential listing of the bull
trout as an endangered species under the Endangered Species Act, by using the
GIS to review the particular characteristics of the streams and rivers located
on its properties for suitability for bull trout habitat, and by overlaying the
proposed regulatory restraints on harvest at the sites it determined might be
suitable habitat for bull trout. The GIS will also be used to evaluate potential
acquisition opportunities.
Although GIS systems are generally available for purchase, many of the
Company's competitors do not utilize GIS systems, mainly due to the relatively
high initial cost and to the length of time necessary to collect sufficient data
to optimize the use of the GIS. Thus, the Company believes the GIS gives it an
advantage over its competitors.
Land Sales
In October 1997, the Company sold approximately 13,000 acres from the
Klamath Falls Timberlands. The Company expects to sell additional timberland
parcels in the future. The Company has identified a tract of approximately
23,000 acres that it intends to sell within the next five years and anticipates
that a majority of this tract will be offered for sale in 1998.
FEDERAL AND STATE REGULATION
Endangered Species
The federal Endangered Species Act and counterpart state legislation
protect species threatened with possible extinction. Protection of endangered
species may include restrictions on timber harvesting, road building and other
silvicultural activities in areas containing the affected species. A number of
species indigenous to the Pacific Northwest have been protected under the
Endangered Species Act, including the northern spotted owl, marbled murrelet,
Columbian white-tail deer, mountain caribou, grizzly bear, bald eagle, northern
goshawk and various anadromous fish species. Currently, the Company has
identified several spotted owl, bald eagle and northern goshawk nesting areas
affecting the Timberlands and the presence of bull trout in certain of its
streams, which may affect harvesting on approximately 26,000 acres.
In 1990, the United States Fish and Wildlife Service (the "USFWS")
listed the northern spotted owl as a threatened species throughout its range in
Washington, Oregon and California. At the time of the listing, the USFWS issued
suggested guidelines ("Guidelines") to be followed by landowners in order to
comply with the Endangered Species Act's prohibition against harming or
harassing owls. The Guidelines recommend several measures, including the
restriction of harvest activities in areas within a certain proximity of known
owl activity centers. The USFWS also proposed a rule for the conservation of the
owl on non-federal land. Such proposed rule was subsequently withdrawn. The
Oregon Forest Practices Act and related regulations also protect endangered
species and has specific provisions governing habitat protection for the spotted
owl, the bald eagle and other threatened species.
Weyerhaeuser regularly surveyed for bald eagles on its properties and
submitted the results of its surveys and its annual site management plan for
each known eagle site to the Oregon Department of Fish and Wildlife. The latest
survey showed that there were approximately 80 eagle sites on the Klamath Falls
Timberlands. The Company observes harvesting restrictions around the eagle
sites. In addition, commencing in 1990, Weyerhaeuser utilized independent
wildlife consultants to survey for the presence of northern spotted owls on or
affecting the Klamath Falls Timberlands. The Company has continued all survey
processes for continuity of all voluntary survey initiatives and regulatory
compliance. The surveys have been conducted every year in order to (i) meet the
regulatory requirements for timber
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harvest and other management activities, (ii) monitor existing sites and
determine the current status of such sites, (iii) determine if areas identified
as containing suitable habitat are supporting owls and (iv) investigate other
spotted owl or other species sightings. The most recent of such surveys was
completed in July 1997, and identified approximately 27 northern spotted owl
sites affecting the Klamath Falls Timberlands, three of which are located on the
Klamath Falls Timberlands. The Company has continued these practices for the
Klamath Falls Timberlands and is implementing such practices on the Ochoco
Timberlands.
The Company believes that it is managing its harvesting operations in
the areas affected by protected species in substantial compliance with
applicable federal and state regulations. Based on certain consultants' reports,
and on management's knowledge of the Timberlands, the Company does not believe
that there are any species protected under the Endangered Species Act or similar
state laws that, under current regulations and Court interpretation, would
materially adversely affect the Company's ability to harvest the Timberlands in
accordance with current harvest plans. There can be no assurance, however, that
species within the Timberlands may not subsequently receive protected status
under the Endangered Species Act or that currently protected species may not be
discovered in significant numbers within the Timberlands. Additionally, there
can be no assurance that future legislative, administrative or judicial
activities related to protected species will not adversely affect the Company or
its ability to continue its activities and operations as currently conducted.
Timberlands
The operation of the Timberlands is subject to specialized statutes and
regulations in the State of Oregon, which has enacted laws which regulate
forestry operations, including the Forest Practices Act, which addresses many
growing, harvesting and processing activities on forest lands. Among other
requirements, these laws restrict the size and spacing of harvest units, and
impose certain reforestation obligations on the owners of forest lands. The
State of Oregon requires a company to provide prior notification before
beginning harvesting activity. The Forest Practices Act and other state laws and
regulations control timber slash burning, operations during fire hazard periods,
logging activities affecting or utilizing water courses or in proximity to
certain ocean and inland shore lines, water anti-degradation and certain grading
and road construction activities. A number of other timber states have been
considering legislation and regulations governing forest practices, and some
tightening of existing controls is expected.
Environmental Laws and Superfund
The Company's operations are subject to federal, state and local
environmental laws and regulations relating to the protection of the
environment. Although the Company believes that it is in material compliance
with these requirements, there can be no assurance that significant costs, civil
and criminal penalties, and liabilities will not be incurred, including those
relating to claims for damages to property or natural resources resulting from
the Company's operations.
Environmental laws and regulations have changed substantially and
rapidly over the last 20 years, and the Company anticipates there will be
continuing changes. The trend in environmental regulations is to place more
restrictions and limitations on activities that may affect the environment, such
as emissions of pollutants and the generation and disposal of wastes.
Increasingly strict environmental restrictions and limitations have resulted in
increased operating costs for the Company and it is possible that the costs of
compliance with environmental laws and regulations will continue to increase.
Although the Company does not consider current laws and regulations
relating to the environment to be materially burdensome, there can be no
assurance that future legislative, administrative or judicial actions, which are
becoming increasingly stringent, will not adversely affect the Company or its
ability to continue its activities and operations as currently conducted. The
Company is not aware of any pending legislative, administrative or judicial
action relating to the protection of the environment that could materially and
adversely affect the Company.
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The Federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as Superfund, and comparable state laws
impose liability, without regard to fault or the legality of the original act,
on certain classes of persons that contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
a site and companies that disposed or arranged for the disposal of the hazardous
substances found at a site. Those statutes also authorize government
environmental authorities such as the U.S. Environmental Protection Agency and,
in some instances, third parties, to take actions in response to threats to the
public health or the environment and to seek recovery of the costs incurred from
the responsible persons. Based on environmental compliance auditing programs,
the Company is not aware of any activities by the Company or any conditions on
the Timberlands that would be likely to result in the Company being named a
potentially responsible party.
Access to Timberlands May be Limited by Federal Regulation
A substantial portion of the Timberlands consists of sections of land
that are intermingled with or adjacent to sections of federal land managed by
the USFS and the BLM. Removal of trees from those portions of the Timberlands
requires transportation of the logs by truck across logging and general purpose
roads. In many cases, access is only, or most economically, achieved through a
road or roads built across adjacent federal land pursuant to a reciprocal
right-of-way ("RROW"). Removal of federal timber often requires similar access
across the Timberlands. Recent litigation (not involving the Company) before the
United States Court of Appeals for the Ninth Circuit held that the BLM was not
required to consult with the USFWS, which administers the Endangered Species
Act, prior to approving a private landowner's proposal to build an access road
across federal land pursuant to an existing RROW entered into prior to the
enactment of the Endangered Species Act wherein the BLM did not have discretion
to disapprove a road segment due to endangered species concerns. A reversal on
appeal or a rehearing of that case, or future federal law or regulation
requiring the BLM to consult with the USFWS in connection with an RROW, could
materially adversely affect the Company's ability to harvest the affected
portion of the Timberlands. Certain of the Company's RROW agreements contain
provisions that require compliance with state and federal environmental laws and
regulations. To the extent that the Company acquires new Timberlands that
require access through federal lands, the Company may enter into new RROW
agreements with the BLM or other federal agencies which would require
consultation with the USFWS. In addition, the BLM has published advance notice
of its intent to revise regulations governing RROW agreements entered into the
future to, among other things, expand the BLM's consideration of environmental
and cultural factors in granting, issuing or renewing rights-of-way, provide the
BLM with regulatory authority to object to the location of roads because of
potential effects on threatened or endangered species and allow for the
abandonment of rights-of-way under certain circumstances.
Safety and Health
The operations of the Timberlands are subject to the requirements of
the Federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes relating to the health and safety of employees. The Company believes
that it is in compliance with OSHA regulations, including general industry
standards, permissible exposure levels for toxic chemicals and record-keeping
requirements.
Employees
As of January 12, 1998, the Company had 32 salaried employees,
including employees of the Manager that manage the business of the Company. The
employees of the Timberlands are not unionized, and the Company believes that
its employee relations are good. The Company's wage scale and benefits are
generally competitive with other forest products companies. All of the
silvicultural activities on the Timberlands and the harvesting and delivery of
logs are conducted by independent contractors who are not employees of the
Company.
The Company employee benefits include a 401(k) savings plan for all
employees, a health insurance plan (including co-payments and deductibles) for
all employees and a medical savings plan for all employees.
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FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements and information
that are based on the beliefs of the Company and the Manager, as well as
assumptions made by, and information currently available to, the Company and the
Manager. All statements, other than statements of historical fact, included in
this Annual Report are forward-looking statements, including, but not limited
to, statements identified by the words "anticipate", "believe", "estimate" and
"expect" and similar expressions and statements regarding the Company's business
strategy, plans and objectives of management of the Company for future
operations. Such statements reflect the current views of the Company and the
Manager with respect to future events, based on what they believe are reasonable
assumptions; however, such statements are subject to certain risks,
uncertainties and assumptions. If one or more of these risks or uncertainties
materialize, or if underlying assumptions prove incorrect, actual results may
vary materially from those in the forward-looking statements. The Company does
not intend to update these forward-looking statements and information.
RISK FACTORS
Cyclicality of Forest Products Industry Will Affect the
Company's Results of Operations
The Company's results of operations are, and will continue to be,
affected by the cyclical nature of the forest products industry. Prices and
demand for logs have been, and in the future can be expected to be, subject to
cyclical fluctuations. The demand for logs is primarily affected by the level of
new residential construction activity, and, to a lesser extent, repair and
remodeling activity and other industrial uses, which are subject to fluctuations
due to changes in economic conditions, interest rates, population growth,
weather conditions and other factors. Decreases in the level of residential
construction activity will be reflected in reduced demand for logs, which may
result in lower revenues, profits and cash flows.
Timber Supply May Increase in the Future
Various factors, including environmental and endangered species
concerns, have limited, and are likely to continue to limit, the amount of
timber offered for sale by certain United States government agencies, which
historically have been major suppliers of timber to the United States forest
products industry. From January 1988 to January 1998, federal timber under
contract in Washington and Oregon decreased approximately 88%.
Although the Company believes that sales of timber by United States
government agencies are likely to remain at relatively low levels for the
foreseeable future, any reversal of policy that substantially increases such
sales could significantly reduce prices for logs, which could have a material
adverse effect on the Company. Furthermore, increased imports from Canada (due
to the expiration in 2001 of the United States-Canada lumber trade agreement or
otherwise) and other foreign countries could reduce the prices the Company
receives for its timber.
The Company's Ability to Harvest Timber Will be Subject to Limitations
Revenues, net income and cash flow from the Company's operations will
be dependent to a significant extent on its ability to harvest timber at
adequate levels. There can be no assurance that the Company will in the future
achieve harvest levels necessary to maintain or increase revenues, net income or
cash flows. Weather conditions, timber growth cycles, access limitations and
regulatory requirements associated with the protection of wildlife and water
resources or any shortage of contract loggers may restrict harvesting of the
Timberlands, as may other factors, including damage by fire, insect infestation,
disease, prolonged drought and natural disasters. For example in 1993,
approximately 30,000 acres of the Timberlands had to be partially salvaged due
to an infestation of the fir engraver beetle. One or more major fires on the
Timberlands could adversely affect the Company's operating results. Although
damage from such causes usually is localized and affects only a limited
percentage of the timber, there can be no assurance that any damage to the
Timberlands will, in fact, be so limited. The risks to the Company described
above are somewhat heightened because of the concentration of the Timberlands in
central Oregon. As is typical in the forest products industry, the
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Company does not maintain insurance coverage with respect to damage to its
timberlands. Even if such insurance were available, the cost would be
prohibitive.
A substantial portion of the Klamath Falls Timberlands consists of
sections of land that are intermingled with or adjacent to sections of federal
land managed by USFS and BLM. In many cases, access is only, or most
economically, achieved through a road or roads built across adjacent federal
land. In order to access such intermingled timberlands, the Company has in the
past obtained and will need to continue to obtain either temporary or permanent
access rights across these public lands. Although the Company currently has
legal access to substantially all of the merchantable timber included in the
Timberlands, this process has often been, and will likely continue to be,
affected by, among other things, the requirements of the Endangered Species Act,
the National Environmental Policy Act and the Clean Water Act. See "--Federal
and State Regulation."
The Company is Subject to Federal and State Environmental and
Endangered Species Regulation
The Company is subject to regulation under various environmental laws,
including the Endangered Species Act, as well as similar state laws and
regulations. The Endangered Species Act and state legislation protect species
threatened with possible extinction. A number of species indigenous to the
Timberlands have been and in the future may be protected under these laws,
including the northern spotted owl, bald eagle, northern goshawk and bull trout.
Protection of endangered and threatened species may include restrictions or
prohibitions on timber harvesting, road building and other silvicultural
activities on private, federal and state land containing the affected species.
See "--Federal and State Regulation."
Although the Company has identified bald eagle, northern spotted owl
and northern goshawk nesting areas on the Timberlands and the presence of bull
trout in certain of its streams, the Company, in cooperation with the Oregon
Department of Fish and Wildlife, has developed plans for managing such species
and does not believe that such plans will have a material adverse effect on the
Company's ability to harvest the Timberlands in accordance with current harvest
plans. There can be no assurance, however, that species on or around the
Timberlands may not subsequently receive protected status under the Endangered
Species Act or that currently protected species may not be discovered in
significant numbers on or around the Timberlands. Any such changes could
materially and adversely affect the results of operations of the Company.
The Federal Water Pollution Control Act authorizes the regulation of
wetland areas. Timberlands within a wetlands area may be subject to access
limitations or prohibitions, and may involve the expenditure of substantial sums
for the protection of such wetland areas. The Federal Insecticide, Fungicide,
and Rodenticide Act regulates the use of pesticides that may be used in forestry
practices. Violations of various statutory and regulatory programs that apply to
the Company's operations can result in civil penalties, remediation expenses,
natural resource damages, potential injunctions, cease and desist orders and
criminal penalties. Some environmental statutes impose strict liability,
rendering a person liable for environmental damage without regard to negligence
or fault on the part of such person. There can be no assurance that such laws or
future legislation or administrative or judicial action with respect to
protection of the environment will not adversely affect the Company.
The Company Experiences Significant Competition
The forest products industry is highly competitive in terms of price
and quality. Many of the Company's competitors have substantially greater
financial and operating resources than the Company. Wood products are subject to
increasing competition from a variety of non-wood products, which affects the
demand for logs. In addition, competition from imported logs and end-use wood
products from foreign sources into the United States may adversely affect the
demand and prices for the Company's timber. To the extent there is a significant
increase in competitive pressures, the Company's results of operations could be
materially and adversely affected. See "--The Timberlands--Competition."
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Risks of Acquisition Strategy
The Company intends to pursue acquisitions as one means of increasing
both the value of the Master Partnership's Units and its cash flow. The Company
cannot predict whether it will be successful in consummating any such
acquisitions or what the consequences of any such acquisitions would be.
Moreover, there can be no assurance that general economic or industry conditions
will be conducive to the Company's acquisition strategy, that the Company will
be able to identify and acquire any such assets or businesses on economically
acceptable terms, that any acquisitions will not be dilutive to earnings and
distributions to Unitholders or that any additional debt incurred to finance an
acquisition will not affect the ability of the Company to make distributions to
Unitholders. The Company is subject to certain covenants in agreements governing
its indebtedness that might restrict the ability of the Company to incur
indebtedness to finance acquisitions.
The Company's acquisition strategy involves numerous risks, including
difficulties inherent in the integration of operations and systems, the
diversion of management's attention from other business concerns and the
potential loss of key employees of acquired businesses. In addition, future
acquisitions also may involve the expenditure of significant funds. Depending
upon the nature, size and timing of future acquisitions, the Company may be
required to secure additional financing. There is no assurance that such
additional financing will be available to the Company on acceptable terms.
The Company Will Be Dependent Upon Key Personnel
The Company believes that its success will depend to a significant
extent upon the efforts and abilities of its operating management team. The
failure by the Manager to retain the key members of its senior operating
management team could adversely affect the financial condition or results of
operations of the Company. See "Executive Compensation--Employment Agreements."
Dependence on Certain Key Customers
The Company currently derives a significant portion of its revenues
from sales of timber to certain key customers. The loss of these or other
significant customers could materially adversely affect the Company's results of
operations.
The Company's Indebtedness May Affect its Operations
As of December 31, 1997, the Company's total long-term indebtedness was
$225.0 million, representing 60.7% of the Company's total capitalization. As a
result, the Company is significantly leveraged and has indebtedness that is
substantial in relation to its partners' capital. Future borrowings could result
in a significant increase in the Company's leverage. The ability of the Company
to make principal and interest payments depends on future performance, which
performance is subject to many factors, a number of which will be outside the
Company's control. The Company's leverage may adversely affect the ability of
the Company to finance its future operations and capital needs, limit its
ability to pursue acquisitions and other business opportunities and make its
results of operations more susceptible to adverse economic or operating
conditions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company Has a Limited Operating History
The Klamath Falls Timberlands and the Ochoco Timberlands, prior to
their acquisition by the Company, had been part of Weyerhaeuser and Ochoco,
respectively, and had not been operated as separate businesses or divisions. In
addition, prior to the Company's acquisition of the Timberlands, sales from the
Timberlands were generally made to affiliated conversion facilities and not to
unaffiliated customers. Although the Company has operated the Klamath Falls
Timberlands since September 1996, and sales during such period have been made
exclusively to unaffiliated
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customers, there can be no assurance that the Company will be able to manage
successfully the Timberlands as a separate business on a profitable basis.
Change of Management Provisions
The ownership of Subordinated Units by certain affiliates of the
Manager effectively precludes the removal of the Manager as managing member of
the Company or as general partner of the Master Partnership without its consent.
In addition, the Amended and Restated Agreement of Limited Partnership of the
Master Partnership (the "MLP Partnership Agreement") contains certain provisions
that may have the effect of discouraging a person or group from attempting to
remove the Manager as managing member of the Company or as general partner of
the Master Partnership or otherwise change the management of the Company.
Inability to Fund a Change of Control Offer
The Company must offer to purchase the Notes upon the occurrence of
certain events. The Indenture provides that in the event of a Change of Control,
the Issuers are required, subject to certain conditions, to offer to purchase
all outstanding Notes at a price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest thereon to the date of purchase. On a pro forma
basis, the Issuers will not have sufficient funds available to purchase all of
the outstanding Notes were they to be tendered in response to an offer made as a
result of a change of control. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
THE OPERATING COMPANY AGREEMENT
The following paragraphs are a summary of the material provisions of
the Second Amended and Restated Operating Agreement of the Company (the
"Operating Company Agreement"). The discussions presented below of the material
provisions of the Operating Company Agreement are qualified in their entirety by
reference to the Operating Company Agreement, which is filed as an exhibit to
this Annual Report.
Organization and Duration
The Company was organized in 1996 to acquire the Klamath Falls
Timberlands. The Master Partnership owns a 98.9899% non-managing member interest
in the Company and the Manager owns a 1.0101% interest in the Company and
manages and operates the Company's business as the managing member. The Manager
also serves as the general partner of the Master Partnership, owning an
aggregate 2% interest in the Company and the Master Partnership on a combined
basis. The Company will continue in existence until December 31, 2087 or until
the earlier dissolution of the Company pursuant to the terms of the Operating
Company Agreement.
Cash Distribution Policy
The Company will distribute to the Manager and the Master Partnership,
on a quarterly basis, all of its Available Cash. Distributions will be made
1.0101% to the Manager and 98.9899% to the Master Partnership.
Indemnification
The Operating Company Agreement provides that the Company will
indemnify the Manager, any Departing Manager (as defined in the Glossary), any
person who is or was an affiliate of a Manager or any Departing Manager, any
person who is or was a member, partner, officer, director, employee, agent or
trustee of a Manager or any Departing Manager or any affiliate of a Manager or
any Departing Manager, or any person who is or was serving at the request of a
Manager or any Departing Manager or any affiliate of any such person, any
affiliate of a Manager or any Departing Manager as an officer, director,
employee, ember, partner, agent, fiduciary or trustee of another person
("Indemnities"), to the fullest extent permitted by law, from and against any
and all losses, claims, damages, liabilities (joint and several), expenses
(including, without limitation, legal fees and expenses), judgments, fines,
penalties, interest, settlements and
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other amounts arising from any and all claims, demands, actions, suits or
proceedings, whether civil, criminal, administrative or investigative, in which
any Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as an Indemnitee; provided that in each case
the Indemnitee acted in good faith and in a manner that such Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal proceeding, had no reasonable cause to believe
its conduct was unlawful. Any indemnification under these provisions will be
only out of the assets of the Company, and the Manager shall not be personally
liable for, or have any obligation to contribute or loan funds or assets to the
Company to enable it to effectuate, such indemnification. The Company is
authorized to purchase (or to reimburse the Manager or its affiliates for the
cost of) insurance against liabilities asserted against and expenses incurred by
such persons in connection with the Company's activities, regardless of whether
the Company would have the power to indemnify such person against such
liabilities under the provisions described above.
Termination and Dissolution
The Company will continue until December 31, 2087, unless sooner
terminated pursuant to the Operating Company Agreement. The Company will be
dissolved upon (i) the election of the Manager to dissolve the Company and the
approval of all members, (ii) the sale of all or substantially all of the assets
and properties of the Company, (iii) the entry of a decree of judicial
dissolution of the Company, (iv) the dissolution of the Master Partnership, or
(v) the withdrawal or removal of the Manager or any other event that results in
its ceasing to be the general partner of the Master Partnership or the managing
member of the Company, as the case may be, (other than by reason of a transfer
of its general partner interest in accordance with the MLP Partnership Agreement
or its managing member interest in accordance with the Operating Company
Agreement, as the case may be, or withdrawal or removal following approval and
admission of a successor). Upon a dissolution pursuant to clause (v) the Master
Partnership may, prior to the effective date of such withdrawal, elect a
successor Manager; provided, however, that such successor shall be the same
person, if any, that is elected by the limited partners of the Master
Partnership as the successor to the Manager in its capacity as the general
partner of the Master Partnership, subject to receipt by the Company of an
opinion of counsel to the effect that (x) such action would not result in the
loss of limited liability of any limited partner of the Master Partnership or of
a member of the Company and (y) neither the Master Partnership, the
reconstituted limited partnership nor the Company would be treated as an
association taxable as a corporation or otherwise be taxable as an entity for
federal income tax purposes upon the exercise of such right to continue.
Liquidation and Distribution of Proceeds
Upon dissolution of the Company, unless the Company is reconstituted
and continued as a new limited liability company, the person authorized to wind
up the affairs of the Company (the "Liquidator") will, acting with all of the
powers of the Manager that such Liquidator deems necessary or desirable in its
good faith judgment in connection therewith, liquidate the Company's assets and
apply the proceeds of the liquidation as follows: (i) first towards the payment
of creditors of the Company in the order or priority provided in the Operating
Company Agreement and by law and (ii) then to the Master Partnership and the
Manager in accordance with their respective capital account balances as so
adjusted. Under certain circumstances and subject to certain limitations, the
Liquidator may defer liquidation or distribution of the Company's assets for a
reasonable period of time or distribute assets to partners in kind if it
determines that a sale would be impractical or would cause undue loss to the
members.
Removal and Withdrawal of the Manager
The Manager shall be removed as manager of the Company if it has been
removed as the general partner of the Master Partnership pursuant to the MLP
Partnership Agreement. The Manager may not be removed as general partner of the
Master Partnership unless such removal is approved by the vote of the holders of
not less than 66 2/3% of the outstanding Units (including Units held by the
Manager and its affiliates) and the Company receives an Opinion of Counsel (as
defined in the Glossary). The ownership of the Subordinated Units by certain
affiliates of the Manager effectively gives the Manager the ability to prevent
its removal. The Manager has agreed not to voluntarily withdraw as managing
member of the Company and general partner of the Master Partnership prior to
December 31, 2007, subject
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to limited exceptions, without obtaining the approval of (i) at least a majority
of the outstanding Common Units, voting as a class; (ii) at least a majority of
the outstanding Subordinated Units, voting as a class, and, thereafter; (iii) at
least a majority of the outstanding Units. The Manager has also agreed not to
voluntarily withdraw as described above without furnishing an Opinion of
Counsel.
ITEM 2. PROPERTIES
TIMBER INVENTORY
The Company currently owns and manages approximately 633,000 fee acres
of timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 1998 to
be approximately 2.1 BBF in Oregon east of the Cascade Range. The Timberlands
include substantial holdings of merchantable, good-quality timber. A
merchantable tree is a tree of sufficient size that will produce a sound log 16
feet in length and at least five inches in diameter, inside bark, at the small
end. The Company's merchantable timber inventory consists of premium species of
softwood, consisting of Ponderosa Pine and Douglas fir, species which have
historically commanded premium prices over other softwood species, as well as
Lodgepole Pine, White Fir and other species. The Company believes that the
Timberlands are suitable and adequate for current operations.
The Timberlands have stands of varying sizes and ages and are unique in
the forests east of the Cascade Range in Oregon in that approximately 180,000
acres of the 633,000 acre total consist of actively managed pine Plantations
with stands ranging in age from two to 36 years. The Plantations are stocked
with high quality Ponderosa Pine (approximately 77%) and Lodgepole Pine
(approximately 23%). Because the timber on the Plantations is generally not yet
considered merchantable, volumes of timber on the Plantations are not included
in the Company's estimated merchantable timber volume. However, initial thinning
of the Plantation stands, including the thinning of commercial quantities of
merchantable timber, is expected to begin within the next five years. See "The
Timberlands--Harvest Plans."
Merchantable Timber Inventory by Species
The Company maintains data regarding the estimated merchantable timber
inventory by species within the Timberlands. All volumes are based on
information developed by Company personnel. As of January 1, 1998, the total
timber inventory amounted to 2,106.9 MMBF. The Company's combined timber
inventory by MMBF and percentage is Ponderosa Pine 918.4 (44%), Lodgepole Pine
395.2 (19%), White Fir 408.8 (19%), Douglas fir 285.7 (13%) and other species
98.8 (5%). Other species include Cedar, Sugar Pine, Western Larch and Grand Fir.
Size and Species Distribution of Merchantable Timber
The Company's Timberlands are well diversified, not only by species mix
but also by size distribution. Timber on the Timberlands generally reaches
merchantable size between 40 and 50 years in natural stands and between 25 and
35 years in the Plantations. The Company maintains data as to the estimated
volume distribution of merchantable timber on the Timberlands by species and by
diameter at breast-height ("DBH"). As of January 1, 1998, approximately 814
MMBF, or 39%, of the merchantable timber had a DBH of 16 or more inches.
Acreage Distribution by Age Class on Plantations
The Company also maintains data as to the acreage distribution of
timber on the Plantations by age class. As of January 1, 1998, the Plantations
totaled 180,020 acres. Of the total acreage, 65,400 acres range from 1 to 15
years of age, 111,700 acres range from 16 to 25 years of age, and 2,900 acres
are 26 years of age or older.
17
<PAGE>
ITEM 3. 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
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY
HOLDER MATTERS
In connection with the consummation of the Transactions, a 98.9899%
member interest in the Company was issued to the Master Partnership and a
1.0101% member interest was issued to the Manager. There is no established
public trading market for the Company's equity securities. The Company
distributes all of its Available Cash on a quarterly basis. No distributions
have been made prior to the date of this Annual Report.
18
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
U.S. TIMBERLANDS PREDECESSOR(1)
--------------------- -------------------------------------------
August 30, January 1,
1996 through through
December 31, August 29,
1997 1996 1996 1995 1994 1993
------- ------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS AND OTHER DATA
(IN MILLIONS):
EBITDDA (6) ........................ 53.3 (1.4) 3.6 12.5 11.5 16.6
Additions to timber, timberlands and
logging roads (3) ................. 111.4 283.5 0.0 0.2 0.0 0.1
Cash flow from (used in) operating
activities ........................ 26.3 (3.0) 5.5 11.8 13.2 15.1
OPERATING STATEMENT DATA
(IN MILLIONS):
Revenues (2) (3) ................... $ 77.3 $ 14.0 $ 15.6 $ 31.7 $ 32.3 $ 36.3
Depreciation, depletion and road
amortization (2) (3) .............. 17.3 3.3 0.9 1.5 1.5 1.4
Cost of timber and property
sales (2) (3) ..................... 8.7 -- -- -- -- 0.1
Operating income (loss) (2) (3) .... 27.3 (4.8) 2.7 11.1 10.1 15.1
Income (loss) before extraordinary
items (4) ......................... (1.4) (13.0) 2.7 11.6 9.9 14.8
Extraordinary items, losses on
extinguishment of debt (5) ........ 9.3 -- -- -- -- --
Net income (loss) .................. (10.7) (13.0) 2.7 11.6 9.9 14.8
BALANCE SHEET DATA (AT
PERIOD END, IN MILLIONS):
Working capital .................... 1.8 21.5 0.5 1.3 0.2 2.1
Total assets (3) ................... 385.2 310.2 27.8 30.9 29.8 32.3
Long-term debt (7) ................. 225.0 305.0 -- -- -- --
Equity (deficit) (8) ............... 147.1 (2.9) 27.8 29.2 27.7 29.6
OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
volumes (MMBF) (2) (3) ............ 138.9 30.2 32.8 63.8 68.3 66.3
Property sales volumes (MMBF) (2) .. 41.5 -- -- -- -- 9.4
</TABLE>
- --------------------------------
(1) Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial and
operating data after August 30, 1996 are not comparable to financial and
operating data of the Predecessor. See discussion of the Company and the
Predecessor's basis of presentation in Note 1 of the Notes to the
Consolidated Financial Statements. Also, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Revenues in 1997 consist of $60.4 million of log and stumpage sales, $15.2
million of timber and property sales and $1.7 million of by-products and
other sales. Revenues prior to 1997 consist primarily of log sales. Timber
and property sales were $4.2 million in 1993. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(3) See August 1996 acquisition of the Klamath Falls Timberlands and July 1997
acquisition of the Ochoco Timberlands in Note 3 of the Notes to the
Consolidated Financial Statements.
(4) See effect of interest expense and amortization of deferred financing fees
and debt guarantee fees in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(5) See effect of debt extinguishment in Note 5 of the Notes to the
Consolidated Financial Statements.
(6) EBITDDA is defined as operating income plus depreciation, depletion and
road amortization and cost of timber and property sales. EBITDDA should not
be considered as an alternative to net income, operating income, cash flows
from operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles.
EBITDDA is not intended to represent cash flow and does not represent the
measure of cash available for distribution, but provides additional
information for evaluating the Company's ability to make the Minimum
Quarterly Distribution. In addition, EBITDDA does not necessarily represent
19
<PAGE>
funds available for management's discretionary use as it is calculated
prior to debt service obligations and capital expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(7) See discussion of long-term debt at Note 5 of the Notes to the Consolidated
Financial Statements .
(8) See discussion of the Company and the Predecessor's equity (deficit) in
Note 1 of the Notes to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The basis of presentation of the Company's financial statements is
described in Note 1 to the consolidated financial statements. The comparability
of the financial results of the Company and the Predecessor is primarily
affected by (i) increased revenues resulting from increased harvest levels on
the Klamath Falls Timberlands, (ii) revenues realized from harvesting on the
Ochoco Timberlands acquired by the Company in July 1997, (iii) increased
depletion charges resulting from the step-up in asset values of the Timberlands,
(iv) reduced per MBF logging and hauling costs resulting from the use of
independent contractors rather than Company employees to conduct silvicultural
activities and the harvesting and delivery of logs due to lower hourly wage
rates, the elimination of compensation payments during seasonal down time and
the reduction in associated capital costs and (v) a different customer base, as
a majority of the Predecessor's sales were to an affiliated customer at
internally established transfer prices whereas all of the Company's sales are to
unaffiliated conversion facilities at market based prices (although whether the
transfer prices or market-based prices were higher changed from time to time).
SUPPLY AND DEMAND FACTORS
The Company's results of operations are affected by various factors,
many of which are beyond its control, including general industry conditions,
domestic and international prices and supply and demand for logs, lumber and
other wood products, seasonality and competition from other domestic and
international supplying regions and substitute products.
Supply
The supply of logs available for purchase has been most affected in
recent years by significant reductions in timber harvested from public
timberlands, principally as a result of efforts to preserve the habitat of
certain endangered species, as well as a change in the emphasis of government
policy toward habitat preservation, conservation and recreation and away from
timber management. Since the early 1970s, environmental and other similar
concerns and governmental policies have substantially reduced the volume of
timber under contract to be harvested from public lands. The pace of regulatory
activity accelerated in the late 1980s. From January 1988 to January 1998,
federal timber under contract in Washington and Oregon decreased approximately
88%. The resulting supply decrease caused prices for logs to increase
significantly, reaching peak levels during 1993. Although prices have declined
from these record levels, current prices still exceed pre-1993 levels. The low
supply of timber from public lands, which is expected to continue for the
foreseeable future, has benefited private timber holders such as the Company
through higher stumpage and log prices.
Industry participants do not expect environmental restrictions to ease
materially within any reasonable planning horizon. Consequently, many producers
of lumber and wood products are attempting to adapt to the new supply
environment by increasing their emphasis on raw material yields, entering into
long term timber supply arrangements and value added manufacturing, and
accessing previously untapped supplies (such as private wood lot owners, timber
with difficult access, alternative species and imports). These factors have
tended to restrict prices from even greater increases. While raw material supply
is expected to be an ongoing challenge for the lumber and wood products
industry, such conditions are likely to cause the favorable operating
environment for timber owners such as the Company to continue for the
foreseeable future.
20
<PAGE>
In response to an increase in timber prices in the early 1990s, imports
of logs and lumber from abroad (from countries such as Canada and New Zealand)
increased. These imports, however, only partially offset the lost volume of
timber from public timberlands and did not replace the mature, high-quality
timber found in greater quantities on public timberlands. Since 1993, imports
have decreased and their current impact on timber prices is minimal.
Demand
Changes in general economic and demographic factors, including the
strength of the economy and interest rates for home mortgages and construction
loans, have historically caused fluctuations in housing starts and, in turn,
demand and prices for lumber and commodity wood products. With the growth of the
home center distribution business, the repair and remodeling markets have become
a significant factor in terms of the demand for lumber and commodity wood
products and have dampened the wide fluctuations that occurred when new housing
starts were the primary factor. A large portion of the Company's property
consists of Pine species, which are used in the finishing market, for molding
trim, doors and windows. This market is more affected by repair and remodeling
than new housing construction. Prices for these species, primarily Ponderosa
Pine, reached a peak in the spring of 1993 and as a result attracted imports of
Radiata Pine from New Zealand and Chile. The market absorbed these relatively
small quantities with little impact on prices. The demand for logs in the United
States is also affected by the level of lumber imports. In response to
increasing lumber imports from Canada, the United States and Canada signed an
agreement in 1996 which restricts the availability of Canadian softwood lumber
in the United States. The Company believes that this agreement has not had a
material impact on the price or demand for logs in the United States although
its long-term effect is uncertain.
Due to transportation costs, domestic conversion facilities in the
Pacific Northwest tend to purchase raw materials within relatively confined
geographic areas, generally within a 200-mile radius. The conversion facilities
in the vicinity of the Timberlands need more wood supply to run at capacity than
can be produced by nearby timberlands. As a result, the demand from this region
is relatively steady, although prices fluctuate with market conditions.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The results of operations for the year ended December 31, 1996 are
based on combining the periods of January 1, 1996 through August 29, 1996 (the
period prior to the Weyerhaeuser Acquisition) and August 30, 1996 through
December 31, 1996 both as shown in the historical financial statements appearing
elsewhere in this Annual Report. The principal effect of the Weyerhaeuser
Acquisition in 1996 was an increase in depletion, depreciation and road
amortization (DD&A) expense (due to a higher cost basis for the Company's
timber, timberlands and logging roads) and interest expense (due to borrowings
to finance the Weyerhaeuser Acquisition).
Revenues. Revenues in 1997 were $77.3 million, an increase of 161% over
revenues of $29.6 million in 1996. This increase was primarily attributable to a
$32.8 million increase in revenues from log and stumpage sales and a $15.2
million increase in timber and property sales, partially offset by a decrease of
$0.3 million in by-products and other revenues.
Log and stumpage sales volumes in 1997 were 127,900 MBF, an increase of
103% over log and stumpage sales volumes of 63,000 MBF in 1996. The significant
increase in the volume harvested was mainly due to the Company's aggressive
harvest plan compared to that of the Predecessor for the first eight months of
1996, as well as the commencement of log and stumpage sales from the Ochoco
Timberlands which were acquired on July 15, 1997. Average log and stumpage
prices increased by 8%, from $439 per MBF in 1996 to $472 per MBF in 1997,
primarily due to a larger proportion of higher valued timber harvested from the
Ochoco Timberlands during the last half of 1997.
Revenues from timber and property sales were $15.2 million during 1997.
There were no such timber or property sales during 1996.
21
<PAGE>
The reduction in by-products and other revenue was primarily
attributable to a 36% decrease in the volume of fiber sold for use as chips. Due
to low demand in the pulp and paper industry, chip prices had decreased to a
level where it was no longer profitable for the Company to process residual
fiber for use as chips for much of 1997. Demand for these chips, however,
increased in the last quarter of 1997.
Operating Costs. Operating costs were $50.1 million in 1997, an
increase of 58% over operating costs of $31.7 million in 1996. This increase was
the result of a $2.4 million increase in cost of products sold, an $8.7 million
increase in the cost of timber and property sales and a $13.1 million increase
in DD&A expense. These increases were partially offset by a $5.8 million
decrease in selling, general and administrative expenses.
The increase in cost of products sold was primarily the result of a
$4.3 million increase in logging costs and a $0.3 million increase in severance
taxes. Partially offsetting these increases were a $1.2 million decrease in wood
fiber processing costs and a $1.0 million decrease in outside log purchases.
Logging costs and severance taxes increased primarily as a result of a 55%
increase in the level of merchantable grade logs harvested and sold, partially
offset by a 14% decrease in the Company's logging cost per MBF. The decrease in
the Company's logging cost per MBF was primarily the result of the Company's
changing from a mix of internal logging crews and outside contractors during the
first eight months of 1996 to the use of outside contractors for all its logging
operations during the last four months of 1996 and in 1997. Wood fiber
processing costs decreased by 58% as a result of a 14% decrease in the volume of
fiber processed and sold as chips and a write-down to fiber log inventories
during 1996, resulting from a decline in chip prices during the period. During
1997, the Company had timber deed sales with a combined cost basis of $8.7
million. No sales of tracts of timber or timberland were made during 1996.
DD&A expense was $17.3 million in 1997, a $13.1 million increase over
DD&A expense of $4.2 million in 1996. This increase was primarily due to the
significant increase in the Company's depletion rate combined with the large
increase in the volume of logs harvested and sold as previously mentioned. The
increase in the depletion rate was primarily the result of the step-up in asset
values of the Klamath Falls Timberlands upon their acquisition from
Weyerhaeuser.
Selling, general and administrative expenses were $6.2 million in 1997,
a decrease of 48% from comparable expenses of $12.0 million in 1996. This
decrease in selling, general and administrative expenses was primarily the
result of $4.9 million in one-time payments for advisory services paid to
affiliates of the Company in connection with the Weyerhaeuser Acquisition and
$2.8 million of one-time management fees paid to an affiliate of the Company for
management services in 1996. The advisory fees were incurred in connection with
the Weyerhaeuser Acquisition and its initial financing. The management fee
generally relates to services rendered in connection with the initial formation
of the Company and Old Services. Primarily offsetting these advisory and
management fees were increases in salaries and wages as well as professional
fees resulting from the Company operating as an independent entity rather than
as a division of Weyerhaeuser.
Interest Expense. Interest expense was $25.3 million during 1997 and
primarily related to $215.0 million of term debt and $90.0 million of revolving
debt incurred in connection with the Weyerhaeuser Acquisition in August 1996 and
$110.0 million of incremental debt incurred in connection with the Ochoco
Acquisition on July 15, 1997. The Company refinanced $225.0 million of its
existing debt on November 19, 1997 by issuing the Notes in the Public Note
Offering and paid down the remaining $190.0 million of outstanding debt between
July 15, 1997 and December 31, 1997 with the proceeds from the MLP Offering and
cash flows from operating activities. The Company incurred $7.3 million in
interest expense during the last four months of 1996. There was no interest
expense and no debt outstanding during the first eight months of 1996, as the
Predecessor participated in Weyerhaeuser's centralized cash management system.
Amortization of Deferred Financing Fees and Debt Guarantee Fees. The
Company deferred $4.1 million of fees incurred in connection with the financing
of the Weyerhaeuser Acquisition. The Company deferred $6.0 million of fees in
connection with the financing of the Ochoco Acquisition and related term debt
refinancing. These costs were being amortized over the life of the debt. The
Company deferred $6.7 million of fees incurred in connection with the
22
<PAGE>
issuance of $225.0 million of Notes in the Public Note Offering. The Company
also incurred $4.4 million of debt guarantee fees from August 30, 1996 through
the extinguishment of the $130.0 million of debt guaranteed by Weyerhaeuser on
November 19, 1997. The amortization of deferred financing fees and debt
guarantee fee expense during 1997 and 1996 were $4.2 million and $1.3 million,
respectively. There was no deferred financing fee amortization or debt guarantee
fee expense during the first eight months of 1996.
Interest Income. Interest income was $1.5 million during 1997. For the
last four months of 1996, there was $0.4 million in interest income. There was
no interest income during the first eight months of 1996, as the Predecessor
participated in Weyerhaeuser's centralized cash management system.
Other (Income) Expense. Other (income) expense, net changed from
approximately zero in 1996 to $0.6 million in 1997. Other (income) expense in
1997 primarily represents a $0.6 million charge related to an unrealized loss on
an unhedged financial instrument as of December 31, 1997.
Losses on Extinguishment of Debt. The Company refinanced certain
long-term borrowings during 1997 resulting in extraordinary losses on
extinguishment of debt of $9.3 million due to the write-off of existing
unamortized deferred financing fees and other related fees.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The results of operations for 1996 are based on combining the periods
January 1, 1996 through August 29, 1996 (the period prior to the Weyerhaeuser
Acquisition) and August 30, 1996 through December 31, 1996 both as shown in the
historical financial statements. The principal effect of the Weyerhaeuser
Acquisition in 1996 was an increase in DD&A expense (due to a higher cost basis
for the Company's timber, timberlands and logging roads) and interest expense
(due to borrowings to finance the Weyerhaeuser Acquisition).
Revenues. Revenues were $29.6 million in 1996, a decrease of 7% from
revenues of $31.7 million in 1995. Revenues from the sale of logs were $27.7
million in 1996, as compared to $29.1 million in 1995 while by-products and
other revenues were $1.9 million in 1996, as compared to $2.6 million in 1995.
Log sales volumes remained relatively constant, decreasing from 63,800
MBF in 1995 to 63,000 MBF in 1996. The majority of the revenue decrease was due
to a reduction in the average log sales price of $17 per MBF from $456 in 1995
to $439 in 1996. Sales prices were negatively affected in 1996 by uncertainty
surrounding the possible sale of the Klamath Falls Timberlands, as some
customers obtained other sourcing commitments. The average sales price was also
reduced due to a change in the species mix of the logs sold, with a higher
percentage of lower valued White Fir and a lower percentage of higher valued
Douglas fir logs.
The reduction in revenues from by-products and other was primarily
attributable to a 26% decrease in chip sales revenue. Due to low demand in the
pulp and paper industry, average chip prices decreased by 26% in 1996 compared
to 1995.
Operating Costs. Operating costs were $31.7 million in 1996, a 53%
increase over operating costs of $20.7 million in 1995. This increase was the
result of a $7.8 million increase in selling, general and administrative
expenses, a $2.8 million increase in DD&A expense and a $0.4 million increase in
cost of products sold. The increase in selling, general and administrative
expenses was primarily the result of $4.9 million in one time payments for
advisory services paid to affiliates of the Company in connection with the
Weyerhaeuser Acquisition and $2.8 million of management fees paid to an
affiliate of the Company for management services. The advisory fees were
incurred in connection with the Weyerhaeuser Acquisition and its initial
financing. The management fee generally relates to services rendered in
connection with the initial formation of the Company and Old Services. The
increase in DD&A was primarily due to the significant increase in the Company's
depletion rate as a result of the step-up in asset values of the Klamath Falls
Timberlands upon their acquisition from Weyerhaeuser. The increase in cost of
goods sold was primarily due to an increase in wood fiber processing costs.
23
<PAGE>
Interest Expense. Interest expense was $7.3 million in 1996 and related
to $215.0 million of term debt and $90.0 million of revolving debt incurred in
connection with the Weyerhaeuser Acquisition in August 1996. There was no
interest expense and no debt outstanding during 1995, as the Predecessor
participated in Weyerhaeuser's centralized cash management system.
Amortization of Deferred Financing Fees and Debt Guarantee Fees. The
Company deferred $4.1 million of fees incurred in connection with the financing
of the Weyerhaeuser Acquisition. These costs are being amortized over the life
of the related debt. In addition, the Company is accreting $3.6 million of
estimated debt guarantee fees from August 30, 1996 through the estimated
Holdings Debt extinguishment date of November 15, 1997. The debt guarantee fees
payable to Weyerhaeuser relate to the Holdings Debt which was incurred in
connection with the Weyerhaeuser Acquisition. The amortization of deferred
financing fees and debt guarantee fee expense during 1996 were $0.2 million and
$1.1 million, respectively. There was no deferred financing fee amortization or
debt guarantee fee expense during 1995.
Interest Income. Interest income was $0.4 million during 1996. There was no
interest income during 1995, as the Predecessor participated in Weyerhaeuser's
centralized cash management system.
Other (Income) Expense, Net. Other (income) expense, net changed from
income of $0.6 million in 1995 to near zero in 1996. Nonrecurring income from
easements and road use permits represents $0.4 million of the 1995 other income,
net.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the transactions discussed below, the Company's primary source
of liquidity has been cash and cash equivalents from borrowings under its
revolving credit facility drawn on at the closing of the Weyerhaeuser
Acquisition. On July 14, 1997, the Company refinanced its original revolving
credit facility and certain term debt and incurred an additional $110.0 million
of term debt in connection with the Ochoco Acquisition. Effective November 19,
1997, the Master Partnership completed its MLP Offering of 8,577,487 Common
Units (including Common Units issued upon the exercise by the underwriter's of
their over-allotment option in December 1997). Net proceeds from the MLP
Offering were $163.2 million. In addition, the Company issued $225.0 million of
Notes in the Public Note Offering. The proceeds from the MLP Offering and the
Public Note Offering were primarily utilized to retire all outstanding
borrowings under the revolving credit facility and $330.0 million of term debt.
For purposes of this discussion, these transactions are hereafter referred to as
the "Transactions." As of December 31, 1997, the Company has a cash balance of
$10.6 million, $1.8 million of working capital and $100.0 million of internal
borrowing capacity under the Bank Credit Facility.
For purposes of the following comparison of cash flows from operating,
investing and financing activities, the 1996 period cash flows are based on
combining January 1, 1996 through August 29, 1996 (the period prior to the
Weyerhaeuser Acquisition) and August 30, 1996 through December 31, 1996.
Operating Activities. Cash flows provided by operating activities in
1997 were $26.3 million, as compared to cash flows provided by operating
activities of $2.5 million in 1996. The $23.8 million increase in cash flows
provided by operating activities was primarily due to an increase in the volume
of log and stumpage sales, proceeds from timber and property sales and $5.7
million of advance deposits on stumpage sales contracts. In addition, 1996
operating cash flows included $4.9 million of one-time payments to certain
affiliates of the Company in connection with the Weyerhaeuser Acquisition and
$2.8 million in one-time management fees paid to an affiliate of the Company.
The increase in operating cash flows was partially offset by a substantial
increase in interest and debt guarantee fees in 1997 as compared to 1996.
Investing Activities. Cash flows used by investing activities were
$101.6 million in 1997, as compared to cash flows used by investing activities
of $291.9 million during 1996. During 1997, $110.9 million was used in the
Ochoco Acquisition and a $10.0 million receivable from an affiliate was repaid.
During 1996, $283.5 million was used in the
24
<PAGE>
Weyerhaeuser Acquisition and $10.0 million was paid to an affiliate. The results
for 1996 also include $2.4 million in proceeds from logging equipment
dispositions as a result of the Company's discontinuance of its logging crews
upon consummation of the Weyerhaeuser Acquisition.
Financing Activities. Cash flows provided by financing activities were
$69.3 million in 1997, as compared to cash flows provided by financing
activities of $306.0 million during 1996. During 1997, the Company refinanced
$175.0 million of long-term debt incurred in connection with the Weyerhaeuser
Acquisition and incurred an additional $110.0 million of long-term debt in
connection with the Ochoco Acquisition. The Company incurred $6.0 million of
deferred financing fees in connection with the refinancing of long-term debt and
the incurrence of financing for the Ochoco Acquisition. In addition, the Company
distributed $1.2 million to a member related to his 1997 estimated tax
liability. The Company received $163.2 million in net proceeds from the Master
Partnership's MLP Offering and $218.3 million in proceeds, net of financing
fees, related to the issuance of the Notes. Cash flows provided by financing
activities during 1996 principally represent borrowings under debt facilities
and equity contributions from members in connection with the Weyerhaeuser
Acquisition. These 1996 cash flows are partially offset by deferred financing
fees incurred in connection with obtaining financing for the Weyerhaeuser
Acquisition and the Predecessor's normal distributions of net operating and
investment cash flows to Weyerhaeuser.
Notes
The following summary of the terms of the Notes is qualified in its
entirety by the terms of the Indenture which is included as an exhibit to this
Report and is hereby incorporated by reference herein. The $225.0 million
aggregate principal amount of Notes represent unsecured general obligations of
the Company and bear interest at 9 5/8% per annum, payable semiannually in
arrears on May 15 and November 15. The Notes mature on November 15, 2007 unless
previously redeemed. The Notes will not require any mandatory redemption or
sinking fund payments prior to maturity and are redeemable at the option of the
Company in whole or in part, on or after November 15, 2002 at predetermined
redemption prices plus accrued interest to the redemption date. In addition, at
any time on or prior to November 15, 2000, the Company, at its option, may
redeem the Notes with the net cash proceeds of a Common Units offering or other
equity interests of the Master Partnership, at 109.625% of the principal amount
hereof, plus accrued and unpaid interest thereon to the redemption date,
provided that at least 65% of the principal amount of the Notes originally
issued remain outstanding immediately following such redemption. Upon the
occurrence of certain events constituting a "change of control" (as defined in
the Indenture), the Company must offer to purchase the Notes, at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase.
The Indenture contains various affirmative and restrictive covenants
applicable to the Company and its subsidiaries, including limitations on the
ability of the Company and its subsidiaries to, among other things, (i) incur
additional indebtedness (other than certain permitted indebtedness) unless the
Company's Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture)
is greater than 2.25 to 1.00, and (ii) make distributions to the Master
Partnership, make investments (other than permitted investments) in any person,
create liens, engage in transactions with affiliates, suffer to exist any
restrictions on the ability of a subsidiary to make distributions or repay
indebtedness to the Master Partnership, engage in sale and leaseback
transactions, enter into a merger, consolidation or sale of all or substantially
all of its assets, sell assets or harvest timber in excess of certain
limitations or engage in a different line of business. Under the Indenture, the
Company will be permitted to make cash distributions to the Master Partnership
so long as no default or event of default exists or would exist upon making such
distribution (a) if the Company's Consolidated Fixed Charge Coverage Ratio (as
defined in the Indenture) is greater than 1.75 to 1.00, in an amount, in any
quarter, equal to Available Cash (as defined in the Indenture) for the
immediately preceding fiscal quarter or (b) if the Company's Consolidated Fixed
Charge Coverage Ratio is equal to or less than 1.75 to 1.00, in an aggregate
amount after the closing of this offering not to exceed (i) $7.5 million less
the aggregate of all restricted payments made under this clause (b)(i) during
the immediately preceding 16 fiscal quarters (or shorter period, if applicable,
beginning on the issue date of the Notes), plus (ii) the net proceeds of certain
capital contributions (including the sale of Common Units) received by the
Master Partnership.
25
<PAGE>
Bank Credit Facility
The following summary of the terms of the Bank Credit Facility is
qualified in its entirety by the Form of Bank Credit Facility which is included
as an exhibit to this Report and is hereby incorporated by reference. The Bank
Credit Facility consists of the $75.0 million Acquisition Facility and the $25.0
million Working Capital Facility. As of December 31, 1997, there were no
outstanding borrowings under the Bank Credit Facility. The Bank Credit Facility
bears interest at the lower of the Bank's prime rate plus a margin of 2.0%
(10.5% at December 31, 1997) or LIBOR plus a margin of 2.5% (8.41% at December
31, 1997). The Working Capital Facility expires on November 19, 2000 and all
amounts borrowed thereunder shall then be due and payable. At November 19, 2000,
the Master Partnership may elect to amortize any outstanding loans under the
Acquisition Facility in sixteen equal quarterly installments beginning one
quarter after the conversion to a term loan, subject to certain provisions
contained in the agreement governing the Bank Credit Facility.
The Bank Credit Facility contains various affirmative and restrictive
covenants applicable to the Company, including limitations on the ability of the
Company to, among other things, (i) incur certain additional indebtedness, (ii)
incur any liens other than (a) liens on accounts receivable and inventory to
secure indebtedness under a refinancing facility for the Working Capital
Facility and (b) liens for purchase money financing of acquired assets up to an
aggregate $10.0 million, (iii) sell assets or harvest timber in excess of
certain limitations (which limitations are similar to those under the Indenture)
and (iv) make investments, engage in transactions with affiliates, and enter
into a merger, consolidation or sale of assets. The Bank Credit Facility
requires that the Company maintain at all times the following financial ratios:
(i) Minimum Pro Forma EBITDDA (as defined in the Bank Credit Facility) to Pro
Forma Interest Expense (as defined in the Bank Credit Facility) of 2.10 to 1.0
(calculated on a four quarter rolling basis) from the closing date through June
30, 1998, increasing to 2.25 to 1.0 thereafter and through June 30, 1999 and
further increasing to 2.35 to 1.0 thereafter, (ii) Maximum Funded Debt (as
defined in the Bank Credit Facility) to Pro Forma EBITDDA (as defined in the
Bank Credit Facility) of not more than 5.25 to 1.0 (calculated on a four quarter
rolling basis) from the closing date through June 30, 1998, reducing to 4.75 to
1.0 thereafter and through June 30, 1999, and further reducing to 4.50 to 1.0
thereafter and (iii) Minimum Asset Value (as defined in the Bank Credit
Facility) to Funded Debt Ratio (as defined in the Bank Credit Facility) of 175%
measured on a quarterly basis based on quarter end numbers.
Under the Bank Credit Facility, so long as no Event of Default (as
defined in the Bank Credit Facility) exists or would result, the Company will be
permitted to make quarterly cash distributions to the Master Partnership in an
amount not to exceed Available Cash (as defined in the Bank Credit Facility) in
the preceding quarterly period. Available Cash shall reflect a reserve equal to
50% of the interest projected to be paid on the Notes in the next succeeding
quarter, as well as 100% of the aggregate amount of all accrued and unpaid
interest in respect of the Bank Credit Facility on the date of determination. In
addition, in the third, second and first quarters preceding a quarter in which a
scheduled principal payment is to be made on the Notes, Available Cash will be
required to reflect a reserve equal to 25%, 50% and 75%, respectively, of the
principal amount to be repaid on such date. The Bank Credit Facility also
requires Available Cash to reflect a reserve for certain net proceeds from asset
sales and excess harvests pending reinvestment.
Capital Expenditures/Cash Distributions
Capital expenditures in 1997 totaled $1.1 million. Capital expenditures
incurred were mainly in the nature of land management/silvicultural expenses and
office equipment and vehicle purchases. Capital expenditures were financed
through cash flow generated by operations. As the Company does not currently own
and does not plan to own manufacturing facilities, and all logging is
subcontracted to third parties, it is anticipated that capital expenditures in
the future will not be material and will consist mainly of land
management/silvicultural expenditures. It is not currently anticipated that the
Company will either maintain log inventories, although small log inventories may
be maintained for a short period of time, or incur material capital expenditures
for machinery and equipment. The Company anticipates that capital expenditures
will be approximately $1.8 million in 1998. Capital expenditures will consist
primarily of capitalized silvicultural costs and miscellaneous equipment and
computer hardware and software expenditures.
26
<PAGE>
Cash required to meet the Master Partnership's quarterly cash
distributions, and interest and principal payments on indebtedness will be
significant. The Manager expects that the debt service will be funded from
current operations. The Master Partnership expects to make cash distributions
from current funds and cash generated from operations.
Effects of Inflation
Prices for the Company's stumpage and logs may be subject to sharp
cyclical fluctuations due to market or other economic conditions, including the
level of construction activity but generally do not directly follow inflationary
trends. Costs of forest operations and general and administrative expenses
generally reflect inflationary trends.
Year 2000 Compliance
In connection with the Company's business activities, the Company is
assessing the computer and information system needs of the overall organization.
Along with this assessment, the Company is also reviewing its computer-based
systems and applications to ensure that its computer and information systems
will function properly at Year 2000. At this time, management of the Company
believes that the specific costs of achieving Year 2000 compliance for its
current systems will not have a material effect on the Company's consolidated
financial statements.
Other
Pursuant to an agreement dated as of July 29, 1997 between John J.
Stephens, the former President and Chief Executive Officer and a former Director
of the Manager and one of the Founding Directors, and the Company, Old Services,
Mr. Rudey and certain of his affiliates, Mr. Stephens' interest in Old Services
was redeemed for 95,238 Subordinated Units upon the consummation of the
Transactions and $1.0 million payable in January 1998. Pursuant to an agreement
dated as of July 29, 1997 between George R. Hornig, a Director of the Manager
and one of the Founding Directors, and the Company, Old Services, Mr. Rudey and
certain of his affiliates, Mr. Hornig's interest in Old Services was redeemed
upon the closing of the Transactions for 48,160 Subordinated Units.
ITEM 8. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set
forth in the "Index to Financial Statements" on page 46.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
27
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
OF THE REGISTRANT
The Manager manages and operates the activities of the Company. The
Company does not directly employ any of the persons responsible for managing or
operating the Company.
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE MANAGER
The following table sets forth certain information with respect to the
members of the Board of Directors of the Manager, its executive officers and
certain key employees. Executive officers and directors are elected for one-year
terms.
<TABLE>
<S> <C> <C>
Name Age Position with Manager
- ---- --- ---------------------
John M. Rudey 54 Chairman and Director(1)
Allen E. Symington 58 President and Chief Financial Officer and Director(2)
Robert E.L. Michie, Jr 50 Vice President - Operations
John C. McDowell 48 Vice President - Finance and Controller
Aubrey L. Cole 74 Director(3)
George R. Hornig 43 Director(4)
Spencer R. Stuart 75 Director(5)
Thomas C. Theobald 60 Director(6)
Robert F. Wright 72 Director(7)
Walter L. Barnes 55 Harvesting Manager
Robert A. Broadhead 46 Marketing Manager
Martin Lugus 57 General Manager
Kurt A. Muller 39 Planning Manager
Christopher J. Sokol 48 Forestry Manager
</TABLE>
- ----------
(1) Member of the Executive (Chairman), Nominating (Chairman), Finance and
Compensation (Chairman) Committees.
(2) Member of the Executive and Finance Committees.
(3) Member of the Executive and Nominating Committees.
(4) Member of the Executive and Finance Committees.
(5) Member of the Audit, Conflicts (Chairman), Compensation and LTIP
Committees.
(6) Member of the Audit, Conflicts, Compensation, Finance (Chairman) and
LTIP Committees.
(7) Member of the Nominating, Finance, Compensation, Audit (Chairman) and LTIP
(Chairman) Committees.
John M. Rudey serves as Chairman and a Director of the Manager. Since 1992,
Mr. Rudey has served as Chief Executive Officer of Garrin Properties Holdings,
Inc., a private investment company that manages and advises investment
portfolios principally concentrated in the timber and forest products industries
and in real estate. He has previously acquired and managed for his family
investment group a subsidiary of Westinghouse Electric Co. and a division of
Monumental Life Insurance Company. Mr. Rudey holds a B.A. from Harvard College
and an M.B.A. from Harvard Business School.
Allen E. Symington serves as President and Chief Financial Officer and a
Director of the Manager. From 1996- 98, Mr. Symington was Vice President,
Finance of Simpson Timber Investment Company ("Simpson") (a private
28
<PAGE>
timberlands owner and forest products manufacturer) and from 1995-96 he served
as Vice President - Investments and Treasurer. From 1988-94, Mr. Symington
served as Vice President--Investments. Mr. Symington joined Simpson in 1962 and
served in various capacities. Mr. Symington is currently Vice Chairman of the
Washington State Employees Retirement Board and a director of Enterprises
International (a company which produces manufacturing equipment for the pulp and
paper industry). Mr. Symington holds a B.S. in Forest Products with a minor in
Business and Finance from the University of Washington.
Robert E.L. Michie, Jr. serves as Vice President - Operations of the
Manager. From 1989-98, Mr. Michie was the Timberlands Manager of Simpson Timber
Company, managing its timberland properties in Oregon and Washington. Prior to
joining Simpson, Mr. Michie served in various capacities with Crown Zellerbach
Corporation and its successor, Cavenham Forest Industries, Inc. Mr. Michie holds
a B.S. in Industrial Engineering from Texas Tech University and an M.B.A. in
Management from the University of Alaska.
John C. McDowell serves as Vice President - Finance and Controller of the
Manager. From 1989-97, Mr. McDowell served as Vice President - Controller for
Simpson, and from 1986-88 he served as Assistant Treasurer for Simpson. From
1982-85, Mr. McDowell was Vice President - Controller for Simlog Leasing
Company. From 1980-81, Mr. McDowell served as Controller for Farmer Construction
Company; and from 1974-79, Mr. McDowell was an Audit Manager for Ernst & Young.
Mr. McDowell holds a B.A. in Business Administration from the University of
Washington and is a Certified Public Accountant.
Aubrey L. Cole serves as a Director of the Manager. Since 1989 Mr. Cole
has been a consultant for Aubrey Cole Associates, a sole proprietorship which
provides management consulting services and makes investments. From 1986 to
1989, Mr. Cole was the Vice Chairman of the Board and Director of Champion
International Corporation (a publicly traded forest products company) and from
1983 to 1993, Mr. Cole was the Chairman of Champion Realty Corporation (a land
sales subsidiary of Champion International). Mr. Cole holds a B.B.A. from the
University of Texas and serves on the Advisory Board of the Business School.
George R. Hornig serves as a Director of the Manager. Since 1993, Mr.
Hornig has been a Managing Director of Deutsche Bank North America Holdings,
Inc. (the United States arm of Deutsche Bank, a German banking concern) and
affiliated entities. From 1991 to 1993, Mr. Hornig was the President and Chief
Operating Officer of Dubin & Swieca Holdings, Inc., an investment management
business. From 1988 to 1991, Mr. Hornig was a co-founder, Managing Director and
Chief Operating Officer of Wasserstein Perella & Co., Inc. (a mergers and
acquisitions investment bank). From 1983 to 1988, Mr. Hornig was an investment
banker in the Mergers and Acquisitions Group of The First Boston Corporation.
Prior to 1983, Mr. Hornig was an attorney with Skadden, Arps, Slate, Meagher &
Flom. Mr. Hornig holds a B.A. from Harvard College, a J.D. from Harvard Law
School and an M.B.A. from Harvard Business School. Mr. Hornig is also a director
of SL Industries, Inc. and Forrester Research, Inc.
Spencer R. Stuart serves as a Director of the Manager. Mr. Stuart currently
serves as honorary Chairman of Stuart Spencer & Associates/Management
Consultants - Executive Searches, an international executive search and
management consulting firm, which he founded in 1956, and from which he retired
as Chairman and Chief Executive Officer in 1974. From 1990-92, Mr. Stuart was
Chairman of Dean Witter Council of Management Advisors, a division of Dean
Witter Investment Banking. Mr. Stuart is a director of Enhance Financial
Services Group, Inc., Enhance Reinsurance Company and Asset Guaranty Inc. Mr.
Stuart holds a B.S. from Haverford College.
Thomas C. Theobald serves as a Director of the Manager. Since 1994, Mr.
Theobald has been a Managing Director of William Blair Capital Partners, L.L.C.
From 1987-94, Mr. Theobald served as Chairman and Chief Executive Officer of
Continental Bank Corporation. From 1960-87, Mr. Theobald was Vice Chairman of
Citicorp and Citibank N.A. Mr. Theobald holds a B.A. from Holy Cross College and
an M.B.A. from Harvard Graduate School of Business. Mr. Theobald is also a
director of the following companies: Xerox Corporation, Mutual Life Insurance
Company of New York, Anixter International, LaSalle U.S. Realty Income and
Growth Fund, Stein Roe Funds and LaSalle Partners.
29
<PAGE>
Robert F. Wright serves as a Director of the Manager. Since 1988, Mr.
Wright has served as President and Chief Executive Officer of Robert F. Wright
Associates, Inc., a firm making strategic investments and providing business
consulting services. Previously, Mr. Wright spent 40 years, 28 years as a
partner, at Arthur Andersen & Co. Mr. Wright holds a B.A. from Michigan State
University and an M.B.A. from New York University. Mr. Wright is a director of
the following companies: Hanover Direct Inc. (a catalog marketer), Reliance
Standard Life Insurance Co. and affiliates (life insurance companies), The
Navigators Group Inc. (a property insurance company), Norweb North America
Corporation (an Irish investment company), Rose Technology Group Limited (a
Canadian professional engineering company), Deotexas Inc. (a development stage
company) and Williams Real Estate Co., Inc. (a real estate company).
Walter L. Barnes serves as Harvesting Manager of the Manager, responsible
for all solid wood logging and fiber operations. From 1993-1996, prior to
joining the Company, Mr. Barnes acted as the Operations Harvest Manager for
Weyerhaeuser. Mr. Barnes was employed by Weyerhaeuser for 28 years and has
extensive experience managing different harvesting systems on both the East and
West sides of the Cascade Range. Mr. Barnes holds a B.S. degree from the
University of Wyoming.
Robert A. Broadhead serves as Marketing Manager of the Manager, responsible
for all log and stumpage sales transactions. Mr. Broadhead was employed by
Weyerhaeuser for 20 years and gained additional experience in investing and
planning while serving as Planning Manager from 1981 to 1994. Mr. Broadhead
holds a B.S. degree from Humboldt State University.
Martin Lugus serves as General Manager of the Manager, responsible for all
land management and operations on fee lands. Mr. Lugus was employed by
Weyerhaeuser for 28 years, during which time he served as Forestry Manager from
1981 to 1991 and Timberlands Manager from 1991 to 1996. Mr. Lugus holds a B.S.
from University of Connecticut and a M.F. from Yale School of Forestry and
Environmental Studies.
Kurt A. Muller serves as Planning Manager of the Manager, responsible
for all harvest planning, as well as operating and developing the inventory and
GIS systems. From 1982 to 1989, Mr. Muller was President of Woodland Consulting
Services, Inc., during which time he gained additional experience in contracting
forestry operations and forest land management as District Forester. Mr. Muller
was employed by Weyerhaeuser for eight years and holds a B.S. degree from Oregon
State University.
Christopher J. Sokol serves as Forestry Manager of the Manager, responsible
for forestry operations, environmental relationships, harvest prescriptions and
nursery/orchard operations. Prior to joining the Company in 1996, Mr. Sokol was
employed by Weyerhaeuser for 22 years and gained additional experience in forest
regeneration and timber sales while serving as District Forester from 1982 to
1991 and as Forestry Manager thereafter. Mr. Sokol holds a B.S. from Oregon
State University.
ITEM 11. EXECUTIVE COMPENSATION
The Master Partnership and the Manager were formed in June 1997. The
Company was formed in June 1996, but had no officers or employees during the
relevant period. Accordingly, neither the Company nor the Manager paid any
compensation to its directors and officers with respect to 1996 or earlier, nor
did any obligations accrue in respect of management incentive or retirement
benefits for the directors and officers with respect to such year. Prior to the
closing of the MLP Offering and Public Note Offering, all executive officers
were employees of Old Services. Upon the closing of the MLP Offering and the
Public Note Offering on November 19, 1997, the executive officers became
employees of the Manager; therefore, the following disclosure covers the period
from November 19, 1997 through December 31, 1997. Under the terms of the
Operating Company Agreement, the Company is required to reimburse the Manager
for expenses relating to the operation of the Company, including salaries and
bonuses of employees employed on behalf of the Company, as well as the costs of
providing benefits to such persons under employee benefit plans and for the
costs of health and life insurance.
30
<PAGE>
The following table sets forth annual salary, bonus and all other
compensation awards and payouts earned by the Manager's Chief Executive Officer
and the named executive officers for services rendered during the fiscal year
ended December 31, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER
ANNUAL COMPENSATION LONG TERM COMPENSATION COMPENSATION
---------------------------------------- ------------------------------------ ------------
SECURITIES
UNDERLYING
OTHER ANNUAL RESTRICTED OPTIONS/
NAME AND POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS SARS(#) LTIP PAYOUTS
- ----------------- ---- ------ ----- ------------ ------------ ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John J. Stephens, President and
Chief Executive Officer (1)... 1997 $ 52,500 $ -- $ -- $ -- $ -- $ --
Michael J. Morgan, Vice
President and Chief Financial
Officer (2).............. 1997 $ 14,700 $100,000 $ -- $ -- $ -- $ --
</TABLE>
(1) Mr. Stephens resigned as President and Chief Executive Officer effective
January 2, 1998.
(2) Mr. Morgan was terminated as Vice President and Chief Financial Officer
effective January 5, 1998. Edward J. Kobacker was terminated as Executive
Vice President and Chief Operating Officer effective January 5, 1998.
Pursuant to the terms of his termination, Mr. Kobacker received severance
payments of $700,000. In addition, pursuant to the terms of his employment
agreement, he is entitled to receive $450,000 in three equal installments
of $150,000 on January 1, 1998, 1999 and 2000 as compensation for having
forfeited his right to exercise certain in-the-money stock options granted
him by a prior employer.
LONG-TERM INCENTIVE PLAN
The Manager has adopted the U.S. Timberlands Company, L.P. Amended and
Restated 1997 Long-Term Incentive Plan (the "Long-Term Incentive Plan") for key
employees and directors of the Manager and its affiliates. The summary of the
Long-Term Incentive Plan contained herein does not purport to be complete and is
qualified in its entirety by reference to the Long-Term Incentive Plan, which is
filed as an exhibit hereto. The Long-Term Incentive Plan consists of two
components, a unit option plan (the "Unit Option Plan") and a restricted unit
plan (the "Restricted Unit Plan"). The Long-Term Incentive Plan currently
permits the grant of Unit Options and Restricted Units covering an aggregate of
857,748 Common Units.
Unit Option Plan. The Unit Option Plan currently permits the grant of
options ("Unit Options") covering 857,748 Common Units. Unit Options granted
during the Subordination Period will become exercisable automatically upon, and
in the same proportions as, the conversion of the Subordinated Units to Common
Units. If a grantee's employment is terminated by reason of his death,
disability or retirement, the grantee's Unit Options will become immediately
exercisable. In addition, a grantee's Unit Options will become immediately
exercisable in the event of a "change of control" of the Company (as defined in
the Long-Term Incentive Plan).
Upon exercise of a Unit Option, the Manager will acquire Common Units
in the open market at a price equal to the then-prevailing price on the
principal national securities exchange upon which the Common Units are then
traded, or directly from the Company or any other person, or use Common Units
already owned by the Manager, or any combination of the foregoing. The Manager
will be entitled to reimbursement by the Company for the difference between the
cost incurred by the Manager in acquiring such Common Units and the proceeds
received by the Manager from an optionee at the time of exercise. Thus, the cost
of the Unit Options will be borne by the Company. If the Master Partnership
issues new Common Units upon exercise of the Unit Options, the total number of
Units outstanding will increase and the Manager will remit the proceeds received
from the optionee to the Company.
The Unit Option Plan has been designed to furnish additional
compensation to key executives and key directors and to increase their
proprietary interest in the future performance of the Company measured in terms
of growth in the market value of Common Units.
31
<PAGE>
The following table sets forth certain information with respect to Unit
Options granted to the named executive officers during the fiscal year 1997:
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE OR OTHER
PERIOD UNTIL MATURATION
NAME NUMBER OF UNIT OPTIONS OR PAYOUT (3)
---- ---------------------- -----------------------
<S> <C> <C>
John J. Stephens..... 107,218(1) 3 years
Michael J. Morgan.... 64,332(2) 3 years
</TABLE>
- --------------------------
(1) Mr. Stephens ceased to be a member of the Manager's Board of Directors on
January 2, 1998. The 107,218 Unit Options granted to Mr. Stephens expired
unexercised as a result of his termination.
(2) The 64,332 Unit Options granted to Mr. Morgan expired unexercised as a
result of his termination.
(3) The Unit Options become exercisable automatically upon, and in the same
proportion as, the conversion of the Subordinated Units to Common Units,
which date shall be no earlier than December 31, 2000.
The following table sets forth certain information with respect to
option grants to the named executive officers during fiscal 1997:
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF STOCK
SECURITIES OPTIONS/ SARS EXPIRATION PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(4)
OPTIONS/ SARS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------------
GRANTED FISCAL YEAR ($/SH) (3) DATE 5% 10%
------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John J. Stephens.............. 107,218(1) 12.5% $ 21.00 11/19/07 (1) $ 1,416,350 $ 3,588,586
Michael J. Morgan............. 64,332(2) 7.5% $ 21.00 11/19/07 (2) $ 849,826 $ 2,153,192
</TABLE>
- -------------------------
(1) The 107,218 Unit Options granted to Mr. Stephens expired unexercised as a
result of his termination.
(2) The 64,332 Unit Options granted to Mr. Morgan expired unexercised as a
result of his termination.
(3) The Unit Options become exercisable automatically upon, and in the same
proportion as, the conversion of the Subordinated Units to Common Units,
which date shall be no earlier than December 31, 2000.
(4) A ten year period (the maximum length of the Unit Option term) was used for
compounding purposes in the above calculations.
32
<PAGE>
The following table sets forth certain information with respect to the
aggregate number and value of options at the fiscal year-end 1997:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR ENDED OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS AT
DECEMBER 31,1997 DECEMBER 31,1997
SHARES ---------------------- ----------------------------
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John J. Stephens............. None $ -- -- 107,218(1) $ -- $ N.A. (3)
Michael J. Morgan............ None $ -- -- 64,332(2) $ -- $ N.A. (3)
</TABLE>
- ---------------------
(1) The 107,218 Unit Options granted to Mr. Stephens expired unexercised as a
result of his termination.
(2) The 64,332 Unit Options granted to Mr. Morgan expired unexercised as a
result of his termination.
(3) At the close of trading on December 31, 1997, the market value of the
Common Units was $20.75 per share. Since the Units Options, once
exercisable, would be exercisable at $21.00 per share, the in-the-money
computation is inapplicable.
Restricted Unit Plan. A Restricted Unit is a "phantom" unit that
entitles the grantee to receive a Common Unit upon the vesting of the phantom
unit. No grants have been made under the Restricted Unit Plan. The LTIP
Committee may, in the future, determine to make grants under such plan to key
employees and directors containing such terms as the Committee shall determine.
Restricted Units granted during the Subordination Period will vest automatically
upon, and in the same proportions as, the conversion of the Subordinated Units
to Common Units. Common Units to be delivered upon the "vesting" of rights may
be Common Units acquired by the Manager in the open market, Common Units already
owned by the Manager, Common Units acquired by the Manager directly from the
Company or any other person, or any combination of the foregoing. The Manager
will be entitled to reimbursement by the Company for the cost incurred in
acquiring such Common Units. If the Master Partnership issues new Common Units,
the total number of Units outstanding will increase and the Company will receive
no remuneration.
The issuance of the Common Units pursuant to the Restricted Unit Plan
is intended to serve as a means of incentive compensation for performance and
not primarily as an opportunity to participate in the equity appreciation in
respect of the Common Units. Therefore, no consideration will be payable by the
plan participants upon vesting and issuance of the Common Units.
The Manager's Board of Directors in its discretion may terminate the
Long-Term Incentive Plan at any time with respect to any Common Units or Unit
Options for which a grant has not theretofore been made. The Manager's Board of
Directors will also have the right to alter or amend the Long-Term Incentive
Plan or any part thereof from time to time; provided, however, that no change in
any outstanding grant may be made that would impair the rights of the
participant without the consent of such participant.
Compensation of Directors
No additional remuneration will be paid to employees who also serve as
directors. Each independent director receives $50,000 annually, for which they
each agree to participate in four regular meetings of the Board of Directors and
four Audit/Conflicts Committee meetings. Each other non-employee director
receives $50,000 annually (to be paid in cash or Subordinated Units, as
determined by each director), for which they each agree to participate in four
regular meetings of the Board of Directors. Each non-employee director will
receive $1,250 for each additional meeting in which he participates. In
addition, each non-employee director will be reimbursed for his out-of-pocket
expenses in connection with attending meetings of the Board of Directors or
committees thereof. Each director will be fully indemnified by the Company for
his actions associated with being a director to the extent permitted under
Delaware law.
33
<PAGE>
The Manager has entered into consulting agreements with each of Aubrey
Cole Associates (a consulting firm affiliated with Mr. Cole), Robert F. Wright
Associates, Inc. (a consulting firm affiliated with Mr. Wright) and Mr. Hornig
pursuant to which each such person or firm provides consulting services to the
Manager. Each such agreement provides for an annual retainer of $25,000, plus
$150 per hour (with a maximum per diem of $1,200) for services rendered at the
request of the Manager. Each consulting agreement will be reviewed annually by a
majority of the directors who do not have consulting agreements.
Employment Agreements
The Manager has entered into employment agreements with Messrs. Rudey,
Symington, Michie and McDowell (the "Executives"). The summary of the Employment
Agreements which follows does not purport to be complete and is qualified in its
entirety by reference to the forms of Employment Agreement, which are filed as
exhibits to this Annual Report. Each agreement has a term of approximately five
years and includes confidentiality provisions and noncompete provisions. In each
agreement, the confidentiality provisions will continue for 18 months following
the later to occur of the Executive's termination of employment or, in the case
of Messrs. Rudey and Symington, his resignation or removal from the Board, and,
unless the Executive is terminated without "Cause," or the Executive terminates
his employment for "Good Reason" or due to disability, the noncompete provisions
will continue for a period of 12 months after the termination of such
employment.
The agreements provide for an annual base salary of $300,000, $260,000,
$175,000 and $145,000 for each of Messrs. Rudey, Symington, Michie and McDowell,
respectively, subject to such increases as the Board of Directors of the Manager
may authorize from time to time. In addition, each of the Executives will be
eligible to receive an annual cash bonus to be determined by the Compensation
Committee not to exceed 100% of his base salary. Each of Messrs. Symington,
Michie and McDowell has been guaranteed a minimum bonus equal to 50% of his base
salary for each of 1998 and 1999. Each of the Executives also participates in
the Long-Term Incentive Plan of the Manager as described above. The Executives
will also be entitled to participate in such other benefit plans and programs as
the Manager may provide for its employees in general.
The agreements provide that in the event an Executive's employment is
terminated without "Cause" (as defined in the Employment Agreements) or if the
Executive terminates his employment for "Good Reason" (as defined below), such
individual will be entitled to receive a severance payment in an amount equal to
his base salary for the remainder of the employment term under the Employment
Agreement or 12 months, whichever is less, plus a prorated bonus for the year of
such termination calculated based on the bonus being equal to 100% of base
salary. In the event of termination due to death or disability, the Executive
will be entitled to accrued salary and benefits up to the date of the
termination. In the event the individual's employment is terminated for "Cause,"
he will receive accrued salary and benefits up to the date of termination.
Good Reason is defined in the agreements generally as: (i) in the case
of Messrs. Rudey and Symington, failure of the Manager's members to elect or
re-elect the Executive to the Board of Directors, (ii) failure of the Manager to
vest in the Executive the position, duties and responsibilities contemplated by
his Employment Agreement, (iii) failure of the Manager to pay any portion of the
Executive's compensation, (iv) any material breach by the Manager of any
material provision of the Employment Agreement and (v) a material reduction in
the individual's duties, responsibilities or status upon a "change of control"
as defined in the Employment Agreement. "Cause" is defined generally as: (i) any
felony conviction, (ii) any material breach by the Executive of a material
written agreement between the Executive and the Company, (iii) any breach caused
by the Executive of the MLP Partnership Agreement, (iv) any willful misconduct
by the Executive materially injurious to the Company, (v) any willful failure by
the Executive to comply with any material policies, procedures or directives of
the Board of Directors of the Manager or (vi) any fraud, misappropriation of
funds, embezzlement or other similar acts of misconduct with respect to the
Company.
34
<PAGE>
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS
The Compensation Committee of the Manager is composed of Messrs. Rudey,
Stuart, Theobald and Wright. Mr. Rudey also serves as Chairman of the Manager.
35
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT OF THE COMPANY
The Company is managed by the Manager pursuant to the Operating Company
Agreement. Under the Operating Company Agreement the Manager is entitled to
reimbursement of certain costs of managing the Company. These costs included
compensation and benefits payable to officers and employees of the Manager,
payroll taxes, general and administrative expenses and legal and professional
fees.
CONSULTING AGREEMENTS
The Manager has entered into consulting agreements with each of Aubrey
Cole Associates (a consulting firm affiliated with Mr. Cole), Robert F. Wright
Associates, Inc. (a consulting firm affiliated with Mr. Wright) and Mr. Hornig
pursuant to which each such person or firm provides consulting services to the
Manager. Each such agreement provides for an annual retainer of $25,000, plus
$150 per hour (with a maximum per diem of $1,200) for services rendered at the
request of the Manager. Each consulting agreement will be reviewed annually by a
majority of the directors who do not have consulting agreements.
RELATED PARTY TRANSACTIONS
Pursuant to an agreement dated as of July 29, 1997 between John J.
Stephens, a Founding Director and the former President and Chief Executive
Officer of the Manager, and the Company, Old Services, Mr, Rudey and certain of
his affiliates, Mr. Stephen's interest in Old Services was redeemed for 95,238
Subordinated Units upon the consummation of the Transactions and $1.0 million
paid in January 1998. Pursuant to an agreement dated as of July 29, 1997 between
Mr. Hornig and the Company, Old Services, Mr. Rudey and certain of his
affiliates, Mr. Hornig's interest in Old Services was redeemed upon the closing
of the Transactions for 48,160 Subordinated Units.
REPURCHASE OF CERTAIN MEMBER INTERESTS; SEVERANCE PAYMENTS
On January 5, 1998, the Manager made certain changes in senior
management. In connection therewith, Edward J. Kobacker, the former Executive
Vice President and Chief Operating Officer and a former Director of the Manager,
became entitled to receive approximately $700,000 in severance payments pursuant
to his employment agreement. In addition, pursuant to the terms of the Manager's
operating agreement, the member interests of each of Mr. Stephens, Mr. Kobacker
and John H. Beuter, a former Director of the Manager, were subject to repurchase
at an aggregate price of $385,000 payable in three annual installments
commencing February 1, 1998. The Company will reimburse the Manager for such
repurchase payments.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a)(1) AND (2) FINANCIAL STATEMENTS
See "Index to Financial Statements" set forth on page 46.
(a)(3) EXHIBITS
<TABLE>
<S> <C>
+3.1 --Second Amended and Restated Operating Agreement of U.S. Timberlands Klamath
Falls, L.L.C.
+10.1 --Credit Agreement among U.S. Timberlands Klamath Falls, L.L.C. and certain banks
+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
Klamath Falls, L.L.C. other parties
*10.4 --Form of U.S. Timberlands Company, L.P. 1997 Long-Term Incentive Plan
*10.5 Employment Agreement for Mr. Rudey
10.6 Employment Agreement for Mr. Symington
10.7 Employment Agreement for Mr. Michie
10.8 Employment Agreement for Mr. McDowell
*10.9 --Supply Agreement between U.S. Timberlands Klamath Falls, L.L.C. and Collins
Products LLC
*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 Master
Partnership's Current Report on Form 8-K filed January 15, 1998.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by the Annual Report.
37
<PAGE>
APPENDIX A
GLOSSARY OF CERTAIN TERMS
Acquisition: The acquisition by the Master Partnership of substantially all
of the equity interests in the Company and the business and assets of U.S.
Timberlands Management Company, L.L.C., on November 19, 1997.
Acquisition Facility: A $75.0 million revolving credit facility entered
into by the Company used for acquisitions and improvements.
Available Cash: With respect to any quarter prior to liquidation:
(a) the sum of (i) all cash and cash equivalents of the
Company Group on hand at the end of such quarter and (ii) all additional cash
and cash equivalents of the Company Group on hand on the date of determination
of Available Cash with respect to such quarter resulting from borrowings for
working capital purposes made subsequent to the end of such quarter, less
(b) the amount of any cash reserves that is necessary or
appropriate in the reasonable discretion of the Manager to (i) provide for the
proper conduct of the business of the Company Group (including reserves for
future capital expenditures and for anticipated future credit needs of the
Company Group) subsequent to such quarter, (ii) comply with applicable law or
any loan agreement, security agreement, mortgage, debt instrument or other
agreement or obligation to which any member of the Company Group is a party or
by which it is bound or its assets are subject, or (iii) provide funds for
distributions under Section 6.4 or 6.5 of the MLP Partnership Agreement in
respect of any one or more of the next four quarters; provided, however, that
the Manager may not establish cash reserves pursuant to (iii) above if the
effect of such reserves would be that the MLP is unable to distribute the
Minimum Quarterly Distribution on all Common Units with respect to such quarter;
and, provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such quarter but on
or before the date of determination of Available Cash with respect to such
quarter shall be deemed to have been made, established, increased or reduced for
purposes of determining Available Cash within such quarter if the Manager so
determines. Notwithstanding the foregoing, "Available Cash" with respect to the
quarter in which the liquidation of the Company occurs and any subsequent
quarter shall equal zero.
Bank Credit Facility: The $75.0 million Acquisition Facility and the $25.0
million Working Capital Facility both entered into by the Company.
BBF: One billion board feet.
BLM: The U.S. Department of Interior Bureau of Land Management.
Board Foot (BF): A unit of lumber measurement 1 foot square and 1 inch
thick.
Cause: Means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the Manager liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as a general partner
of the Company.
CERCLA and Superfund: Refer generally to the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended.
Chips: Wood generated either in a whole log chip mill or as a
by-product of the manufacture of lumber and plywood and used in the manufacture
of pulp and paper and various composite panel products such as medium density
fiberboard, particle board and oriented strand board.
38
<PAGE>
Closing Date: November 19, 1997.
Code: Internal Revenue Code of 1986, as amended.
Collins: Collins Products LLC.
Collins Supply Agreement: The 10-year log supply agreement that the
Company has entered into with Collins, extendable by Collins for two additional
five-year terms.
Common Units: A Unit representing a fractional part of the Partnership
Interests of all limited partners and assignees and having the rights and
obligations specified with respect to Common Units in the Partnership Agreement.
Company: U.S. Timberlands Klamath Falls, L.L.C., a Delaware limited
liability company, and any successors thereto.
Company Group: The Company, the Master Partnership and any subsidiary of
either such entity, treated as a single consolidated entity.
Compensation Committee: A committee of the board of directors of the
Manager which initially consists of five directors, including two independent
directors, which determines the compensation of the officers of the Manager and
administer its employee benefit plans.
Conflicts Committee: A committee of the board of directors of the
Manager composed entirely of two or more directors who are neither members,
officers nor employees of the Manager nor officers, directors, employees or
security holders of any affiliate of the Manager.
DBH: "Diameter at breast height," a term frequently used to describe a
tree measurement taken 4 1/2 feet above ground level.
DD&A: Depreciation, depletion and road amortization.
Departing Manager: A former managing member of the Company from and
after the effective date of any withdrawal or removal of such former managing
member pursuant to the Operating Company Agreement.
EBITDDA: Operating income plus depreciation, depletion and amortization
and cost of timber and property sales. EBITDDA should not be considered as an
alternative to net income, operating income, cash flows from operating
activities or any other measure of financial performance presented in accordance
with generally accepted accounting principles. EBITDDA is not intended to
represent cash flow and does not represent the measure of cash available for
distribution, but provides additional information for evaluating the Company's
ability to make the Minimum Quarterly Distribution.
Fee Timber: Timber which is located on property owned in fee, as
opposed to timber that is located on lands owned by other parties and is
acquired pursuant to cutting contracts.
Finance Corp.: U.S. Timberlands Finance Corp., a wholly-owned subsidiary
of the Company.
Founding Directors: John J. Stephens and George R. Hornig, individuals
who received approximately 143,398 Subordinated Units upon redemption of their
interests in Old Services, and the other individuals who were directors of the
Manager at the Closing Date.
GIS: The Company's computerized geographic information system.
39
<PAGE>
Guidelines: The guidelines, suggested by the United States Fish and
Wildlife Service in 1990, are to be followed by landowners in order to comply
with the Endangered Species Act's prohibition against harming or harassing owls.
Holdings: U.S. Timberlands Holdings, L.L.C., a Delaware limited
liability company.
Holdings Debt: The $130.0 million of bank indebtedness incurred by
Holdings in connection with the Company's acquisition of the Klamath Falls
Timberlands in August 1996.
Incentive Distributions: The distributions of Available Cash from
Operating Surplus initially made to the Manager that are in excess of the
Manager's aggregate 2% general partner interest.
Indenture: The indenture pursuant to which the Notes were issued, which
is filed as an exhibit hereto.
Issuers: The Company together with Finance Corp.
Klamath Falls Timberlands: The approximately 604,000 fee acres of
timberland acquired by the Company and Old Services in August 1996 from
Weyerhaeuser.
Logs: The stem of the tree after it has been felled. The raw material
from which lumber, plywood and other wood products are processed.
Long-Term Incentive Plan: The U.S. Timberlands Company, L.P. Amended and
Restated 1997 Long-Term Incentive Plan.
LTIP Committee: A committee of the board of directors of the Manager,
which initially consists of three directors, including the two independent
directors, which acts with respect to the Company's Long-Term Incentive Plan.
Manager or New Services: U.S. Timberlands Services Company, L.L.C.
(formerly known as New Services, L.L.C.), a Delaware limited liability company,
and its successors and permitted assigns as general partner of the Master
Partnership.
Management Incentive Plan: The U.S. Timberlands Company, L.P. Management
Incentive Plan.
Master Partnership: U.S. Timberlands Company, L.P., and any successors
thereto.
MBF: One thousand board feet. A common unit of measure for pricing
standing timber as well as lumber.
MLP Offering: The initial public offering by the Master Partnership of
the Common Units.
MLP Partnership Agreement: The Amended and Restated Agreement of
Limited Partnership of the Master Partnership (which is filed as an exhibit
hereto), as it may be amended, restated or supplemented from time to time.
MMBF: One million board feet.
Merchantable Timber: A tree that will produce a sound log 16 feet in
length and at least 5" in diameter, inside bark, at the small end. Timber may be
merchantable even if it has not reached its optimum sale value.
Minimum Quarterly Distribution: $0.50 per Unit with respect to each
quarter or $2.00 per Unit on an annualized basis, subject to adjustment.
40
<PAGE>
Notes: The $225.0 million aggregate principal amount of unsecured
senior notes due 2007, offered publicly by the Company on November 13, 1997.
NYSE: The New York Stock Exchange.
Ochoco: Ochoco Lumber Company.
Ochoco Acquisition: The acquisition of the Ochoco Timberlands by the
Company from Ochoco on July 15, 1997.
Ochoco Timberlands: The approximately 42,000 fee acres of timberland
and cutting rights on approximately 3,000 acres of timberland acquired by the
Company on July 15, 1997 from Ochoco.
Old Services: U.S. Timberlands Management Company, L.L.C., formerly
known as U.S. Timberlands Services Company, L.L.C.
Operating Company Agreement: The Second Amended and Restated Operating
Agreement of the Operating Company, as it may be amended, supplemented or
restated from time to time (which is filed as an exhibit hereto).
Operating Surplus: As to any period prior to liquidation, on a
cumulative basis and without duplication:
(a) the sum of (i) $15.0 million plus all cash and cash
equivalents of the Partnership Group on hand as of the close of business on the
Closing Date, (ii) all cash receipts of the Partnership Group for the period
beginning on the Closing Date and ending with the last day of such period, other
than cash receipts from Interim Capital Transactions and (iii) all cash receipts
of the Partnership Group after the end of such period but on or before the date
of determination of Operating Surplus with respect to such period resulting from
borrowings for working capital purposes, less
(b) the sum of (i) Operating Expenditures for the period
beginning on the Closing Date and ending with the last day of such period and
(ii) the amount of cash reserves that is necessary or advisable in the
reasonable discretion of the Manager to provide funds for future Operating
Expenditures, provided however, that disbursements made (including contributions
to a member of the Partnership Group or disbursements on behalf of a member of
the Partnership Group) or cash reserves established, increased or reduced after
the end of such period but on or before the date of determination of Available
Cash with respect to such period shall be deemed to have been made, established,
increased or reduced for purposes of determining Operating Surplus, within such
period if the Manager so determines. Notwithstanding the foregoing, "Operating
Surplus" with respect to the quarter in which the liquidation occurs and any
subsequent quarter shall equal zero.
Opinion of Counsel: A written opinion of counsel, acceptable to the
Manager in its reasonable discretion, to the effect that the taking of a
particular action will not result in the loss of the limited liability of the
limited partners of the Master Partnership or cause the Master Partnership to be
treated as an association taxable as a corporation or otherwise taxed as an
entity for federal income tax purposes.
OSHA: Federal Occupational Safety and Health Act.
Partnership Interest: An ownership interest in the Master Partnership,
which shall include the general partner interests and limited partner interests.
Plantations: The 184,000 acres of the Timberlands which are actively
managed tree farms.
Predecessor: The southern Oregon timberlands operations of Weyerhaeuser
acquired by the Company in the Weyerhaeuser Acquisition.
41
<PAGE>
Public Note Offering: The public offering by the Operating Company of
the Notes.
Registration Statement: The Registration Statement on Form S-1 (No. 333-
34389), filed by the Company and Finance Corp. with the United States Securities
and Exchange Commission, relating to the Notes.
RROW: Reciprocal right-of-way.
Seedling: A young tree generally less than three years of age used as
planting stock for reforestation.
Securities Act: The Securities Act of 1933, as amended.
Silviculture: The practice of cultivating forest crops based on the
knowledge of forestry; more particularly, controlling the establishment,
composition and growth of forests.
Softwoods: Coniferous trees, usually evergreen and having needles or
scalelike leaves, such as Ponderosa. pine, Douglas fir, white pine and spruce.
Stand: An area of trees possessing sufficient uniformity of age, size
and composition to be distinguished from adjacent areas so as to form a
management unit. The term is usually applied to forests of commercial value.
Stumpage: Standing timber (timber as it stands uncut in the woods).
Subordinated Unit: A Unit representing a fractional part of the
partnership interests of all limited partners of the Master Partnership and
assignees (other than of holders of the Incentive Distribution Rights) and
having the rights and obligations specified with respect to Subordinated Units
in the MLP Partnership Agreement. The term "Subordinated Unit" as used herein
does not include a Common Unit.
Subordination Period: The Subordination Period will generally extend
from the closing of the MLP Offering until the first to occur of: (a) the first
day of any quarter beginning after December 31, 2002 in respect of which (i)
distributions of Available Cash from Operating Surplus on each of the
outstanding Common Units and the Subordinated Units with respect to each of the
three consecutive, non-overlapping four-quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the outstanding Common Units and Subordinated Units during such periods,
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution on all of
the Common Units and Subordinated Units that were outstanding during such
periods on a fully-diluted basis (i.e., taking into account for purposes of such
determination all Outstanding Common Units, all Outstanding Subordinated Units,
all Common Units and Subordinated Units issuable upon exercise of employee
options that have, as of the date of determination, already vested or are
scheduled to vest prior to the end of the quarter immediately following the
quarter with respect to which such determination is made, and all Common Units
and Subordinated Units that have as of the date of determination, been earned by
but not yet issued to management of the Master Partnership in respect of
incentive compensation), plus the related distribution on the general partner
interest in the Master Partnership and the managing member interest in the
Company, and (iii) there are no outstanding Common Unit Arrearages; and (b) the
date on which the Manager is removed as general partner of the Master
Partnership upon the requisite vote by holders of Outstanding Units under
circumstances where Cause does not exist and Units held by the Manager and its
Affiliates are not voted in favor of such removal. Prior to the end of the
Subordination Period, a portion of the Subordinated Units will convert into
Common Units on a one-for-one basis on the first day after the record date
established by the Manager for any quarter ending on or after (a) December 31,
2000 with respect to one-quarter of the Subordinated Units (1,070,530
Subordinated Units) and (b) December 31, 2001 with respect to an additional
one-quarter of the Subordinated Units (1,070,530 Subordinated Units), on a
cumulative basis, in respect of which (i) distributions of Available Cash from
Operating Surplus on the Common Units and the Subordinated Units with respect to
each of the three consecutive, non-overlapping four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units
42
<PAGE>
and Subordinated Units during such periods, (ii) the Adjusted Operating Surplus
generated during each of the two consecutive, non-overlapping four-quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the Common Units and Subordinated Units
that were outstanding during such periods on a fully diluted basis (i.e., taking
into account for purposes of such determination all Outstanding Common Units,
all Outstanding Subordinated Units, all Common Units and Subordinated Units
issuable upon exercise of employee options that have, as of the date of
determination, already vested or are scheduled to vest prior to the end of the
quarter immediately following the quarter with respect to which such
determination is made, and all Common Units and Subordinated Units that have as
of the date of determination, been earned by but not yet issued to management of
the Master Partnership in respect of incentive compensation), plus the related
distribution on the general partner interest in the Master Partnership and the
managing member interest in the Company, and (iii) there are no outstanding
Common Unit Arrearages; provided, however, that the early conversion of the
second quarter of Subordinated Units may not occur until at least one year
following the early conversion of the first quarter of Subordinated Units. In
addition, if the Manager is removed as general partner of the Master Partnership
under circumstances where Cause does not exist and Units held by the Manager and
its affiliates are not voted in favor of such removal (i) the Subordination
Period will end and all outstanding Subordinated Units will immediately and
automatically convert into Common Units on a one-for-one basis, (ii) any
existing Common Unit Arrearages will be extinguished and (iii) the Manager will
have the right to convert its combined 2% interest in the Master Partnership and
the Company (and all the rights to the Incentive Distribution) into Common Units
or to receive cash in exchange for such interests.
Thinning: Removal of selected trees, usually to eliminate overcrowding,
to remove dead, dying, deformed or diseased trees and to promote more rapid
growth of desired trees. "Pre-commercial thinning" refers to thinning that does
not directly produce merchantable timber. "Commercial thinning" results directly
in merchantable timber.
Timber: Standing trees not yet harvested.
Timberlands: The timber properties of the Company.
Transactions: The transactions related to the formation of the Company
and the Master Partnership, the issuance of the Common Units, the issuance of
the Notes, the entering into of the Bank Credit Facility and the other
transactions that occurred in connection with the Note Offering and the MLP
Offering.
Unitholders: Holders of the Common Units and the Subordinated Units,
collectively.
Units: The Common Units and the Subordinated Units, collectively, but not
including the right to receive Incentive Distributions.
USFS: United States Department of Agriculture--Forest Service.
USFWS: United States Fish and Wildlife Service.
USTK Debt: The $285.0 million of bank indebtedness incurred by the
Company in July 1997 to refinance indebtedness incurred in connection with the
acquisition of the Klamath Falls Timberlands and to finance the acquisition of
the Ochoco Timberlands.
Weyerhaeuser: Weyerhaeuser Company.
Weyerhaeuser Acquisition: The acquisition by the Company and Old
Services in August 1996 of the Klamath Falls Timberlands from Weyerhaeuser.
Working Capital Facility: A $25.0 million revolving credit facility
entered into by the Company to be used for working capital purposes.
43
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 30th day of
March, 1998.
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
By: U.S. Timberlands Services Company, L.L.C.
Manager
/s/ John M. Rudey
By: ____________________________________________
John M. Rudey
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ John M. Rudey Chairman and Director March 30, 1998
- ----------------------------------------------------- (Principal Executive Officer)
John M. Rudey
/s/ Allen E. Symington President, Chief Financial Officer and March 30, 1998
- ----------------------------------------------------- Director (Principal Financial Officer)
Allen E. Symington
/s/ Robert E. L. Michie, Jr. Vice President - Operations March 30, 1998
- -----------------------------------------------------
Robert E. L. Michie, Jr.
/s/ John C. McDowell Vice President - Finance and Controller March 30, 1998
- ----------------------------------------------------- (Principal Accounting Officer)
John C. McDowell
/s/ Aubrey L. Cole March 30, 1998
- ----------------------------------------------------- Director
Aubrey L. Cole
/s/ George R. Hornig March 30, 1998
- ----------------------------------------------------- Director
George R. Hornig
/s/ Spencer R. Stuart March 30, 1998
- ----------------------------------------------------- Director
Spencer R. Stuart
/s/ Thomas C. Theobald March 30, 1998
- ----------------------------------------------------- Director
Thomas C. Theobald
/s/ Robert F. Wright
- ----------------------------------------------------- Director March 30, 1998
Robert F. Wright
</TABLE>
44
<PAGE>
U.S. TIMBERLANDS FINANCE CORP.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 30th day of
March, 1998.
U.S. TIMBERLANDS FINANCE CORP.
/s/ John M. Rudey
By:____________________________________
John M. Rudey
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ John M. Rudey Chairman and Director March 30, 1998
- ----------------------------------------------------- (Principal Executive Officer)
John M. Rudey
/s/ Allen E. Symington President and Chief Financial Officer March 30, 1998
- ----------------------------------------------------- (Principal Financial Officer)
Allen E. Symington
/s/ John C. McDowell Vice President - Finance and Controller March 30, 1998
- ----------------------------------------------------- (Principal Accounting Officer)
John C. McDowell
</TABLE>
45
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants......................................47
Consolidated Balance Sheets -- December 31, 1997 and 1996.....................48
Consolidated Statements of Operations.........................................49
Consolidated Statements of Cash Flows.........................................50
Consolidated Statements of Changes in Members' Equity (Deficit) and
Weyerhaueser Investment and Advances.....................................52
Notes to Consolidated Financial Statements....................................53
46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
U.S. Timberlands Klamath Falls, L.L.C.
We have audited the accompanying consolidated balance sheets of U.S.
Timberlands, as described in Note 1, as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in members' equity
(deficit), and cash flows for the year ended December 31, 1997 and the period
from inception (August 30, 1996) through December 31, 1996. We have also audited
the statements of operations, changes in Weyerhaeuser investment and advances
and cash flows of the Predecessor for the year ended December 31, 1995 and the
period from January 1, 1996 through August 29, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Timberlands as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1997 and the period from inception (August
30, 1996) through December 31, 1996, and the results of the Predecessor's
operations and cash flows for the year ended December 31, 1995 and the period
from January 1, 1996 through August 29, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
January 23, 1998
47
<PAGE>
U.S. TIMBERLANDS
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
ASSETS
------
<S> <C> <C>
December 31,
--------------------------------
1997 1996
--------------------------------
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 10,625 $ 16,613
Accounts receivable, net of allowance for doubtful accounts of
$100 and $0, respectively ...................................................... 2,526 1,563
Other receivables................................................................ 1,247 131
Receivable from affiliate........................................................ -- 10,121
Inventories ..................................................................... -- 78
Prepaid expenses ................................................................ 534 680
Logging equipment held for resale................................................ -- 400
------------ ------------
Total current assets........................................................... 14,932 29,586
------------ ------------
TIMBER, TIMBERLANDS AND LOGGING ROADS, net........................................... 359,349 273,457
SEED ORCHARD AND NURSERY STOCK....................................................... 1,828 1,901
PROPERTY, PLANT AND EQUIPMENT, at cost:
Equipment........................................................................ 605 801
Buildings and land improvements.................................................. 843 677
Less- Accumulated depreciation................................................... (187) (58)
------------ ------------
Total property, plant and equipment............................................ 1,261 1,420
LONG-TERM RECEIVABLE................................................................. 1,171 --
DEFERRED FINANCING FEES ............................................................. 6,673 3,827
------------ ------------
Total assets................................................................... $ 385,214 $ 310,191
=========== ===========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
-----------------------------------------
CURRENT LIABILITIES:
Accounts payable................................................................. $ 1,404 $ 889
Accrued liabilities.............................................................. 4,949 7,238
Deferred revenue................................................................. 5,744 --
Payable to affiliate............................................................. 1,000 --
------------ ------------
Total current liabilities...................................................... 13,097 8,127
BORROWINGS UNDER REVOLVING CREDIT FACILITY -- 90,000
LONG-TERM DEBT 225,000 215,000
MEMBERS' EQUITY (DEFICIT):
Members' deficit prior to the transactions
Old Services..................................................................... -- (1,127)
USTK ............................................................................ -- (1,809)
Members' equity
Managing member's interest....................................................... 1,471 --
Nonmanaging member's interest.................................................... 145,646 --
------------ ------------
147,117 (2,936)
------------ ------------
Total liabilities and members' equity (deficit)................................ $ 385,214 $ 310,191
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
48
<PAGE>
U.S. TIMBERLANDS
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
U.S. Timberlands Predecessor
---------------------------------- -----------------------------------
August 30, January 1,
1996 Through 1996 Through
December 31, August 29,
1997 1996 1996 1995
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
(a) (a)
REVENUES:
Log and stumpage sales...................... $ 60,445 $ 13,590 $ 14,077 $ 29,110
Timber and property sales................... 15,244 -- -- --
By-products and other....................... 1,656 429 1,501 2,623
------------- ------------- ------------- -------------
Total revenues............................ 77,345 14,019 15,578 31,733
OPERATING COSTS:
Cost of products sold....................... 17,778 6,179 9,225 14,951
Cost of timber and property sales........... 8,746 -- -- --
Depreciation, depletion and road amortization 17,303 3,323 927 1,486
Selling, general and administrative expenses 6,250 9,284 2,730 4,235
----------- ------------- ------------- -------------
Operating income (loss)................ 27,268 (4,767) 2,696 11,061
INTEREST EXPENSE................................ 25,321 7,316 -- --
AMORTIZATION OF DEFERRED FINANCING
FEES AND DEBT GUARANTEE FEES.................... 4,193 1,326 -- --
INTEREST INCOME................................. (1,452) (409) -- --
OTHER (INCOME) EXPENSE, net..................... 574 36 1 (555)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS........................................... (1,368) (13,036) 2,695 11,616
EXTRAORDINARY ITEMS, losses on
extinguishment of debt.......................... 9,337 -- -- --
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (10,705) $ (13,036) $ 2,695 $ 11,616
============ ============ ============ ============
</TABLE>
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the
consolidated statement of operations for 1997 and the combined
statement of operations for the period from August 30, 1996
through December 31, 1996 are not comparable to the statements
of operations of the Predecessor. See the accompanying notes
for additional information.
The accompanying notes are an integral part of these
consolidated statements.
49
<PAGE>
U.S. TIMBERLANDS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
U.S. Timberlands Predecessor
--------------------------------- ------------------------------------
August 30, January 1,
1996 Through 1996 Through
December 31, August 29,
1997 1996 1996 1995
--------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
(a) (a)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ (10,705) $ (13,036) $ 2,695 $ 11,616
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities.................................
Depreciation, depletion, amortization and
cost of timber and property sold......... 26,775 3,549 927 1,486
Write-off of deferred financing fees...... 9,148 -- -- --
Other noncash items....................... 630 51 6 (200)
Changes in operating accounts ..............
Receivables............................... (3,250) (1,694) 699 1,057
Interest receivable from affiliate........ 121 (121) -- --
Inventories............................... 78 921 1,348 (1,535)
Prepaid expenses.......................... 146 (680) 371 (308)
Accounts payable.......................... 515 889 (292) (272)
Accrued liabilities....................... (2,919) 7,137 (242) (34)
Deferred revenue.......................... 5,744 -- -- --
------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities............................. 26,283 (2,984) 5,512 11,810
CASH FLOWS FROM INVESTING ACTIVITIES:
Weyerhaeuser Acquisition.................... -- (283,464) -- --
Receivable from affiliate................... 10,000 (10,000) -- --
Purchase of property, plant and equipment... (319) (212) (6) (1,124)
Proceeds from sales of property, plant and
equipment.................................. 400 2,374 -- 223
Ochoco Acquisition.......................... (110,873) -- -- --
Timber and road additions................... (534) (12) (26) (224)
Capitalized seed orchard and nursery costs. (240) (136) (427) (734)
-------------- -------------- -------------- --------------
Net cash used in investing activities..... (101,566) (291,450) (459) (1,859)
CASH FLOWS FROM FINANCING ACTIVITIES:
Weyerhaeuser investment and advances, net.. -- -- (5,054) (9,951)
Members' contributions...................... 163,206 10,100 -- --
Member's distribution....................... (1,191) -- -- --
Deferred financing fees..................... (12,720) (4,053) -- --
Long-term borrowings........................ 510,000 305,000 -- --
Repayment of long-term borrowings........... (590,000) -- -- --
------------- ------------- ------------- -------------
Net cash provided by (used in) financing
activities............................... 69,295 311,047 (5,054) (9,951)
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS............................. (5,988) 16,613 (1) --
CASH AND CASH EQUIVALENTS, beginning
of period.................................... 16,613 -- 1 1
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end
of period.................................... $ 10,625 $ 16,613 $ -- $ 1
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest..................... $ 28,083 $ 2,062 $ -- $ --
NONCASH ACTIVITIES:
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
U.S. Timberlands Predecessor
--------------------------------- ------------------------------------
August 30, January 1,
1996 Through 1996 Through
December 31, August 29,
1997 1996 1996 1995
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
(a) (a)
Net asset transfers (to) from Weyerhaeuser
Company, principally property, plant and
equipment................................. $ -- $ -- $ 1,043 $ (255)
Redemption of member's interest in Old
Service................................... $ 1,000 $ -- $ -- $ --
</TABLE>
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the
consolidated statement of cash flows for 1997 and the combined
statement of cash flows for the period from August 30, 1996
through December 31, 1996 are not comparable to statements of
cash flows of the Predecessor. See the accompanying notes for
additional information.
The accompanying notes are an integral part of these
consolidated balance sheets.
51
<PAGE>
U.S. TIMBERLANDS
CONSOLIDATED STATEMENTS OF CHANGES IN
MEMBERS' EQUITY (DEFICIT) AND WEYERHAEUSER
INVESTMENT AND ADVANCES
(in thousands)
<TABLE>
<CAPTION>
U.S.
Timberlands
Management
Company
Predecessor L.L.C. U.S. Timberlands Klamath Falls, L.L.C.
------------ ------------- ----------------------------------------------------------
(a) (a) (a) (a) (a)
Member's Member's
Members' Member's Equity Equity
Equity Equity (Deficit)- (Deficit)- Total
Weyerhaeuser (Deficit)- (Deficit)- Managing Nonmanaging Members'
Investment and Prior to the Prior to the Member's Member's Equity
Advances Transactions Transactions Interest Interest (Deficit)
-------------- ------------ ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.. $ 27,745 $ -- $ -- $ -- $ -- $ --
Net income................ 11,616 -- -- -- -- --
Net distributions to
Weyerhaeuser Company..... 9,951 -- -- -- -- --
Net asset transfers to
Weyerhaeuser Company..... (255) -- -- -- -- --
------------- ------------ ------------ ----------- ------------ ----------
BALANCE, December 31, 1995 29,155 -- -- -- -- --
Net income................ 2,695
Net distributions to
Weyerhaeuser Company..... (5,054) -- -- -- -- --
Net asset transfers from
Weyerhaeuser Company..... 1,043 -- -- -- -- --
------------
BALANCE, August 29, 1996.... $ 27,839 -- -- -- -- --
===========
Members' contributions.... 100 10,000 -- -- 10,100
Net loss.................. (1,227) (11,809) -- -- (13,036)
------------- ------------- ------------ ------------ ------------
BALANCE, December 31, 1996.. (1,127) (1,809) -- -- (2,936)
Members' distribution..... (1,191) -- -- -- (1,191)
Net loss- January 1, 1997
through November 18, 1997 (2,009) (7,424) -- -- (9,433)
Redemption of member's
interest................. (1,000) -- -- -- (1,000)
Assumption of Old Services'
net liabilities.......... 5,327 (5,584) -- -- (257)
Allocation of managing and
nonmanaging members'
interests in members'
deficit.................. -- 14,817 (148) (14,669) --
Member's contributions.... -- -- 1,632 161,574 163,206
Net loss- November 19, 1997
through December 31, 1997. -- -- (13) (1,259) (1,272)
------------ ------------ ------------ ------------ -------------
BALANCE, December 31, 1997.. $ -- $ -- $ 1,471 $ 145,646 $ 147,117
=========== =========== =========== =========== ===========
</TABLE>
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the
consolidated statement of members' equity (deficit) for the
year ended December 31, 1997 and the combined statement of
changes in members' deficit for the period from August 30,
1996 through December 31, 1996 are not comparable to the
statements of changes in Weyerhaeuser investment and advances
of the Predecessor. See the accompanying notes for additional
information.
The accompanying notes are an integral part of these
consolidated statements.
52
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands except unit amounts)
1. ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION:
Organization
The accompanying consolidated financial statements include the accounts of
U.S. Timberlands Klamath Falls, L.L.C. (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 co-obligor for USTK's Notes (defined below). It has nominal assets and does
not conduct any operations. All intercompany transactions have been eliminated
in consolidation.
U.S. Timberlands Company, L.P. (the MLP) owns a 99% nonmanaging member
interest in USTK. 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., formerly
known as U.S. Timberlands Services Company, L.L.C. (Old Services). U.S.
Timberlands Services Company, L.L.C. (the Manager) manages the businesses of the
Company and owns a 1% managing member interest in USTK.
Nature of Operations
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 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.
Initial Public Offering and Related Transactions
On November 19, 1997, the MLP completed an initial public offering (the
Common Units Offering) of 8,577,487 common units (including the 1,118,803 common
units issued upon exercise of the underwriters' overallotment option in December
1997) representing limited partner interests (Common Units). In addition, the
Company issued $225,000 of senior unsecured notes in a public offering (the
Notes). Concurrent with the Common Units Offering, Old Services contributed all
of its assets to the Manager in exchange for interests therein. Immediately
thereafter, USTK assumed certain indebtedness of U.S. Timberlands Holdings,
L.L.C. (Holdings), an affiliate of USTK, and the Manager contributed its timber
operations to USTK in exchange for a member's interest in USTK. The Manager then
contributed all but a 1% member interest in USTK to the MLP in exchange for a
general partner interest, 1,387,963 subordinated units representing limited
partner interests (Subordinated Units) and the right to receive certain
incentive distributions. The Manager distributed the 1,387,963 Subordinated
Units to Old Services and Old Services used a portion of such Subordinated Units
to redeem interests in Old Services. Holdings also contributed all of its member
interest in USTK to the MLP in exchange for 2,894,157 Subordinated Units. This
series of transactions is hereafter referred to as the Transactions. Since the
controlling owner of Old Services and USTK prior to the Transactions now
controls the Manager, the Transactions were recorded as a reorganization under
common control and therefore remain at their historical cost.
53
<PAGE>
BASIS OF PRESENTATION - PRIOR TO THE TRANSACTIONS
During 1996, USTK and Old Services were formed and subsequently entered
into an agreement with Weyerhaeuser Company on August 30, 1996 to purchase
approximately 601,000 acres of timber and timberlands and certain other assets
(the Weyerhaeuser Acquisition) as discussed further in Note 3. As legal
entities, USTK and Old Services were not consolidated. However, due to common
ownership and management, the financial statements of USTK and Old Services
prior to the Transactions have been presented on a combined basis. All
intercompany transactions between the above entities have been eliminated in the
accompanying financial statements.
BASIS OF PRESENTATION - PREDECESSOR
As a result of the Weyerhaeuser Acquisition, USTK acquired the Klamath
Falls Timberlands and certain related assets of Weyerhaeuser Company (as used
herein, the acquired timberlands and related assets are referred to as the
Predecessor). All of the financial statements provided herein (including the
financial statements pertaining to the Predecessor) were prepared by, and are
solely the responsibility of the Company. The Weyerhaeuser Acquisition was
accounted for as a purchase and, therefore, the accompanying financial
statements as of and for the periods ended prior to the date of the Weyerhaeuser
Acquisition are accounted for under the pre-Weyerhaeuser Acquisition basis of
accounting. Because the Predecessor did not operate or legally exist as a
stand-alone entity, there are no separate meaningful equity accounts of the
Predecessor prior to the Weyerhaeuser Acquisition. Significant changes could
have occurred in the funding and operations of the Predecessor were it to have
operated as an independent stand-alone entity. As a result, the financial
information included herein is not necessarily indicative of the financial
position and results of operations of the Predecessor which may have occurred if
it were an independent, stand-alone company during the periods presented.
Revenues for the Predecessor principally represent logs harvested for
sale to Weyerhaeuser's Klamath Falls wood conversion facilities at prices
determined in accordance with Weyerhaeuser's transfer pricing policy. These
transfer prices are not necessarily indicative of the prices the Predecessor
would have achieved if the logs had been sold to unaffiliated wood processors.
Revenues to Weyerhaeuser wood conversion facilities and unaffiliated wood
processors are summarized as follows:
January 1, 1996
Through
Source of Revenues August 39, 1996 1995
--------------------------------------- ----------------- -----------------
Weyerhaeuser Company................ $ 10,157 $ 20,065
Unaffiliated wood processors........ 5,421 11,668
---------------- ----------------
Total............................. $ 15,578 $ 31,733
=============== ===============
Concurrent with the Weyerhaeuser Acquisition, Collins Products Company
L.L.C. (Collins), an unaffiliated party, acquired Weyerhaeuser's Klamath Falls
wood conversion facilities. The Company has entered into a 10-year log supply
agreement with Collins providing for the delivery by the Company to Collins of
34 million board feet of merchantable timber each year at market prices as
discussed in Note 9.
The Predecessor participated in Weyerhaeuser Company's centralized cash
management system and, as such, its operating and capital expenditure needs were
met by Weyerhaeuser Company. The net advances from and distributions to
Weyerhaeuser Company are presented in the accompanying combined balance sheets
as a component of Weyerhaeuser investment and advances prior to the Weyerhaeuser
Acquisition. The Weyerhaeuser investment and advances account is noninterest
bearing.
Certain costs incurred by Weyerhaeuser Company for financial services,
information systems and other indirect costs have been allocated to the
Predecessor on a revenue and volume harvested basis. The resulting charge to the
54
<PAGE>
Predecessor was $445 in the period from January 1, 1996 through August 29, 1996
and $622 in 1995, and is included in selling, general and administrative
expenses in the accompanying combined statements of operations. Management
believes the allocation methods used provide the Predecessor with a reasonable
share of such expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies summarized below include both those
of the Company and the Predecessor, unless otherwise noted.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue on delivered log sales are recognized upon delivery to the
customer. Revenue on timber deeds and timberland and property sales are
generally recognized upon closing. Revenue from timber sold under stumpage
contracts (i.e., the customer arranges to harvest and deliver the logs) is
recognized when the timber is harvested. Deferred revenue as of December 31,
1997, represents cash received in advance of logs harvested under stumpage
contracts.
CONCENTRATION OF CREDIT RISK
As of December 31, 1997, the Company had accounts receivable from five
individual customers that represent 25%, 21%, 20%, 17% and 12% of total accounts
receivable, respectively.
The Company had sales to individual customers that were greater than
10% of total sales for the respective periods as follows:
<TABLE>
<CAPTION>
U.S. Timberlands Predecessor
--------------------------------- -----------------------------------
January 1, 1996
August 30, 1996 Through Through August 29,
1997 December 31, 1996 1996 1995
---- ----------------------- ------------------ ----
<S> <C> <C> <C> <C>
Weyerhaeuser Company......... -- -- 65% 63%
Unaffiliated customer........ 23% 54% 14% 14%
Unaffiliated customer........ 21% 14% 10% --
Unaffiliated customer........ 15% 11% -- --
Unaffiliated customer........ 11% -- -- --
</TABLE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with
maturities at date of purchase of 90 days or less.
55
<PAGE>
LOGGING EQUIPMENT HELD FOR RESALE
Logging equipment held by the Company as of December 31, 1996, is
recorded as logging equipment held for resale in the accompanying consolidated
balance sheet, as the Company changed to the use of outside contractors for all
of its logging operations concurrent with the Weyerhaeuser Acquisition.
TIMBER, TIMBERLANDS AND LOGGING ROADS
Timber, timberlands and logging roads are stated at cost less depletion
and amortization for timber previously harvested. The depletion rate is
calculated using a single composite pool by dividing the total cost of
merchantable timber by its estimated net merchantable volume. Depletion in any
given year represents the net merchantable volume harvested multiplied by the
depletion rate. These estimates are subject to change based on periodic
reevaluations of merchantable volume. Logging road costs for main and spur roads
are amortized based on the net merchantable volume harvested.
SEED ORCHARD AND NURSERY STOCK
The Company operates and maintains a seed orchard and nursery. Costs
incurred by the orchard and nursery to produce seed and seedlings utilized in
the reforestation of the Company's timberlands are capitalized to seed orchard
and nursery stock in the accompanying balance sheets. A certain amount of seed
and seedling stock is sold to unaffiliated customers and is reflected as a
component of by-products and other revenues in the accompanying statements of
operations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions and
betterments to buildings and equipment are capitalized. Maintenance and repairs
are expensed as incurred. Depreciation is provided over the useful lives of the
assets on the straight-line method. Estimated useful lives for buildings and
land improvements is 40 years and equipment ranges from 3 to 5 years.
DEFERRED FINANCING FEES
Deferred financing fees consist of fees incurred in connection with
obtaining the related debt financing. The Company amortizes deferred financing
fees over the terms of the related debt which approximates the effective
interest method.
INCOME TAXES
USTK and Old Services are both limited liability companies (L.L.C.s).
Accordingly, USTK and Old Services are not liable for federal or state income
taxes since the respective L.L.C.s' income or loss is reported on the separate
tax returns of the individual members. Accordingly, no provision for current or
deferred income taxes has been reflected in the accompanying financial
statements.
FINANCIAL INSTRUMENTS
All of the Company's material financial instruments are recognized in
its balance sheets. Except as noted below, the carrying values generally
approximate fair market value for these financial assets and liabilities:
Notes - The estimated fair value of the Notes, based upon interest
rates at December 31, 1997 for similar obligations with like
maturities, was $235,328 and was carried at $225,000.
56
<PAGE>
Interest Rate Collar Agreement - The Company enters into interest rate
collar agreements to manage interest rate risk. The fair value of
interest rate collar agreements is the estimated amount that the
Company would receive or pay upon termination of the agreement, taking
into consideration the current credit worthiness of the counterparty.
As of December 31, 1997, the Company has an outstanding interest rate
collar agreement. The Company estimates that it would have to pay $630
to terminate this agreement. Accordingly, the Company has recognized an
unrealized loss related to the interest rate collar agreement in other
(income) expense in the accompanying statement of operations.
3. ACQUISITIONS:
WEYERHAEUSER
The total purchase price for the Weyerhaeuser Acquisition referred to
in Note 1 was $283,464, including direct costs of the acquisition. The
Weyerhaeuser Acquisition was accounted for as a purchase with the purchase price
allocated first to current assets acquired, principally inventory, and the
remaining balance being allocated to noncurrent assets acquired, primarily
timber, timberlands and logging roads based on the relative fair market values
of the noncurrent assets as determined by an appraisal. Concurrent with the
Weyerhaeuser Acquisition, the Company changed to the use of outside contractors
for all of its logging operations. Accordingly, logging equipment acquired was
recorded at its estimated resale value.
Pro forma results of operations for 1996 had the Weyerhaeuser
Acquisition occurred on January 1, 1996 are as follows:
1996
--------------------
(Unaudited)
Revenues..................................... $ 29,597
Net loss..................................... (25,845)
OCHOCO
On July 15, 1997, the Company acquired approximately 42,000 acres of
timber and timberlands and approximately 3,000 acres of timber cutting rights
from Ochoco Lumber Company L.P. for $110,873 (the Ochoco Timberlands).
Substantially all of the purchase price was allocated to timber, timberlands and
logging roads. The acquisition was principally financed through $110,000 of debt
financing. Because the Company's acquisition of the Ochoco Timberlands did not
represent an acquisition of an existing business, the pro forma impact on
operations for 1997 of this acquisition has not been disclosed.
57
<PAGE>
4. ACCRUED LIABILITIES:
The Company's accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------------- ---------------------
<S> <C> <C>
Interest...................... $ 2,492 $ 5,254
Debt guarantee fee............ -- 1,100
Severance and harvest tax..... 269 230
Employee compensation......... 703 81
MLP equity issuance costs..... 617 --
Other......................... 868 573
-------------- --------------
$ 4,949 $ 7,238
============== ==============
</TABLE>
5. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------------- ------------------
<S> <C> <C>
USTK - 9-5/8% Notes due 2007....................... $ 225,000 $ --
Holdings - Term loan, paid November 1997........... -- 130,000
USTK - Borrowings under revolving credit
facility, refinanced July 1997 and paid
November 1997..................................... -- 90,000
USTK - Term loan payable quarterly, refinanced
July 1997 and paid November 1997.................. 85,000
--------------- --------------
$ 225,000 $ 305,000
=============== ==============
</TABLE>
USTK DEBT - PRIOR TO THE TRANSACTIONS
As of December 31, 1996, USTK had $90,000 of outstanding borrowings
under a revolving credit facility and an outstanding $85,000 term loan related
to the Weyerhaeuser Acquisition.
On July 14, 1997, USTK entered into a long-term financing arrangement
with certain banks to finance the Ochoco Acquisition discussed in Note 3 and to
refinance borrowings under the USTK revolving credit facility and the Company
term loan (the Long-Term Financing Arrangement). The retirement of debt under
credit facilities existing as of July 14, 1997, resulted in an extraordinary
loss on extinguishment of debt of $3,571 due principally to the write-off of
unamortized deferred financing fees. This write-off is recorded as an
extraordinary item in the accompanying statement of operations.
In connection with the Long-Term Financing Arrangement, USTK incurred
$5,970 of fees which were deferred.
58
<PAGE>
HOLDINGS DEBT - PRIOR TO THE TRANSACTION
As of December 31, 1996, Holdings had $130,000 of outstanding term loan
debt related to the Weyerhaeuser Acquisition (the Holdings Debt). The Holdings
Debt was guaranteed by Weyerhaeuser. In connection with the Holdings Debt,
Holdings was required to pay Weyerhaeuser a debt guarantee fee. The Holdings
Debt and the related debt guarantee fee of $4,368 were paid with proceeds from
the Transactions. The debt guarantee fee is included in amortization of deferred
financing fees and debt guarantee fees in the accompanying statements of
operations.
NOTES
Concurrent with the Transactions, USTK issued $225,000 of Notes. The
Notes were issued jointly and severally by USTK and Finance Corp., a wholly
owned subsidiary of USTK (collectively, the Issuers). The Issuers serve as
co-obligors of the Notes. The Notes represent unsecured general obligations of
the Issuers and bear interest at 9-5/8% payable semiannually in arrears on May
15 and November 15, and mature on November 15, 2007 unless previously redeemed.
The Notes are redeemable at the option of the Issuers in whole or in part, on or
after November 15, 2002 at predetermined redemption prices plus accrued interest
to the redemption date.
In addition, at any time on or prior to November 15, 2000, the Issuers,
at their option, may redeem the Notes with the net cash proceeds of a common
units offering or other equity interests of the Company or the MLP, at 109.625%
of the principal amount hereof, plus accrued and unpaid interest thereon to the
redemption date, provided that at least 65% of the principal amount of the Notes
originally issued remain outstanding immediately following such redemption. The
Notes contain certain restrictive covenants, including limiting the ability of
the Company to make cash distributions, incur additional indebtedness, sell
assets or harvest timber in excess of certain limitations.
In conjunction with the Notes issuance, USTK retired all existing debt
under the Long-Term Financing Arrangement. This resulted in an extraordinary
loss on extinguishment of debt of $5,766 due principally to the write-off of
existing unamortized deferred financing fees. This write-off is recorded in the
accompanying statement of operations.
BANK CREDIT FACILITY
Concurrent with the Transactions, USTK entered into a revolving credit
facility (the Bank Credit Facility) with a commercial bank (the Bank). The Bank
Credit Facility consists of a $75,000 acquisition facility (the Acquisition
Facility) and a $25,000 working capital facility (the Working Capital Facility).
USTK's obligations under the Bank Credit Facility represent unsecured general
obligations. Average borrowings on the Bank Credit Facility were $14,512,000. As
of December 31, 1997, there were no outstanding borrowings on the Bank Credit
Facility.
The Bank Credit Facility bears interest at the lower of the Bank's
prime rate, plus a margin of 2.0% (10.5% at December 31, 1997) or LIBOR plus a
margin of 2.5% (8.41% at December 31, 1997). The Working Capital Facility
expires on November 19, 2000 and all amounts borrowed thereunder shall then be
due and payable. At November 19, 2000, the Company may elect to amortize any
outstanding loans under the Acquisition Facility in sixteen equal quarterly
installments beginning one quarter after the conversion to a term loan, subject
to certain provisions contained in the Bank Credit Facility agreement.
The Bank Credit Facility contains certain restrictive covenants,
including limiting the ability of the Company to make cash distributions, incur
certain additional indebtedness, incur certain liens, or sell assets or harvest
timber in excess of certain limitations. In addition, the Bank Credit Facility
requires that the Company maintain certain financial ratios. As of December 31,
1997, the Company was in compliance with all covenants of the Bank Credit
Facility.
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6. MEMBERS' EQUITY (DEFICIT):
COMMON UNITS OFFERING
On November 19, 1997, the MLP issued 7,458,684 Common Units. Proceeds
from such offering were $141,265, net of underwriter fees and other related
costs of $15,367. Concurrent with such offering, 4,282,120 Subordinated Units
were issued in exchange for all members' interests in USTK and Old Services. On
December 12, 1997, the underwriters exercised their overallotment option and the
MLP issued an additional 1,118,803 Common Units. Proceeds from the exercise of
the overallotment option were $21,940, net of $1,555 of underwriters' fees. Net
proceeds of $163,205 from the Common Units Offering were contributed by the MLP
to USTK upon closing of the Transactions.
ALLOCATION OF INCOME (LOSS)
As provided in USTK's Operating Agreement, income and losses are
allocated 99% to the MLP and 1% to New Services.
CASH DISTRIBUTIONS
The MLP is required to make quarterly cash distributions from Available
Cash, as defined in the MLP's Partnership Agreement. The Company will distribute
cash to the MLP to the extent necessary for the MLP to meet its required
quarterly cash distributions, in accordance with USTK's Operating Agreement.
Generally, cash distributions are paid in order of preferences: first the
minimum quarterly distribution of $.50 per unit (the MQD) to Common Unitholders
and the Manager, and second, to the extent cash remains available, to
Subordinated Unitholders.
The MLP's Partnership Agreement sets forth certain cash distribution
target rates for the MLP to meet in order for the Manager's share of Available
Cash to increase. To the extent that the quarterly distributions exceed $.550
per Common and Subordinated Unit, the Manager receives 15% of the excess
Available Cash rather than the base amount of 2%. To the extent that the
quarterly distributions exceed $.633 per Common and Subordinated Unit, the
Manager receives 25% of the excess Available Cash and to the extent that the
quarterly distributions exceed $.822 per Common and Subordinated Unit, the
Manager receives 50% of the excess Available Cash.
7. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS:
RELATIONSHIP WITH THE MANAGER
The Manager has the ability to control management of the Company and
the MLP and has all voting rights of the Company and the MLP except for certain
matters set forth in USTK's Operating Agreement and in the MLP's Partnership
Agreement. The ownership of the Subordinated Units by certain affiliates of the
Manager effectively gives the Manager the ability to prevent its removal.
The Manager does not receive any management fee or other compensation
in connection with its management of the Company. The Manager and its affiliates
perform services for the Company and are reimbursed for all expenses incurred on
behalf of the Company, including the costs of employee, officer and director
compensation properly allocable to the Company, and all other expenses necessary
or appropriate to the conduct of the business of, and allocable to, the Company.
USTK's Operating Agreement provides that the Manager will determine the expenses
that are allocable to the Company in any reasonable manner determined by the
Manager in its sole discretion. Related noninterest bearing receivables and
payables between the Manager and the Company are settled in the ordinary course
of business. As of December 31, 1997, the Company had a payable to the Manager
of $253. During 1997, expenses allocated to and reimbursed by the Company
totaled $310.
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CONSULTING AGREEMENTS
As of December 31, 1997, the Manager has consulting agreements with
certain affiliated parties pursuant to which each such person or firm will
provide consulting services to the Manager. Each agreement provides for an
annual retainer of $25, plus an hourly rate for services rendered at the request
of the Manager. Payments by the Manager related to consulting agreements in 1997
were not significant.
PAYABLE TO AFFILIATE
In connection with the Transactions, the member interest of John J.
Stephens in Old Services was redeemed for $1,000 and certain subordinated units
of the MLP. The $1,000 is payable to Old Services by the Company in January
1998. The above transaction has been reflected as a direct reduction of equity
in the accompanying financial statements.
MANAGEMENT AND ADVISORY FEES
In connection with the Weyerhaeuser Acquisition, the Company paid a fee
of $4,135 to Timberlands Management Group (TMG), an entity 100% owned and
controlled by John M. Rudey, Chairman. In addition, during the period from
August 30, 1996 to December 31, 1996, the Company paid TMG management fees of
$2,800. These payments have been recorded in selling, general and administrative
expenses in the accompanying statement of operations.
RECEIVABLE FROM AFFILIATE
During the period from August 30, 1996 through December 31, 1996, the
Company paid $10,000 to TMG. The receivable and the related interest were repaid
in February 1997.
8. MANAGEMENT INCENTIVE PLANS:
The MLP has certain equity related management incentive plans. Under
certain circumstances, compensation expense related to these plans may be
recorded by the MLP. Accordingly, the compensation charge will then be recorded
as compensation expense in the Company's financial statements with a
corresponding decrease to contributed capital.
9. COMMITMENTS:
On August 30, 1996, the Company entered into a wood supply agreement
with Collins to supply a volume of approximately 34 million board feet of
merchantable timber to Collins at market prices. The term of the agreement is
ten years and is renewable for two additional terms of five years, each at the
option of Collins.
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10. QUARTERLY RESULTS FOR 1997 AND 1996 (UNAUDITED):
(thousands of dollars)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
December 31(a) September 30 June 30 March 31(a) Total Year
--------------- ------------ ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1997
Revenues................... $ 36,288 $ 17,261 $ 11,462 $ 12,334 $ 77,345
Gross profit (b)............. 16,511 7,608 4,141 5,258 33,518
Income (loss) before
extraordinary item......... 5,457 (1,051) (3,827) (1,947) (1,368)
1996 (c)
Revenues..................... 12,103
Gross Profit (b)............. 4,245
Net Loss..................... (3,023)
</TABLE>
- --------------------------
(a) The quarter ended December 31, 1997 includes revenues of $11,750 and
related costs of $7,555 from a property sale. The quarter ended March 31, 1997
includes revenues of $3,494 and related costs of $1,191 from a timber deed sale.
(b) Gross profit is calculated as revenues less cost of products sold, cost
of timber and property sales and depreciation, depletion and road amortization.
(c) Due to a separate basis of presentation prior to the Weyerhaeuser
Acquisition on August 30, 1996 and a different ownership structure by the
Predecessor, no information for the quarters ended September 30, 1996 and prior
is presented. See discussion of the Company and the Predecessor's basis of
presentation in Note 1 of the Notes to the Consolidated Financial Statements.
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Exhibit 10.6
Execution Copy
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into on
December 20, 1997, effective as of the 5th day of January, 1998, by and among
U.S. Timberlands Services Company, L.L.C., a Delaware limited liability company
(the "Company"), and Allen E. Symington ("Executive").
Recitals:
- --------
A. The Company desires to employ Executive as its President, and
Executive desires to accept such employment, on the terms and conditions set
forth in this Agreement.
B. The Company serves as both the general partner of U.S. Timberlands
Company, L.P., a Delaware limited partnership ("UST"), and the managing member
of U.S. Timberlands Klamath Falls, L.L.C., a Delaware limited liability company
("USTK," and together with UST and any subsidiary entities of USTK and UST, the
"UST Group").
Agreements:
- ----------
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants hereinafter set forth, the parties agree as follows:
Section 1. Employment.
The Company hereby employs Executive, and Executive hereby accepts
employment with the Company, on the terms and conditions set forth in this
Agreement.
Section 2. Term.
Subject to the provisions of Section 6, Executive's employment by the
Company under this Agreement shall be for a term (the "Term") commencing on
January 5, 1998 and expiring on December 31, 2002.
Section 3. Executive's Duties.
3.1 Duties. Executive shall hold the position of the Company's President.
Subject to the control of the board of directors or other governing body of the
Company (the "Board") and the Chairman, and any limitations set forth in the
operating agreement of the Company (the "Company Agreement") and in the
agreements of limited partnership, operating agreements or charter and bylaws of
the entities within the UST Group, Executive shall, in general, assist the
Chairman of the Company in the supervision and control of all the day-to-day
business and affairs of the Company and the UST Group.
<PAGE>
3.2 Performance of Duties. Executive shall perform Executive's duties and
responsibilities during the Company's normal business hours and at all other
times reasonably necessary to comply with the terms and conditions of this
Agreement. Executive shall devote the time and attention required to the
performance of Executive's duties and responsibilities for and on behalf of the
Company on the terms set forth in this Section 3.2. In addition, Executive may
from time to time serve as a consultant to and/or as a member of the board of
directors of other entities, provided that the Board in good faith determines
that such activities do not unreasonably interfere with the business of the
Company and the UST Group and the performance of Executive's duties hereunder.
The parties acknowledge that Executive currently serves as a board member or
advisory member of various civic and charitable organizations and may continue
to participate in these activities, subject to the limitations set forth in the
first two sentences of this Section 3.2; provided, however, that such continued
participation shall in no event be deemed a violation of the limitations of the
first two sentences of this Section 3.2 unless and until Executive shall have
been notified in writing thereof and afforded a reasonable opportunity to cure
the violation.
3.3 Principal Place of Employment. Executive's principal place of
employment shall be at Seattle, Washington, which shall be a material provision
of this Agreement. The Company shall provide Executive, at such location, with
a private office, secretarial services and such other facilities and support
services as are appropriate to the positions of President and necessary or
appropriate in the performance of Executive's assigned duties.
Section 4. Compensation and Other Benefits.
Executive shall be entitled to receive from the Company the following
compensation and benefits for the services to be rendered by Executive
hereunder:
4.1 Salary and Bonuses. During the Term, the Company shall pay Executive an
annual base salary of $260,000, payable in equal installments during the year in
accordance with the Company's customary practices for senior executives ("Base
Salary"). The amount of Executive's Base Salary may be increased from time to
time by the Board, and, once increased, such higher amount shall become the Base
Salary for all purposes of this Agreement and may not thereafter be reduced. The
Company shall also pay to Executive, to the extent earned, an annual cash bonus,
not to exceed 100% of Base Salary, which shall be based on the performance of
Executive and the UST Group's business as determined annually by the
Compensation Committee of the Board in its discretion; provided that for each of
1998 and 1999 such cash bonus shall be a minimum of 50% of Base Salary. The
Company shall have the right to deduct and withhold from Executive's
compensation all taxes and charges that are currently or that hereafter may be
required by law to be so deducted and withheld.
The Company shall establish a program whereby Executive may, at his option,
defer receipt of any or all of the Base Salary and bonuses otherwise payable to
him under this Agreement. Any amounts so deferred shall be placed in a "rabbi"
trust, with a bank or other financial institution reasonably satisfactory to
Executive as trustee providing the maximum security to Executive without causing
the constructive receipt of income for federal income tax purposes (the
"Deferred Compensation Trust") and distributed, together with interest or other
earnings thereon, according
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<PAGE>
to a payment schedule to be designated by Executive. Terms of the Deferred
Compensation Trust shall be reasonably satisfactory to the Executive and provide
maximum flexibility under applicable Internal Revenue Service regulations. The
Company shall bear the costs of administering the Deferred Compensation Trust.
4.2 Long Term Incentive Plan. Executive shall be entitled to participate in
the Long Term Incentive Plan ("LTIP") adopted by the Company on the terms and
conditions set forth therein. Concurrently with the effectiveness of this
Agreement, Executive will be granted Unit Options (as defined in the LTIP)
pursuant to the LTIP in an amount equal to 12.5% of the number of Unit Options
initially available to be granted under the LTIP and substantially in the form
of the grant agreement attached hereto as Attachment A.
4.3 Participation in Benefit Plans. During the Term, Executive shall be
eligible to participate in all employee benefit plans and arrangements now in
effect or which may hereafter be established that are generally applicable to
other senior executives of the Company, including, without limitation, all life,
group insurance, and medical and dental care plans and all disability,
retirement, 401(k) and other employee benefit plans of the Company, as long as
any such plan or arrangement remains generally applicable to other senior
executives of the Company. Executive shall also be entitled to the same
vacation benefits as are generally available to senior executives of the
Company, provided in any case that Executive shall have a minimum of four weeks'
vacation per year.
4.4 Reimbursement of Expenses. The Company shall reimburse Executive for
reasonable expenses incurred by Executive in the performance of Executive's
duties hereunder in accordance with the policy of the Company for reimbursement
of expenses as adopted by the Board from time to time and generally applicable
to all senior executives of the Company. Executive shall furnish the Company
with the supporting documentation required under the Company's policy in
connection with the reimbursement of such expenses.
Section 5. Membership on the Board.
Executive shall be entitled to membership on the Board in accordance with
the terms of the Company Agreement as in effect from time to time.
Section 6. Termination.
6.1 Termination by the Company Without Cause. The Company may terminate
Executive's employment other than for Cause or Executive becoming Disabled (as
such terms are defined below) at any time during the Term if the Board
determines, in its sole discretion, that the continued employment of Executive
is not in the continued interests of the Company. In the event the Company
terminates Executive's employment pursuant to this Section 6.1, then Executive
shall be paid on termination (i) any unpaid Base Salary earned hereunder prior
to the termination date, (ii) all unused vacation time accrued by Executive as
of the termination date in accordance with the Company's vacation policy for
senior executives, (iii) all unpaid amounts of compensation in which Executive
is vested as of the termination date under any and all incentive compensation
plans or
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<PAGE>
programs of the Company, (iv) any expenses in respect of which Executive has
requested, and is entitled to, reimbursement in accordance with Section 4.6, (v)
a prorated bonus for the year of such termination calculated based on the bonus
being equal to 100% of Base Salary, and (vi) an amount equal to the amount of
Base Salary that Executive would receive if Executive's employment had continued
without change through the remainder of the Term or for 12 months, whichever is
less (items (i) through (iv) above being the "Earned Amounts").
6.2 Termination by the Company for Cause. The Company may terminate this
Agreement at any time, in the discretion of the Board, in the event of (i) any
conviction of Executive for a felony, (ii any material breach by Executive of a
material written agreement between Executive and the Company or the UST Group,
including this Agreement, (ii any breach caused by Executive of the limited
partnership agreement or operating agreement of any member of the UST Group, or
the charter or bylaws of any corporation within the UST Group, provided that
Executive had prior written notice of such agreement or other document and any
amendment thereto (including a copy of the full text thereof) and provided that
such breach has a material adverse effect on the Company, (iv any willful
conduct by Executive materially injurious to the Company or the UST Group or
their respective businesses, (v) any willful failure by Executive to comply with
any material policies, procedures, or directives of the Board, provided that,
Executive shall first be given notice from the Board of such failure and such
failure shall not have been cured within ten days after such notice or, if such
failure is not capable of being cured within ten days, Executive shall not have
commenced and be diligently pursuing in good faith efforts to cure such default,
or (vi any fraud, misappropriation of funds, embezzlement, or other similar acts
of misconduct by Executive with respect to the Company or the UST Group. In the
event the Company terminates Executive's employment pursuant to this Section 6.2
for Cause, then Executive shall be paid on termination the Earned Amounts. For
purposes of this Agreement, no act or failure to act on Executive's part shall
be deemed "willful" unless done, or omitted to be done, in bad faith or without
the reasonable belief that the act or failure to act was in the best interests
of the Company or the UST Group. Any act or failure to act on the basis of
authority given by resolution duly adopted by the Board or on the basis of
advice given by legal counsel for the Company shall be conclusively presumed to
have been done, or omitted to be done, in good faith and in the best interests
of the Company or the UST Group. No termination of Executive's employment shall
be for Cause unless such termination shall have been authorized in advance by a
resolution adopted by the Board and delivered to Executive, following a meeting
of the Board at which Executive (together with his counsel) shall have been
afforded a reasonable opportunity to refute the purported grounds for
termination for Cause.
6.3 Termination Upon Death or Disability of Executive. This Agreement shall
terminate upon the death of Executive, or upon Executive becoming Disabled (as
defined below). In the event of a termination of this Agreement pursuant to this
Section 6.3, Executive (or Executive's estate, if applicable) shall be paid on
termination the Earned Amounts. For purposes of this Agreement, "Disabled" shall
mean that Executive shall have qualified for and be receiving benefits under the
Company's long-term disability insurance plan or, if there is no such plan, that
Executive shall have qualified for and be receiving disability benefits under
the federal Social Security Act.
6.4 Voluntary Resignation for Good Reason. Executive may resign Executive's
employment with the Company at any time and, if such resignation is for "Good
Reason", Executive
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<PAGE>
shall be entitled to the same payments and benefits that Executive would receive
under Section 6.1 (i)-(vi) if Executive's employment were being terminated by
the Company other than for Cause or Executive becoming Disabled. "Good Reason"
shall mean any one or more of the following: (i) failure of the Company to
appoint or re-appoint Executive to the offices of Presi dent or to more senior
offices; (ii failure of the Company's members to elect or re-elect Executive to
the Board; (ii failure of the Company, by act, omission, amendment to the
instruments governing its organization and operation or otherwise, to vest in
Executive the position, duties and responsibilities contemplated by this
Agreement; (iv failure by the Company to pay when due any portion of the
compensation payable to Executive hereunder; (v) any material breach by the
Company of any material provision of this Agreement; or (vi on or following a
Change of Control (as such term is defined in the Company's LTIP as the same may
be amended from time to time), either Executive is assigned any duties or
responsibilities materially inconsistent with, or diminished from, Executive's
duties and responsibilities with the Company and the UST Group immediately prior
to the Change of Control, or, Executive's status, duties, responsibilities,
titles or offices with the Company and the UST Group are materially diminished
from those in effect immediately prior to the Change of Control, as determined
in the good faith opinion of Executive; provided, however, Good Reason shall
exist with respect to a matter described above that is capable of being
corrected by the Company only if such matter is not corrected by the Company
within a reasonable period following its receipt of written notice of such
matter from Executive, and in no event shall a termination by Executive
occurring more than 60 days following any such written notice be for Good
Reason.
Section 7. Covenant Not to Compete; Confidentiality.
7.1 Noncompetition. Unless granted written permission by the Board and
subject to any further restrictions contained in the agreements of limited
partnership within the UST Group, while employed by the Company and for a period
of 12 months after the termination of such employment, Executive covenants that
Executive shall not (i) own (as a proprietor, partner, or stockholder of greater
than 4.9 percent of outstanding equity securities, interests or otherwise) an
interest in, or (ii) participate (as an officer, director, or in any other
capacity) in the management, operation, or control of, or (iii) perform services
as or act in the capacity of any employee, independent contractor, consultant,
or agent of any enterprise which engages in one or more of the following
activities in a state in which the Company or the UST Group is then conducting
business and in which the Company or the UST Group commenced conducting business
prior to the commencement of such activities therein by Executive:
(a) acquisition, exchange, operation or sale of timber-producing real
property or rights to harvest timber, a principal purpose of which is
producing logs or other forest products;
(b) harvesting of timber other than harvesting which is incidental to
the ownership or operation of real property not owned or operated for a
principal purpose of producing logs or other forest products;
5
<PAGE>
(c) sale, exchange or purchase of logs other than sales, exchanges or
purchases which are incidental to the ownership or operation of real
property not owned or operated for a principal purpose of producing logs or
other forest products;
(d) acquisition or sale of any facilities used to convert logs into
lumber, plywood or other wood products;
(e) conversion of logs into lumber, plywood or other wood products;
(f) marketing and sale of lumber, plywood or other wood products;
(g) import or export of logs, lumber, plywood or other wood products
to or from the United States;
(h) manufacture, marketing or sale of manufactured, engineered, or
substitute wood products to the extent such products compete with products
produced by the Company or any member of the UST Group; or
(i) any and all other activities relating to the United States forest
products industry to the extent such activities compete with activities of
the Company or any member of the UST Group;
The noncompetition restrictions set forth in this Section 7.1 shall not apply in
the event of a termination of this Agreement pursuant to Section 6.1 or 6.4 nor,
in the event of Executive's termination due to Executive becoming Disabled in
accordance with Section 6.3, shall they apply following Executive ceasing to be
Disabled unless the Company offers to re-employ Executive on terms and
conditions at least as favorable as those set forth in this Agreement.
7.2 Confidentiality. Executive acknowledges that in the course of
Executive's employment by the Company, including as a member of the Board
following employment, if applicable, Executive will be furnished and have access
to certain information concerning the business, financial condition, operations,
assets and liabilities of the Company and the UST Group that is confidential or
proprietary in nature. All such information (irrespective of the form of
communication) is hereinafter collectively referred to as the "Information."
Until the later to occur of (i) the date of termination of Executive's
employment hereunder or (ii) the date of Executive's resignation or removal from
the Board, and for a period of 18 months thereafter, Executive agrees to keep
the Information confidential and agrees that Executive will use the Information
solely for the purpose of performing Executive's duties hereunder or as a member
of the Board or as otherwise authorized by the Company. This Agreement shall be
inoperative as to such portions of the Information which (a) are or become
generally available to the public other than as a result of a disclosure by
Executive in violation of this Agreement, (b) become available to Executive on a
non-confidential basis from a source other than the Company or the UST Group
that is not bound by an obligation of confidentiality to such entity or
entities, or (c) are required to be disclosed by an order or decree of a court
or other tribunal of competent jurisdiction, provided the Company is given
prompt notice of, and the opportunity to contest disclosure under, such order or
decree. Upon termination of this Agreement, Executive will return the
Information furnished by the Company or the UST Group and any documents that
contain, reflect, or are based upon, in whole or in part, the Information.
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<PAGE>
7.3 Equitable Relief. Executive acknowledges and agrees that it would be
difficult to measure damage to the Company or the UST Group from any breach by
Executive of Section 7.1 or 7.2 and that monetary damages would be an inadequate
remedy for any such breach. Accordingly, Executive agrees that if Executive
shall breach Section 7.1 or 7.2, the Company shall be entitled, in addition to
all other remedies it may have at law or in equity, to an injunction or other
appropriate orders or equitable relief to restrain any such breach, without
showing or proving any actual damage sustained by the Company or the UST Group.
Executive further agrees to waive any requirement for the securing or posting of
any bond in connection with such remedies.
7.4 Executive's Acknowledgment. Executive hereby expressly acknowledges and
agrees that (i) the restrictions and obligations set forth in and imposed by
this Section 7 will not prevent Executive from obtaining gainful employment in
Executive's field of expertise or cause Executive undue hardship, and (ii) in
view and consideration of the substantial benefits Executive will receive from
the Company pursuant to this Agreement and the Company Agreement, the
restrictions and obligations imposed on Executive under this Section 7 are
reasonable and necessary to protect the legitimate business interests of the
Company and its members and the UST Group.
Section 8. Indemnification.
(a) During the Term and for a period of six years thereafter, the
Company shall cause Executive to be covered by and named as an insured
under any policy or contract of insurance obtained by it to insure its
directors and officers against personal liability for acts or omissions in
connection with service as an officer or director of the Company or service
in other capacities at the request of the Company. The coverage provided
to Executive pursuant to this Section 8 shall be of a scope and on terms
and conditions at least as favorable as the coverage (if any) provided to
any other officer or director of the Company.
(b) To the maximum extent permitted under applicable law, during the
Term and for a period of six years thereafter, the Company shall indemnify
Executive against and hold Executive harmless from any costs, liabilities,
losses and exposures to the fullest extent and on the most favorable terms
and conditions that similar indemnification is offered to any director or
officer of the Company or any subsidiary or affiliate thereof.
Section 9. Representations and Warranties.
9.1 By Executive. Except for the conditions and limitations set forth in
the Waiver, Settlement and Confidentiality Agreement with Executive's prior
employer, Simpson Investment Company, a copy of which is attached hereto as
Exhibit B and the terms and conditions of which the parties hereto agree
Executive may comply with without breaching the terms of this Agreement,
Executive represents and warrants to the Company that (i) Executive is under no
contractual or other restriction or obligation which would prevent the
performance of Executive's duties hereunder or interfere with the rights of the
Company hereunder and (ii) this Agreement has been duly executed and delivered
by Executive, is the legal, valid and binding obligation of Executive, and is
enforceable against Executive in accordance with its terms, except that no
representation or warranty is made with respect to the provisions of Section 7.
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<PAGE>
9.2 By the Company. The Company represents and warrants to Executive that
(i) it has all requisite limited liability company power and authority to
execute, deliver and perform this Agreement, (ii) all necessary proceedings of
the Company have been duly taken to authorize the execution, delivery and
performance of this Agreement, and (iii) this Agreement has been duly
authorized, executed and delivered by the Company, is the legal, valid and
binding obligation of the Company, and is enforceable against the Company in
accordance with its terms.
Section 10. Life Insurance.
If requested by the Company, Executive shall submit to such physical
examinations by a physician and otherwise take such actions and execute and
deliver such documents as may be reasonably necessary to enable the Company to
obtain life insurance on the life of Executive for the benefit of the Company,
but in no event shall Executive's failure to qualify for such coverage, as a
result of the outcome of the medical examination or otherwise, be grounds for a
termination of Executive's employment.
Section 11. Notices.
Any notice given pursuant to this Agreement shall be in writing and shall
be deemed given on the earlier of the date (i) the notice is personally
delivered to the party to be notified, (ii) that is three days after the notice
is mailed, postage prepaid, certified with return receipt requested, addressed
as follows, or at such other address as a party may from time to time designate
by notice to the other party, (iii) the notice is delivered at the party's
address via courier service, or (iv) the notice is received by fax or
telecopier:
To the Company: U.S. Timberlands Services Company, L.L.C.
625 Madison Avenue - Suite 10-B
New York, New York 10022
Attn: John M. Rudey
Facsimile No: (212) 758-4009
To Executive: Allen E. Symington
7502 51st Avenue, N.E.
Seattle, Washington 98105
Section 12. General Provisions.
12.1 Remedies on Default. In the event either party breaches this
Agreement, the other party shall be entitled to pursue all remedies available at
law or in equity. Except as otherwise provided herein, in the event this
Agreement is breached by either party, the non-breaching party shall not
terminate this Agreement without notice and a reasonable opportunity to cure
such breach.
12.2 Assignment; Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company and any successor of the Company, by merger
or otherwise. Except as provided in the preceding sentence, this Agreement, and
the rights and obligations of the parties
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hereunder, are personal and neither this Agreement, nor any right, benefit, or
obligation of either party hereto, shall be subject to voluntary or involuntary
assignment, alienation or transfer, whether by operation of law or otherwise,
without the prior written consent of the other party. Subject to the foregoing,
the provisions of this Agreement shall be binding upon and inure to the benefit
of the parties and their respective heirs, personal representatives,
administrators, successors, and permitted assigns.
12.3 Waiver. Failure of any party at any time to require performance of
any provision of this Agreement shall not limit such party's right to enforce
such provision, nor shall any waiver of any breach of any provision of this
Agreement constitute a waiver of any succeeding breach of such provision or a
waiver of such provision itself. No attempted or purported waiver of any
provision of this Agreement shall be effective unless set forth in writing and
signed by the party to be bound.
12.4 Amendment. This Agreement may not be modified or amended except by
the written agreement of the parties.
12.5 Severability. The agreements and covenants contained in this
Agreement are severable, and in the event any of the agreements and covenants
contained in this Agreement should be held to be invalid by any court or
tribunal of competent jurisdiction, this Agreement shall be interpreted as if
such invalid agreements and covenants were not contained herein; provided,
however, that if in any legal proceeding a court shall hold unenforceable the
covenants contained in Section 7 by reason of their extent or duration or
otherwise, any such covenant shall be reduced in scope to the extent required by
law and enforced in its reduced form.
12.6 Integration. This Agreement contains the entire agreement and
understanding of the parties with respect to the employment of Executive by the
Company and supersedes all prior and contemporaneous agreements (oral or
written) between them with respect to such subject matter.
12.7 Attorneys' Fees. If any legal action or other proceeding is brought
for the enforcement or interpretation of this Agreement, or because of an
alleged dispute or breach in connection with any of the provisions of this
Agreement, if Executive is the successful or prevailing party, Executive shall
be entitled to recover from the Company reasonable attorneys' fees and other
costs incurred by Executive in connection with that action or proceeding, and in
any petition for appeal or review therefrom, in addition to any other relief to
which Executive may be entitled. The Company shall reimburse Executive for the
reasonable attorney's fees and expenses Executive has incurred in the
negotiation of this Agreement.
12.8 Third Party Beneficiaries. This Agreement does not create, and shall
not be construed as creating, any rights enforceable by any person not a party
to this Agreement.
12.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
12.10 Survival. In the event of termination of this Agreement by either
party, this Agreement shall become void and there shall be no liability on the
part of Executive or the Company except to the extent such termination results
from the breach by a party hereto of its obligations hereunder (in which case
Section 12.1 shall apply); provided that Sections 6.1, 6.2, 6.3, 6.4, 7, 8, 11
and 12.7 shall survive the termination of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
The Company: U.S. TIMBERLANDS SERVICES COMPANY, L.L.C.,
a Delaware limited liability company
/s/ John M. Rudey
By: ______________________________________
Name: John M. Rudey
Title: Chairman
/s/ Allen E. Symington
Executive: ______________________________________
Allen E. Symington
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Exhibit 10.7
Execution Copy
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered on
December 19, 1997 effective as of the 12th day of January, 1998, by and among
U.S. Timberlands Services Company, L.L.C., a Delaware limited liability company
(the "Company"), and Robert E.L. Michie, Jr. ("Executive").
Recitals:
- --------
A. The Company desires to employ Executive as its Vice President--
Operations, and Executive desires to accept such employment, on the terms and
conditions set forth in this Agreement.
B. The Company serves as both the general partner of U.S. Timberlands
Company, L.P., a Delaware limited partnership ("UST"), and the managing member
of U.S. Timberlands Klamath Falls, L.L.C., a Delaware limited liability company
("USTK," and together with UST and any subsidiary entities of USTK and UST, the
"UST Group").
Agreements:
- ----------
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants hereinafter set forth, the parties agree as follows:
Section 1. Employment.
The Company hereby employs Executive, and Executive hereby accepts
employment with the Company, on the terms and conditions set forth in this
Agreement.
Section 2. Term.
Subject to the provisions of Section 6, Executive's employment by the
Company under this Agreement shall be for a term (the "Term") commencing on
January 12, 1998 and expiring on December 31, 2002.
Section 3. Executive's Duties.
3.1 Duties. Executive shall hold the position of the Company's Vice
President--Operations. Subject to the control of the board of directors or other
governing body of the Company (the "Board") and the Chairman, and any
limitations set forth in the operating agreement of the Company (the "Company
Agreement") and in the agreements of limited partnership, operating agreements
or charter and bylaws of the entities within the UST Group,
<PAGE>
Executive shall, in general, assist the President of the Company in the
supervision and control of all the day-to-day business and affairs of the
Company and the UST Group.
3.2 Performance of Duties. Executive shall perform Executive's duties and
responsibilities during the Company's normal business hours and at all other
times reasonably necessary to comply with the terms and conditions of this
Agreement. Executive shall devote the time and attention required to the
performance of Executive's duties and responsibilities for and on behalf of the
Company on the terms set forth in this Section 3.2. In addition, Executive may
from time to time serve as a consultant to and/or as a member of the board of
directors of other entities, provided that the Board in good faith determines
that such activities do not unreasonably interfere with the business of the
Company and the UST Group and the performance of Executive's duties hereunder.
The parties acknowledge that Executive currently serves as a board member or
advisory member of various civic and charitable organizations and may continue
to participate in these activities, subject to the limitations set forth in the
first two sentences of this Section 3.2; provided, however, that such continued
participation shall in no event be deemed a violation of the limitations of the
first two sentences of this Section 3.2 unless and until Executive shall have
been notified in writing thereof and afforded a reasonable opportunity to cure
the violation.
3.3 Principal Place of Employment. Executive's principal place of
employment shall be at the Company's principal executive offices from time to
time. The Company shall provide Executive, at such location, with a private
office, secretarial services and such other facilities and support services as
are appropriate to the positions of Vice President--Operations and necessary or
appropriate in the performance of Executive's assigned duties.
Section 4. Compensation and Other Benefits.
Executive shall be entitled to receive from the Company the following
compensation and benefits for the services to be rendered by Executive
hereunder:
4.1 Salary and Bonuses. During the Term, the Company shall pay Executive
an annual base salary of $175,000, payable in equal installments during the year
in accordance with the Company's customary practices for senior executives
("Base Salary"). The amount of Executive's Base Salary may be increased from
time to time by the Board, and, once increased, such higher amount shall become
the Base Salary for all purposes of this Agreement and may not thereafter be
reduced. The Company shall also pay to Executive, to the extent earned, an
annual cash bonus, not to exceed 100% of Base Salary, which shall be based on
the performance of Executive and the UST Group's business as determined annually
by the Compensation Committee of the Board in its discretion; provided that for
each of 1998 and 1999 such cash bonus shall be a minimum of 50% of Base Salary.
The Company shall have the right to deduct and withhold from Executive's
compensation all taxes and charges that are currently or that hereafter may be
required by law to be so deducted and withheld.
The Company shall establish a program whereby Executive may, at his option,
defer receipt of any or all of the Base Salary and bonuses otherwise payable to
him under this Agreement. Any amounts so deferred shall be placed in a "rabbi"
trust, with a bank or other financial institution
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reasonably satisfactory to Executive as trustee providing the maximum security
to Executive without causing the constructive receipt of income for federal
income tax purposes (the "Deferred Compensation Trust") and distributed,
together with interest or other earnings thereon, according to a payment
schedule to be designated by Executive. Terms of the Deferred Compensation Trust
shall be reasonably satisfactory to the Executive and provide maximum
flexibility under applicable Internal Revenue Service regulations. The Company
shall bear the costs of administering the Deferred Compensation Trust.
4.2 Long Term Incentive Plan. Executive shall be entitled to participate
in the Long Term Incentive Plan ("LTIP") adopted by the Company on the terms and
conditions set forth therein. Concurrently with the effectiveness of this
Agreement, Executive will be granted Unit Options (as defined in the LTIP)
pursuant to the LTIP in an amount equal to 7.5% of the number of Unit Options
initially available to be granted under the LTIP and substantially in the form
of the grant agreement attached hereto as Attachment A.
4.3 Participation in Benefit Plans. During the Term, Executive shall be
eligible to participate in all employee benefit plans and arrangements now in
effect or which may hereafter be established that are generally applicable to
other senior executives of the Company, including, without limitation, all life,
group insurance, and medical and dental care plans and all disability,
retirement, 401(k) and other employee benefit plans of the Company, as long as
any such plan or arrangement remains generally applicable to other senior
executives of the Company. Executive shall also be entitled to the same
vacation benefits as are generally available to senior executives of the
Company, provided in any case that Executive shall have a minimum of four weeks'
vacation per year.
4.4 Reimbursement of Expenses. The Company shall reimburse Executive for
reasonable expenses incurred by Executive in the performance of Executive's
duties hereunder in accordance with the policy of the Company for reimbursement
of expenses as adopted by the Board from time to time and generally applicable
to all senior executives of the Company. Executive shall furnish the Company
with the supporting documentation required under the Company's policy in
connection with the reimbursement of such expenses.
4.5 Automobile/Commuting Allowance. Executive shall be entitled to receive
a monthly automobile/commuting allowance of up to $1,000.00 payable on the first
of each month during the Term, which will fully reimburse Executive for the cost
of either (i) leasing or purchasing, and the insurance therefor, of an
automobile for Executive's business use or (ii) commuting to Executive's
principal place of employment. Executive shall purchase and maintain automobile
insurance covering the automobile with such limits as may be required by the
Company from time to time.
Section 5. [Intentionally Omitted].
Section 6. Termination.
6.1 Termination by the Company Without Cause. The Company may terminate
Executive's employment other than for Cause or Executive becoming Disabled (as
such terms are
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defined below) at any time during the Term if the Board determines, in its sole
discretion, that the continued employment of Executive is not in the continued
interests of the Company. In the event the Company terminates Executive's
employment pursuant to this Section 6.1, then Executive shall be paid on
termination (i) any unpaid Base Salary earned hereunder prior to the termination
date, (ii) all unused vacation time accrued by Executive as of the termination
date in accordance with the Company's vacation policy for senior executives,
(iii) all unpaid amounts of compensation in which Executive is vested as of the
termination date under any and all incentive compensation plans or programs of
the Company, (iv) any expenses in respect of which Executive has requested, and
is entitled to, reimbursement in accordance with Section 4.6, (v) a prorated
bonus for the year of such termination calculated based on the bonus being equal
to 100% of Base Salary, and (vi) an amount equal to the amount of Base Salary
that Executive would receive if Executive's employment had continued without
change through the remainder of the Term or for 12 months, whichever is less
(items (i) through (iv) above being the "Earned Amounts").
6.2 Termination by the Company for Cause. The Company may terminate this
Agreement at any time, in the discretion of the Board, in the event of (i) any
conviction of Executive for a felony, (ii any material breach by Executive of a
material written agreement between Executive and the Company or the UST Group,
including this Agreement, (ii any breach caused by Executive of the limited
partnership agreement or operating agreement of any member of the UST Group, or
the charter or bylaws of any corporation within the UST Group, provided that
Executive had prior written notice of such agreement or other document and any
amendment thereto (including a copy of the full text thereof) and provided that
such breach has a material adverse effect on the Company, (iv any willful
conduct by Executive materially injurious to the Company or the UST Group or
their respective businesses, (v) any willful failure by Executive to comply with
any material policies, procedures, or directives of the Board, provided that,
Executive shall first be given notice from the Board of such failure and such
failure shall not have been cured within ten days after such notice or, if such
failure is not capable of being cured within ten days, Executive shall not have
commenced and be diligently pursuing in good faith efforts to cure such default,
or (vi any fraud, misappropriation of funds, embezzlement, or other similar acts
of misconduct by Executive with respect to the Company or the UST Group. In the
event the Company terminates Executive's employment pursuant to this Section 6.2
for Cause, then Executive shall be paid on termination the Earned Amounts. For
purposes of this Agreement, no act or failure to act on Executive's part shall
be deemed "willful" unless done, or omitted to be done, in bad faith or without
the reasonable belief that the act or failure to act was in the best interests
of the Company or the UST Group. Any act or failure to act on the basis of
authority given by resolution duly adopted by the Board or on the basis of
advice given by legal counsel for the Company shall be conclusively presumed to
have been done, or omitted to be done, in good faith and in the best interests
of the Company or the UST Group. No termination of Executive's employment shall
be for Cause unless such termination shall have been authorized in advance by a
resolution adopted by the Board and delivered to Executive, following a meeting
of the Board at which Executive (together with his counsel) shall have been
afforded a reasonable opportunity to refute the purported grounds for
termination for Cause.
6.3 Termination Upon Death or Disability of Executive. This Agreement
shall terminate upon the death of Executive, or upon Executive becoming Disabled
(as defined below). In the event of a termination of this Agreement pursuant to
this Section 6.3, Executive (or Executive's estate, if
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applicable) shall be paid on termination the Earned Amounts. For purposes of
this Agreement, "Disabled" shall mean that Executive shall have qualified for
and be receiving benefits under the Company's long-term disability insurance
plan or, if there is no such plan, that Executive shall have qualified for and
be receiving disability benefits under the federal Social Security Act.
6.4 Voluntary Resignation for Good Reason. Executive may resign
Executive's employment with the Company at any time and, if such resignation is
for "Good Reason", Executive shall be entitled to the same payments and benefits
that Executive would receive under Section 6.1 (i)-(vi) if Executive's
employment were being terminated by the Company other than for Cause or
Executive becoming Disabled. "Good Reason" shall mean any one or more of the
following: (i) failure of the Company to appoint or re-appoint Executive to the
offices of Vice President-- Operations or to more senior offices; (ii failure of
the Company, by act, omission, amendment to the instruments governing its
organization and operation or otherwise, to vest in Executive the position,
duties and responsibilities contemplated by this Agreement; (ii failure by the
Company to pay when due any portion of the compensation payable to Executive
hereunder; (iv any material breach by the Company of any material provision of
this Agreement; or (v) on or following a Change of Control (as such term is
defined in the Company's LTIP as the same may be amended from time to time),
either Executive is assigned any duties or responsibilities materially
inconsistent with, or diminished from, Executive's duties and responsibilities
with the Company and the UST Group immediately prior to the Change of Control,
or, Executive's status, duties, responsibilities, titles or offices with the
Company and the UST Group are materially diminished from those in effect
immediately prior to the Change of Control, as determined in the good faith
opinion of Executive; provided, however, Good Reason shall exist with respect to
a matter described above that is capable of being corrected by the Company only
if such matter is not corrected by the Company within a reasonable period
following its receipt of written notice of such matter from Executive, and in no
event shall a termination by Executive occurring more than 60 days following any
such written notice be for Good Reason.
Section 7. Covenant Not to Compete; Confidentiality.
7.1 Noncompetition. Unless granted written permission by the Board and
subject to any further restrictions contained in the agreements of limited
partnership within the UST Group, while employed by the Company and for a period
of 12 months after the termination of such employment, Executive covenants that
Executive shall not (i) own (as a proprietor, partner, or stockholder of greater
than 4.9 percent of outstanding equity securities, interests or otherwise) an
interest in, or (ii) participate (as an officer, director, or in any other
capacity) in the management, operation, or control of, or (iii) perform services
as or act in the capacity of any employee, independent contractor, consultant,
or agent of any enterprise which engages in one or more of the following
activities in a state in which the Company or the UST Group is then conducting
business and in which the Company or the UST Group commenced conducting business
prior to the commencement of such activities therein by Executive:
(a) acquisition, exchange, operation or sale of timber-producing real
property or rights to harvest timber, a principal purpose of which is
producing logs or other forest products;
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(b) harvesting of timber other than harvesting which is incidental to
the ownership or operation of real property not owned or operated for a
principal purpose of producing logs or other forest products;
(c) sale, exchange or purchase of logs other than sales, exchanges or
purchases which are incidental to the ownership or operation of real
property not owned or operated for a principal purpose of producing logs or
other forest products;
(d) acquisition or sale of any facilities used to convert logs into
lumber, plywood or other wood products;
(e) conversion of logs into lumber, plywood or other wood products;
(f) marketing and sale of lumber, plywood or other wood products;
(g) import or export of logs, lumber, plywood or other wood products
to or from the United States;
(h) manufacture, marketing or sale of manufactured, engineered, or
substitute wood products to the extent such products compete with products
produced by the Company or any member of the UST Group; or
(i) any and all other activities relating to the United States forest
products industry to the extent such activities compete with activities of
the Company or any member of the UST Group;
The noncompetition restrictions set forth in this Section 7.1 shall not apply in
the event of a termination of this Agreement pursuant to Section 6.1 or 6.4 nor,
in the event of Executive's termination due to Executive becoming Disabled in
accordance with Section 6.3, shall they apply following Executive ceasing to be
Disabled unless the Company offers to re-employ Executive on terms and
conditions at least as favorable as those set forth in this Agreement.
7.2 Confidentiality. Executive acknowledges that in the course of
Executive's employment by the Company, Executive will be furnished and have
access to certain information concerning the business, financial condition,
operations, assets and liabilities of the Company and the UST Group that is
confidential or proprietary in nature. All such information (irrespective of the
form of communication) is hereinafter collectively referred to as the
"Information." Until the date of termination of Executive's employment
hereunder, and for a period of 18 months thereafter, Executive agrees to keep
the Information confidential and agrees that Executive will use the Information
solely for the purpose of performing Executive's duties hereunder or as
otherwise authorized by the Company. This Agreement shall be inoperative as to
such portions of the Information which (a) are or become generally available to
the public other than as a result of a disclosure by Executive in violation of
this Agreement, (b) become available to Executive on a non-confidential basis
from a source other than the Company or the UST Group that is not bound by an
obligation of confidentiality to such entity or entities, or (c) are required to
be disclosed by an order
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or decree of a court or other tribunal of competent jurisdiction, provided the
Company is given prompt notice of, and the opportunity to contest disclosure
under, such order or decree. Upon termination of this Agreement, Executive will
return the Information furnished by the Company or the UST Group and any
documents that contain, reflect, or are based upon, in whole or in part, the
Information.
7.3 Equitable Relief. Executive acknowledges and agrees that it would be
difficult to measure damage to the Company or the UST Group from any breach by
Executive of Section 7.1 or 7.2 and that monetary damages would be an inadequate
remedy for any such breach. Accordingly, Executive agrees that if Executive
shall breach Section 7.1 or 7.2, the Company shall be entitled, in addition to
all other remedies it may have at law or in equity, to an injunction or other
appropriate orders or equitable relief to restrain any such breach, without
showing or proving any actual damage sustained by the Company or the UST Group.
Executive further agrees to waive any requirement for the securing or posting of
any bond in connection with such remedies.
7.4 Executive's Acknowledgment. Executive hereby expressly acknowledges
and agrees that (i) the restrictions and obligations set forth in and imposed by
this Section 7 will not prevent Executive from obtaining gainful employment in
Executive's field of expertise or cause Executive undue hardship, and (ii) in
view and consideration of the substantial benefits Executive will receive from
the Company pursuant to this Agreement and the Company Agreement, the
restrictions and obligations imposed on Executive under this Section 7 are
reasonable and necessary to protect the legitimate business interests of the
Company and its members and the UST Group.
Section 8. Indemnification.
(a) During the Term and for a period of six years thereafter, the
Company shall cause Executive to be covered by and named as an insured
under any policy or contract of insurance obtained by it to insure its
directors and officers against personal liability for acts or omissions in
connection with service as an officer or director of the Company or service
in other capacities at the request of the Company. The coverage provided
to Executive pursuant to this Section 8 shall be of a scope and on terms
and conditions at least as favorable as the coverage (if any) provided to
any other officer or director of the Company.
(b) To the maximum extent permitted under applicable law, during the
Term and for a period of six years thereafter, the Company shall indemnify
Executive against and hold Executive harmless from any costs, liabilities,
losses and exposures to the fullest extent and on the most favorable terms
and conditions that similar indemnification is offered to any director or
officer of the Company or any subsidiary or affiliate thereof.
Section 9. Representations and Warranties.
9.1 By Executive. Executive represents and warrants to the Company that (i)
Executive is under no contractual or other restriction or obligation which would
prevent the performance of Executive's duties hereunder or interfere with the
rights of the Company hereunder and (ii) this Agreement has been duly executed
and delivered by Executive, is the legal, valid and binding
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obligation of Executive, and is enforceable against Executive in accordance with
its terms, except that no representation or warranty is made with respect to the
provisions of Section 7.
9.2 By the Company. The Company represents and warrants to Executive that
(i) it has all requisite limited liability company power and authority to
execute, deliver and perform this Agreement, (ii) all necessary proceedings of
the Company have been duly taken to authorize the execution, delivery and
performance of this Agreement, and (iii) this Agreement has been duly
authorized, executed and delivered by the Company, is the legal, valid and
binding obligation of the Company, and is enforceable against the Company in
accordance with its terms.
Section 10. Life Insurance.
If requested by the Company, Executive shall submit to such physical
examinations by a physician and otherwise take such actions and execute and
deliver such documents as may be reasonably necessary to enable the Company to
obtain life insurance on the life of Executive for the benefit of the Company,
but in no event shall Executive's failure to qualify for such coverage, as a
result of the outcome of the medical examination or otherwise, be grounds for a
termination of Executive's employment.
Section 11. Notices.
Any notice given pursuant to this Agreement shall be in writing and shall
be deemed given on the earlier of the date (i) the notice is personally
delivered to the party to be notified, (ii) that is three days after the notice
is mailed, postage prepaid, certified with return receipt requested, addressed
as follows, or at such other address as a party may from time to time designate
by notice to the other party, (iii) the notice is delivered at the party's
address via courier service, or (iv) the notice is received by fax or
telecopier:
To the Company: U.S. Timberlands Services Company, L.L.C.
625 Madison Avenue - Suite 10-B
New York, New York 10022
Attn: John M. Rudey
Facsimile No: (212) 758-4009
To Executive: Robert E. L. Michie, Jr.
1410 Westview Place NW
Olympia, Washington 98502
Section 12. General Provisions.
12.1 Remedies on Default. In the event either party breaches this
Agreement, the other party shall be entitled to pursue all remedies available at
law or in equity. Except as otherwise provided herein, in the event this
Agreement is breached by either party, the non-breaching party shall not
terminate this Agreement without notice and a reasonable opportunity to cure
such breach.
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12.2 Assignment; Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company and any successor of the Company, by merger
or otherwise. Except as provided in the preceding sentence, this Agreement, and
the rights and obligations of the parties hereunder, are personal and neither
this Agreement, nor any right, benefit, or obligation of either party hereto,
shall be subject to voluntary or involuntary assignment, alienation or transfer,
whether by operation of law or otherwise, without the prior written consent of
the other party. Subject to the foregoing, the provisions of this Agreement
shall be binding upon and inure to the benefit of the parties and their
respective heirs, personal representatives, administrators, successors, and
permitted assigns.
12.3 Waiver. Failure of any party at any time to require performance of
any provision of this Agreement shall not limit such party's right to enforce
such provision, nor shall any waiver of any breach of any provision of this
Agreement constitute a waiver of any succeeding breach of such provision or a
waiver of such provision itself. No attempted or purported waiver of any
provision of this Agreement shall be effective unless set forth in writing and
signed by the party to be bound.
12.4 Amendment. This Agreement may not be modified or amended except by
the written agreement of the parties.
12.5 Severability. The agreements and covenants contained in this
Agreement are severable, and in the event any of the agreements and covenants
contained in this Agreement should be held to be invalid by any court or
tribunal of competent jurisdiction, this Agreement shall be interpreted as if
such invalid agreements and covenants were not contained herein; provided,
however, that if in any legal proceeding a court shall hold unenforceable the
covenants contained in Section 7 by reason of their extent or duration or
otherwise, any such covenant shall be reduced in scope to the extent required by
law and enforced in its reduced form.
12.6 Integration. This Agreement contains the entire agreement and
understanding of the parties with respect to the employment of Executive by the
Company and supersedes all prior and contemporaneous agreements (oral or
written) between them with respect to such subject matter.
12.7 Attorneys' Fees. If any legal action or other proceeding is brought
for the enforcement or interpretation of this Agreement, or because of an
alleged dispute or breach in connection with any of the provisions of this
Agreement, if Executive is the successful or prevailing party, Executive shall
be entitled to recover from the Company reasonable attorneys' fees and other
costs incurred by Executive in connection with that action or proceeding, and in
any petition for appeal or review therefrom, in addition to any other relief to
which Executive may be entitled. The Company shall reimburse Executive for the
reasonable attorney's fees and expenses Executive has incurred in the
negotiation of this Agreement.
12.8 Third Party Beneficiaries. This Agreement does not create, and shall
not be construed as creating, any rights enforceable by any person not a party
to this Agreement.
12.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
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12.10 Survival. In the event of termination of this Agreement by either
party, this Agreement shall become void and there shall be no liability on the
part of Executive or the Company except to the extent such termination results
from the breach by a party hereto of its obligations hereunder (in which case
Section 12.1 shall apply); provided that Sections 6.1, 6.2, 6.3, 6.4, 7, 8, 11
and 12.7 shall survive the termination of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
The Company: U.S. TIMBERLANDS SERVICES COMPANY, L.L.C.,
a Delaware limited liability company
/s/ John M. Rudey
By: _______________________________________
Name: John M. Rudey
Title: Chairman
/s/ Robert E. L. Michie
Executive: _______________________________________
Robert E. L. Michie
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Exhibit 10.8
Execution Copy
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered as of the
5th day of January, 1998, by and among U.S. Timberlands Services Company,
L.L.C., a Delaware limited liability company (the "Company"), and John C.
McDowell ("Executive").
Recitals:
- --------
A. The Company desires to employ Executive as its Vice President--Finance
and Controller, and Executive desires to accept such employment, on the terms
and conditions set forth in this Agreement.
B. The Company serves as both the general partner of U.S. Timberlands
Company, L.P., a Delaware limited partnership ("UST"), and the managing member
of U.S. Timberlands Klamath Falls, L.L.C., a Delaware limited liability company
("USTK," and together with UST and any subsidiary entities of USTK and UST, the
"UST Group").
Agreements:
- ----------
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants hereinafter set forth, the parties agree as follows:
Section 1. Employment.
The Company hereby employs Executive, and Executive hereby accepts
employment with the Company, on the terms and conditions set forth in this
Agreement.
Section 2. Term.
Subject to the provisions of Section 6, Executive's employment by the
Company under this Agreement shall be for a term (the "Term") commencing on
January 5, 1998 and expiring on December 31, 2002.
Section 3. Executive's Duties.
3.1 Duties. Executive shall hold the position of the Company's Vice
President--Finance and Controller. Subject to the control of the board of
directors or other governing body of the Company (the "Board") and the Chairman,
and any limitations set forth in the operating agreement of the Company (the
"Company Agreement") and in the agreements of limited partnership, operating
agreements or charter and bylaws of the entities within the UST Group, Executive
shall, in general, assist the President and Chief Financial Officer of the
Company in the supervision and control of all the day-to-day financial and
accounting affairs of the Company and the UST Group.
<PAGE>
3.2 Performance of Duties. Executive shall perform Executive's duties and
responsibilities during the Company's normal business hours and at all other
times reasonably necessary to comply with the terms and conditions of this
Agreement. Executive shall devote the time and attention required to the
performance of Executive's duties and responsibilities for and on behalf of the
Company on the terms set forth in this Section 3.2. In addition, Executive may
from time to time serve as a consultant to and/or as a member of the board of
directors of other entities, provided that the Board in good faith determines
that such activities do not unreasonably interfere with the business of the
Company and the UST Group and the performance of Executive's duties hereunder.
The parties acknowledge that Executive currently serves as a board member or
advisory member of various civic and charitable organizations and may continue
to participate in these activities, subject to the limitations set forth in the
first two sentences of this Section 3.2; provided, however, that such continued
participation shall in no event be deemed a violation of the limitations of the
first two sentences of this Section 3.2 unless and until Executive shall have
been notified in writing thereof and afforded a reasonable opportunity to cure
the violation.
3.3 Principal Place of Employment. Executive's principal place of
employment shall be at the Company's principal executive offices from time to
time. The Company shall provide Executive, at such location, with a private
office, secretarial services and such other facilities and support services as
are appropriate to the positions of Vice President--Finance and Controller and
necessary or appropriate in the performance of Executive's assigned duties.
Section 4. Compensation and Other Benefits.
Executive shall be entitled to receive from the Company the following
compensation and benefits for the services to be rendered by Executive
hereunder:
4.1 Salary and Bonuses. During the Term, the Company shall pay Executive an
annual base salary of $145,000, payable in equal installments during the year in
accordance with the Company's customary practices for senior executives ("Base
Salary"). The amount of Executive's Base Salary may be increased from time to
time by the Board, and, once increased, such higher amount shall become the Base
Salary for all purposes of this Agreement and may not thereafter be reduced. The
Company shall also pay to Executive, to the extent earned, an annual cash bonus,
not to exceed 100% of Base Salary, which shall be based on the performance of
Executive and the UST Group's business as determined annually by the
Compensation Committee of the Board in its discretion; provided that for each of
1998 and 1999 such cash bonus shall be a minimum of 50% of Base Salary. The
Company shall have the right to deduct and withhold from Executive's
compensation all taxes and charges that are currently or that hereafter may be
required by law to be so deducted and withheld.
The Company shall establish a program whereby Executive may, at his option,
defer receipt of any or all of the Base Salary and bonuses otherwise payable to
him under this Agreement. Any amounts so deferred shall be placed in a "rabbi"
trust, with a bank or other financial institution reasonably satisfactory to
Executive as trustee providing the maximum security to Executive without causing
the constructive receipt of income for federal income tax purposes (the
"Deferred Compensation Trust") and distributed, together with interest or other
earnings thereon, according
2
<PAGE>
to a payment schedule to be designated by Executive. Terms of the Deferred
Compensation Trust shall be reasonably satisfactory to the Executive and provide
maximum flexibility under applicable Internal Revenue Service regulations. The
Company shall bear the costs of administering the Deferred Compensation Trust.
4.2 Long Term Incentive Plan. Executive shall be entitled to participate in
the Long Term Incentive Plan ("LTIP") adopted by the Company on the terms and
conditions set forth therein. Concurrently with the effectiveness of this
Agreement, Executive will be granted Unit Options (as defined in the LTIP)
pursuant to the LTIP in an amount equal to 4.0% of the number of Unit Options
initially available to be granted under the LTIP and substantially in the form
of the grant agreement attached hereto as Attachment A.
4.3 Participation in Benefit Plans. During the Term, Executive shall be
eligible to participate in all employee benefit plans and arrangements now in
effect or which may hereafter be established that are generally applicable to
other senior executives of the Company, including, without limitation, all life,
group insurance, and medical and dental care plans and all disability,
retirement, 401(k) and other employee benefit plans of the Company, as long as
any such plan or arrangement remains generally applicable to other senior
executives of the Company. Executive shall also be entitled to the same vacation
benefits as are generally available to senior executives of the Company,
provided in any case that Executive shall have a minimum of four weeks' vacation
per year.
4.4 Reimbursement of Expenses. The Company shall reimburse Executive for
reasonable expenses incurred by Executive in the performance of Executive's
duties hereunder in accordance with the policy of the Company for reimbursement
of expenses as adopted by the Board from time to time and generally applicable
to all senior executives of the Company. Executive shall furnish the Company
with the supporting documentation required under the Company's policy in
connection with the reimbursement of such expenses.
Section 5. [Intentionally Omitted].
Section 6. Termination.
6.1 Termination by the Company Without Cause. The Company may terminate
Executive's employment other than for Cause or Executive becoming Disabled (as
such terms are defined below) at any time during the Term if the Board
determines, in its sole discretion, that the continued employment of Executive
is not in the continued interests of the Company. In the event the Company
terminates Executive's employment pursuant to this Section 6.1, then Executive
shall be paid on termination (i) any unpaid Base Salary earned hereunder prior
to the termination date, (ii) all unused vacation time accrued by Executive as
of the termination date in accordance with the Company's vacation policy for
senior executives, (iii) all unpaid amounts of compensation in which Executive
is vested as of the termination date under any and all incentive compensation
plans or programs of the Company, (iv) any expenses in respect of which
Executive has requested, and is entitled to, reimbursement in accordance with
Section 4.6, (v) a prorated bonus for the year of such termination calculated
based on the bonus being equal to 100% of Base Salary, and (vi) an amount
3
<PAGE>
equal to the amount of Base Salary that Executive would receive if Executive's
employment had continued without change through the remainder of the Term or for
12 months, whichever is less (items (i) through (iv) above being the "Earned
Amounts").
6.2 Termination by the Company for Cause. The Company may terminate this
Agreement at any time, in the discretion of the Board, in the event of (i) any
conviction of Executive for a felony, (ii any material breach by Executive of a
material written agreement between Executive and the Company or the UST Group,
including this Agreement, (ii any breach caused by Executive of the limited
partnership agreement or operating agreement of any member of the UST Group, or
the charter or bylaws of any corporation within the UST Group, provided that
Executive had prior written notice of such agreement or other document and any
amendment thereto (including a copy of the full text thereof) and provided that
such breach has a material adverse effect on the Company, (iv any willful
conduct by Executive materially injurious to the Company or the UST Group or
their respective businesses, (v) any willful failure by Executive to comply with
any material policies, procedures, or directives of the Board, provided that,
Executive shall first be given notice from the Board of such failure and such
failure shall not have been cured within ten days after such notice or, if such
failure is not capable of being cured within ten days, Executive shall not have
commenced and be diligently pursuing in good faith efforts to cure such default,
or (vi any fraud, misappropriation of funds, embezzlement, or other similar acts
of misconduct by Executive with respect to the Company or the UST Group. In the
event the Company terminates Executive's employment pursuant to this Section 6.2
for Cause, then Executive shall be paid on termination the Earned Amounts. For
purposes of this Agreement, no act or failure to act on Executive's part shall
be deemed "willful" unless done, or omitted to be done, in bad faith or without
the reasonable belief that the act or failure to act was in the best interests
of the Company or the UST Group. Any act or failure to act on the basis of
authority given by resolution duly adopted by the Board or on the basis of
advice given by legal counsel for the Company shall be conclusively presumed to
have been done, or omitted to be done, in good faith and in the best interests
of the Company or the UST Group. No termination of Executive's employment shall
be for Cause unless such termination shall have been authorized in advance by a
resolution adopted by the Board and delivered to Executive, following a meeting
of the Board at which Executive (together with his counsel) shall have been
afforded a reasonable opportunity to refute the purported grounds for
termination for Cause.
6.3 Termination Upon Death or Disability of Executive. This Agreement shall
terminate upon the death of Executive, or upon Executive becoming Disabled (as
defined below). In the event of a termination of this Agreement pursuant to this
Section 6.3, Executive (or Executive's estate, if applicable) shall be paid on
termination the Earned Amounts. For purposes of this Agreement, "Disabled" shall
mean that Executive shall have qualified for and be receiving benefits under the
Company's long-term disability insurance plan or, if there is no such plan, that
Executive shall have qualified for and be receiving disability benefits under
the federal Social Security Act.
6.4 Voluntary Resignation for Good Reason. Executive may resign Executive's
employment with the Company at any time and, if such resignation is for "Good
Reason", Executive shall be entitled to the same payments and benefits that
Executive would receive under Section 6.1 (i)-(vi) if Executive's employment
were being terminated by the Company other than for Cause or Executive becoming
Disabled. "Good Reason" shall mean any one or more of the following:
4
<PAGE>
(i) failure of the Company to appoint or re-appoint Executive to the offices of
Vice President--Finance and Controller or to more senior offices; (ii failure
of the Company, by act, omission, amendment to the instruments governing its
organization and operation or otherwise, to vest in Executive the position,
duties and responsibilities contemplated by this Agreement; (ii failure by the
Company to pay when due any portion of the compensation payable to Executive
hereunder; (iv any material breach by the Company of any material provision of
this Agreement; or (v) on or following a Change of Control (as such term is
defined in the Company's LTIP as the same may be amended from time to time),
either Executive is assigned any duties or responsibilities materially
inconsistent with, or diminished from, Executive's duties and responsibilities
with the Company and the UST Group immediately prior to the Change of Control,
or, Executive's status, duties, responsibilities, titles or offices with the
Company and the UST Group are materially diminished from those in effect
immediately prior to the Change of Control, as determined in the good faith
opinion of Executive; provided, however, Good Reason shall exist with respect to
a matter described above that is capable of being corrected by the Company only
if such matter is not corrected by the Company within a reasonable period
following its receipt of written notice of such matter from Executive, and in no
event shall a termination by Executive occurring more than 60 days following any
such written notice be for Good Reason.
Section 7. Covenant Not to Compete; Confidentiality.
7.1 Noncompetition. Unless granted written permission by the Board and
subject to any further restrictions contained in the agreements of limited
partnership within the UST Group, while employed by the Company and for a period
of 12 months after the termination of such employment, Executive covenants that
Executive shall not (i) own (as a proprietor, partner, or stockholder of greater
than 4.9 percent of outstanding equity securities, interests or otherwise) an
interest in, or (ii) participate (as an officer, director, or in any other
capacity) in the management, operation, or control of, or (iii) perform services
as or act in the capacity of any employee, independent contractor, consultant,
or agent of any enterprise which engages in one or more of the following
activities in a state in which the Company or the UST Group is then conducting
business and in which the Company or the UST Group commenced conducting business
prior to the commencement of such activities therein by Executive:
(a) acquisition, exchange, operation or sale of timber-producing real
property or rights to harvest timber, a principal purpose of which is
producing logs or other forest products;
(b) harvesting of timber other than harvesting which is incidental to
the ownership or operation of real property not owned or operated for a
principal purpose of producing logs or other forest products;
(c) sale, exchange or purchase of logs other than sales, exchanges or
purchases which are incidental to the ownership or operation of real
property not owned or operated for a principal purpose of producing logs or
other forest products;
5
<PAGE>
(d) acquisition or sale of any facilities used to convert logs into
lumber, plywood or other wood products;
(e) conversion of logs into lumber, plywood or other wood products;
(f) marketing and sale of lumber, plywood or other wood products;
(g) import or export of logs, lumber, plywood or other wood products
to or from the United States;
(h) manufacture, marketing or sale of manufactured, engineered, or
substitute wood products to the extent such products compete with products
produced by the Company or any member of the UST Group; or
(i) any and all other activities relating to the United States forest
products industry to the extent such activities compete with activities of
the Company or any member of the UST Group;
The noncompetition restrictions set forth in this Section 7.1 shall not apply in
the event of a termination of this Agreement pursuant to Section 6.1 or 6.4 nor,
in the event of Executive's termination due to Executive becoming Disabled in
accordance with Section 6.3, shall they apply following Executive ceasing to be
Disabled unless the Company offers to re-employ Executive on terms and
conditions at least as favorable as those set forth in this Agreement.
7.2 Confidentiality. Executive acknowledges that in the course of
Executive's employment by the Company, Executive will be furnished and have
access to certain information concerning the business, financial condition,
operations, assets and liabilities of the Company and the UST Group that is
confidential or proprietary in nature. All such information (irrespective of the
form of communication) is hereinafter collectively referred to as the
"Information." Until the date of termination of Executive's employment
hereunder, and for a period of 18 months thereafter, Executive agrees to keep
the Information confidential and agrees that Executive will use the Information
solely for the purpose of performing Executive's duties hereunder or as
otherwise authorized by the Company. This Agreement shall be inoperative as to
such portions of the Information which (a) are or become generally available to
the public other than as a result of a disclosure by Executive in violation of
this Agreement, (b) become available to Executive on a non-confidential basis
from a source other than the Company or the UST Group that is not bound by an
obligation of confidentiality to such entity or entities, or (c) are required to
be disclosed by an order or decree of a court or other tribunal of competent
jurisdiction, provided the Company is given prompt notice of, and the
opportunity to contest disclosure under, such order or decree. Upon termination
of this Agreement, Executive will return the Information furnished by the
Company or the UST Group and any documents that contain, reflect, or are based
upon, in whole or in part, the Information.
7.3 Equitable Relief. Executive acknowledges and agrees that it would be
difficult to measure damage to the Company or the UST Group from any breach by
Executive of Section 7.1
6
<PAGE>
or 7.2 and that monetary damages would be an inadequate remedy for any such
breach. Accordingly, Executive agrees that if Executive shall breach Section 7.1
or 7.2, the Company shall be entitled, in addition to all other remedies it may
have at law or in equity, to an injunction or other appropriate orders or
equitable relief to restrain any such breach, without showing or proving any
actual damage sustained by the Company or the UST Group. Executive further
agrees to waive any requirement for the securing or posting of any bond in
connection with such remedies.
7.4 Executive's Acknowledgment. Executive hereby expressly acknowledges and
agrees that (i) the restrictions and obligations set forth in and imposed by
this Section 7 will not prevent Executive from obtaining gainful employment in
Executive's field of expertise or cause Executive undue hardship, and (ii) in
view and consideration of the substantial benefits Executive will receive from
the Company pursuant to this Agreement and the Company Agreement, the
restrictions and obligations imposed on Executive under this Section 7 are
reasonable and necessary to protect the legitimate business interests of the
Company and its members and the UST Group.
Section 8. Indemnification.
(a) During the Term and for a period of six years thereafter, the
Company shall cause Executive to be covered by and named as an insured
under any policy or contract of insurance obtained by it to insure its
directors and officers against personal liability for acts or omissions in
connection with service as an officer or director of the Company or service
in other capacities at the request of the Company. The coverage provided
to Executive pursuant to this Section 8 shall be of a scope and on terms
and conditions at least as favorable as the coverage (if any) provided to
any other officer or director of the Company.
(b) To the maximum extent permitted under applicable law, during the
Term and for a period of six years thereafter, the Company shall indemnify
Executive against and hold Executive harmless from any costs, liabilities,
losses and exposures to the fullest extent and on the most favorable terms
and conditions that similar indemnification is offered to any director or
officer of the Company or any subsidiary or affiliate thereof.
Section 9. Representations and Warranties.
9.1 By Executive. Executive represents and warrants to the Company that (i)
Executive is under no contractual or other restriction or obligation which would
prevent the performance of Executive's duties hereunder or interfere with the
rights of the Company hereunder and (ii) this Agreement has been duly executed
and delivered by Executive, is the legal, valid and binding obligation of
Executive, and is enforceable against Executive in accordance with its terms,
except that no representation or warranty is made with respect to the provisions
of Section 7.
9.2 By the Company. The Company represents and warrants to Executive that
(i) it has all requisite limited liability company power and authority to
execute, deliver and perform this Agreement, (ii) all necessary proceedings of
the Company have been duly taken to authorize the execution, delivery and
performance of this Agreement, and (iii) this Agreement has been duly
7
<PAGE>
authorized, executed and delivered by the Company, is the legal, valid and
binding obligation of the Company, and is enforceable against the Company in
accordance with its terms.
Section 10. Life Insurance.
If requested by the Company, Executive shall submit to such physical
examinations by a physician and otherwise take such actions and execute and
deliver such documents as may be reasonably necessary to enable the Company to
obtain life insurance on the life of Executive for the benefit of the Company,
but in no event shall Executive's failure to qualify for such coverage, as a
result of the outcome of the medical examination or otherwise, be grounds for a
termination of Executive's employment.
Section 11. Notices.
Any notice given pursuant to this Agreement shall be in writing and shall
be deemed given on the earlier of the date (i) the notice is personally
delivered to the party to be notified, (ii) that is three days after the notice
is mailed, postage prepaid, certified with return receipt requested, addressed
as follows, or at such other address as a party may from time to time designate
by notice to the other party, (iii) the notice is delivered at the party's
address via courier service, or (iv) the notice is received by fax or
telecopier:
To the Company: U.S. Timberlands Services Company, L.L.C.
625 Madison Avenue - Suite 10-B
New York, New York 10022
Attn: John M. Rudey
Facsimile No: (212) 758-4009
To Executive: John C. McDowell
12745 NE 35th Place
Bellevue, Washington 98005
Section 12. General Provisions.
12.1 Remedies on Default. In the event either party breaches this
Agreement, the other party shall be entitled to pursue all remedies available at
law or in equity. Except as otherwise provided herein, in the event this
Agreement is breached by either party, the non-breaching party shall not
terminate this Agreement without notice and a reasonable opportunity to cure
such breach.
12.2 Assignment; Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company and any successor of the Company, by merger
or otherwise. Except as provided in the preceding sentence, this Agreement, and
the rights and obligations of the parties hereunder, are personal and neither
this Agreement, nor any right, benefit, or obligation of either party hereto,
shall be subject to voluntary or involuntary assignment, alienation or transfer,
whether by operation of law or otherwise, without the prior written consent of
the other party. Subject to the foregoing, the provisions of this Agreement
shall be binding upon and inure to the benefit of the
8
<PAGE>
parties and their respective heirs, personal representatives, administrators,
successors, and permitted assigns.
12.3 Waiver. Failure of any party at any time to require performance of any
provision of this Agreement shall not limit such party's right to enforce such
provision, nor shall any waiver of any breach of any provision of this Agreement
constitute a waiver of any succeeding breach of such provision or a waiver of
such provision itself. No attempted or purported waiver of any provision of this
Agreement shall be effective unless set forth in writing and signed by the party
to be bound.
12.4 Amendment. This Agreement may not be modified or amended except by the
written agreement of the parties.
12.5 Severability. The agreements and covenants contained in this Agreement
are severable, and in the event any of the agreements and covenants contained in
this Agreement should be held to be invalid by any court or tribunal of
competent jurisdiction, this Agreement shall be interpreted as if such invalid
agreements and covenants were not contained herein; provided, however, that if
in any legal proceeding a court shall hold unenforceable the covenants contained
in Section 7 by reason of their extent or duration or otherwise, any such
covenant shall be reduced in scope to the extent required by law and enforced in
its reduced form.
12.6 Integration. This Agreement contains the entire agreement and
understanding of the parties with respect to the employment of Executive by the
Company and supersedes all prior and contemporaneous agreements (oral or
written) between them with respect to such subject matter.
12.7 Attorneys' Fees. If any legal action or other proceeding is brought
for the enforcement or interpretation of this Agreement, or because of an
alleged dispute or breach in connection with any of the provisions of this
Agreement, if Executive is the successful or prevailing party, Executive shall
be entitled to recover from the Company reasonable attorneys' fees and other
costs incurred by Executive in connection with that action or proceeding, and in
any petition for appeal or review therefrom, in addition to any other relief to
which Executive may be entitled. The Company shall reimburse Executive for the
reasonable attorney's fees and expenses Executive has incurred in the
negotiation of this Agreement.
12.8 Third Party Beneficiaries. This Agreement does not create, and shall
not be construed as creating, any rights enforceable by any person not a party
to this Agreement.
12.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
12.10 Survival. In the event of termination of this Agreement by either
party, this Agreement shall become void and there shall be no liability on the
part of Executive or the Company except to the extent such termination results
from the breach by a party hereto of its obligations hereunder (in which case
Section 12.1 shall apply); provided that Sections 6.1, 6.2, 6.3, 6.4, 7, 8, 11
and 12.7 shall survive the termination of this Agreement.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
The Company: U.S. TIMBERLANDS SERVICES COMPANY, L.L.C.,
a Delaware limited liability company
By: /s/ John M. Rudey
--------------------------------------------------
Name: John M. Rudey
Title: Chairman
Executive: /s/ John C. McDowell
--------------------------------------------------
John C. McDowell
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM U.S.
TIMBERLANDS KLAMATH FALLS, L.L.C. DECEMBER 31, 1997 AND DECEMBER 31, 1996
COMBINED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001047739
<NAME> U.S. TIMBERLANDS KLAMATH FALLS, L.L.C
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR OTHER
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996<F1>
<PERIOD-START> JAN-01-1997 AUG-30-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 10,625 16,613
<SECURITIES> 0 0
<RECEIVABLES> 3,733 1,694
<ALLOWANCES> 0 0
<INVENTORY> 0 78
<CURRENT-ASSETS> 14,932 29,586
<PP&E> 1,448 1,478
<DEPRECIATION> 187 58
<TOTAL-ASSETS> 385,214 310,191
<CURRENT-LIABILITIES> 13,097 8,127
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 145,646 (2,936)
<TOTAL-LIABILITY-AND-EQUITY> 385,214 310,191
<SALES> 77,345 14,019
<TOTAL-REVENUES> 77,345 14,019
<CGS> 17,778 6,179
<TOTAL-COSTS> 50,077 18,786
<OTHER-EXPENSES> 574 36
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 25,321 7,316
<INCOME-PRETAX> (1,368) (13,036)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,368) (13,036)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (9,337) 0
<CHANGES> 0 0
<NET-INCOME> (10,705) (13,036)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<FN>
<F1>THE INCOME STATEMENT DATA FOR THE PERIOD ENDED DECEMBER 31, 1996 REPRESENTS
ONLY FOUR MONTHS OF OPERATIONS AS THE COMPANY WAS FORMED ON AUGUST 30, 1996.
</FN>
</TABLE>
