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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file numbers 1-13573-01 and 1-13573
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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 of (I.R.S. Employer
incorporation Identification No.)
or organization)
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
--------------------------
Indicate by check mark whether the co-registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
co-registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes |X| No |_|
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands)
(Unaudited)
Quarter Ended September 30,
---------------------------
1998 1997
-------- --------
Revenues $ 26,096 $ 17,261
Costs and expenses:
Cost of goods sold 5,024 4,065
Depletion, depreciation and
road amortization 8,561 5,363
Silviculture 200 225
Selling, general and administrative 2,026 1,408
-------- --------
Total costs and expenses 15,811 11,061
-------- --------
Operating income 10,285 6,200
Interest expense 5,587 6,941
Interest income (116) (418)
Financing fees 169 756
Other (income) expense - net 1,248 (28)
-------- --------
Income (loss) before extraordinary
item 3,397 (1,051)
Extraordinary item - loss on
extinguishment of debt -- 3,571
-------- --------
Net income (loss) $ 3,397 $ (4,622)
======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 2 of 18
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------------------
1998 1997
-------- --------
Revenues $ 55,667 $ 41,057
Costs and expenses:
Cost of goods sold 11,712 11,445
Cost of timberland sales 5,917 --
Depletion, depreciation and
road amortization 16,494 11,949
Silviculture 412 656
Selling, general and administrative 7,416 4,300
-------- --------
Total costs and expenses 41,951 28,350
-------- --------
Operating income 13,716 12,707
Interest expense 16,685 17,818
Interest income (386) (1,192)
Financing fees 506 2,954
Other (income) expense - net 1,138 (48)
-------- --------
Loss before extraordinary item (4,227) (6,825)
Extraordinary item - loss on
extinguishment of debt -- 3,571
-------- --------
Net loss $ (4,227) $(10,396)
======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 3 of 18
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1998 1997
-------- --------
(Unaudited) (Audited)
Assets
Current assets:
Cash and cash equivalents $ 10,936 $ 10,625
Accounts receivable - net 4,449 2,526
Prepaid expenses and other assets 4,081 1,781
-------- --------
Total current assets 19,466 14,932
Timber, timberlands and roads - net 337,631 359,349
Seed orchard and nursery stock 1,768 1,828
Property, plant and equipment - net 1,194 1,261
Notes receivable 678 1,171
Deferred financing fees 6,167 6,673
-------- --------
Total assets $366,904 $385,214
======== ========
Liabilities
Current liabilities:
Accounts payable and accrued
liabilities $ 12,389 $ 7,353
Deferred revenue 2,766 5,744
-------- --------
Total current liabilities 15,155 13,097
Long-term debt 225,000 225,000
Members' equity
Managing member's interest 1,267 1,471
Non-managing member's interest 125,482 145,646
-------- --------
Total liabilities and member's equity $366,904 $385,214
======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 4 of 18
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1998 1997
--------- ---------
Cash Flows From Operating Activities:
Net loss $ (4,227) $ (10,396)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation, road amortization and
cost of timberland sold 22,411 11,949
Deferred financing fees 506 4,006
Other non-cash items 1,270 --
Working capital changes - net (3,532) 4,132
--------- ---------
Net cash provided by operating activities 16,428 9,691
Cash Flows From Investing Activities:
Ochoco acquisition -- (110,873)
Timber and road additions - net (279) (371)
Repayment of receivable from affiliate -- 10,000
Advance from affiliate -- 3,000
Repayment of advance from affiliate -- (3,000)
Capitalized seed orchard and nursery costs - net (159) (137)
Purchase of property, plant and equipment - net (32) (290)
Proceeds from sale of logging equipment -- 400
--------- ---------
Net cash used in investing activities (470) (101,271)
Cash Flows From Financing Activities:
Long-term borrowings -- 285,000
Repayment of long-term borrowings -- (177,000)
Deferred financing fees -- (5,970)
Distribution to members (16,140) (1,191)
Deferred offering costs - common units -- (1,840)
Long-term receivables - net 493 --
--------- ---------
Net cash provided by (used in) financing activities (15,647) 98,999
--------- ---------
Increase in cash and cash equivalents 311 7,419
Cash and cash equivalents - beginning of period 10,625 16,613
--------- ---------
Cash and cash equivalents - end of period $ 10,936 $ 24,032
========= =========
Supplemental Cash Flow Information:
Cash paid for interest $ 10,589 $ 13,141
========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 5 of 18
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except as otherwise indicated)
(Unaudited)
1. Organization, Nature Of Operations And Basis Of Presentation
Organization
The accompanying consolidated financial statements include the accounts of
U.S. Timberlands 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 with USTK for $225 million of senior unsecured notes
issued by the Company in a public offering November 13, 1997 (the "Notes").
Finance Corp. has nominal assets and does not conduct any operations. All
significant intercompany transactions have been eliminated in consolidation.
U.S. Timberlands Company, L.P. (the "Master Partnership") owns a 99%
non-managing member interest in USTK. The Master Partnership was formed June 27,
1997 to acquire and own the business and assets of U.S. Timberlands Management
Company, L.L.C. U.S. Timberlands Services Company, L.L.C. (the "Managing
Member") manages the business of the Company and owns a 1% managing member
interest in USTK. The Managing Member also owns a 1% general partner interest in
the Master Partnership.
Nature of Operations
The primary activities of the Company are growing trees and selling logs
and stumpage (standing timber) to third party wood processors. The Company's
timberlands are located in Oregon, east of the Cascade Range. Logs harvested
from the Company's timberlands are sold to unaffiliated domestic conversion
facilities. These logs are processed for sale as lumber; molding products;
doors; mill work; commodity, specialty, and overlaid plywood products; laminated
veneer lumber; engineered wood I-beams; particleboard; hardboard; paper and
other wood products. These products are used in residential, commercial, and
industrial construction; home remodeling and repair; general industrial
applications; and a variety of paper products. The Company also owns and
operates its own seed orchard and nursery, which produce up to five million
genetically selected conifer seedlings each year. Approximately half of the
annual seedling production is used by the Company for its own reforestation
programs; the balance is sold to other forest products companies.
Basis of Presentation
These consolidated financial statements have been prepared by the Company,
without audit by independent public accountants, pursuant to the rules and
regulations of the United States Securities and Exchange Commission. In the
opinion of management, the consolidated financial statements include all normal
recurring adjustments necessary to present fairly the information required to be
set forth therein. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from these statements pursuant to such
rules and regulations and, accordingly, should be read in conjunction with the
consolidated financial statements included in the Company's 1997 Annual Report
on Form 10-K. Certain reclassifications have been made to the 1997 amounts
presented for comparability purposes and have no impact on net income. Operating
results for the three and nine month periods ended
Page 6 of 18
<PAGE>
September 30, 1998 are not necessarily indicative of the results that may be
expected for the full year.
There have been no significant changes in the accounting policies of the
Company. There were no significant changes in the Company's commitments and
contingencies as previously described in the 1997 Annual Report on Form 10-K.
2. Subsequent Event
On October 21, 1998, the Board of Directors of the Managing Member
authorized the Master Partnership to make a distribution of $0.50 per Unit. The
total distribution from the Master Partnership will be $6,495 (including $65 to
the Managing Member) and will be paid on November 13, 1998 to Unitholders of
record on November 3, 1998. All of the cash necessary to make such distribution
will be distributed to the Master Partnership by USTK. In addition, on November
13, 1998, USTK will distribute $66 to the Managing Member.
Page 7 of 18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
Certain information contained in this report may constitute
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Forward-looking information is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected. Such risks, trends and
uncertainties include the highly cyclical nature of the forest products
industry, general economic conditions, competition, price conditions or trends
for the Company's products, the possibility that timber supply could increase if
governmental, environmental or endangered species policies change, and
limitations on the Company's ability to harvest its timber due to adverse
natural conditions or increased governmental restrictions. These and other risks
are described in the Company's other reports and registration statements, which
are available from the United States Securities and Exchange Commission.
Overview
The Company's principal operations consist of growing and harvesting
timber and selling logs, stumpage (standing timber), and related by-products to
third party wood processors. These logs and byproducts are processed for sale as
lumber; molding products; doors; mill work; commodity, specialty, and overlaid
plywood products; laminated veneer lumber; engineered wood I-beams;
particleboard; hardboard; paper and other wood products. These products are used
in residential, commercial, and industrial construction; home remodeling and
repair; general industrial applications; and a variety of paper products. The
results of the Company's operations and its ability to pay quarterly
distributions to its Unitholders depend upon a number of factors, many of which
are beyond its control. These factors include general economic and industry
conditions, domestic and export prices, supply and demand for logs, seasonality,
government regulations affecting the manner in which timber may be harvested,
and competition from other supplying regions and substitute products.
Seasonality
The Company's log and stumpage sales volumes are generally at their lowest
levels in the first and second quarter of each year. In the first quarter, heavy
snowfalls in higher elevations prevent access to many areas of the Company's
timberlands. This limited access, along with spring break-up conditions (when
warming weather thaws and softens roadbeds) in March or April, restricts logging
operations to lower elevations and areas with rockier soil types. As a result of
these constraints, the Company's sales volumes are typically at their lowest in
the first quarter, improving in the second quarter and at their highest during
the third and fourth quarters. Most customers in the region react to this
seasonality by carrying sufficiently high log inventories at the end of the
calendar year to carry them to the second quarter of the following year.
Page 8 of 18
<PAGE>
Current Market Conditions
Low mortgage interest rates have created highly favorable conditions for
new home construction, repair and remodel, and industrial and other
construction, which has strengthened the demand for the Company's logs and
timber. However, as the result of weak log markets in Asia, the supply of logs
has increased on the West Coast. Combined with the continued heavy importing of
lumber from Canada, this has put downward pressure on prices for the Company's
logs and timber during the first nine months of 1998.
The key lumber price indicator for ponderosa pine during the quarter ended
September 30, 1998 was unchanged from the second quarter of 1998 but decreased
25% from the quarter ended September 30, 1997. The third quarter 1998 product
price indicator for lodgepole pine was unchanged compared to both the second
quarter of 1998 and the third quarter of 1997.
In contrast to the product prices for key pine products, third quarter
1998 Douglas fir and white fir product prices increased appreciably compared to
the second quarter of 1998 while remaining relatively flat compared to the same
period in 1997. The third quarter 1998 product price indicator for Douglas fir
and white fir increased 14% and 24%, respectively, over second quarter 1998
levels. Strong demand for lumber and panel products manufactured from these
species persisted through the quarter, and the Company benefited from this
demand by shifting more production to fir logs to improve the overall mix of its
third quarter 1998 log sales.
Results of Operations
Selected operating statistics for the Company:
Price Realization
Sales Volume (MBF) ($/MBF) Timberland
------------------ ----------------- Sales
Logs Stumpage Logs Stumpage ($ 000)
------ -------- ------ -------- -------
1998
Nine months ended
September 30 69,258 40,655 $ 428 $ 458 $6,276
3rd Quarter 29,017 27,940 $ 431 $ 470 --
2nd Quarter 23,832 10,731 $ 432 $ 431 $6,276
1st Quarter 16,409 1,984 $ 418 $ 447 --
1997
Nine months ended
September 30 70,334 23,404 $ 431 $ 428 --
3rd Quarter 25,867 10,056 $ 436 $ 569 --
2nd Quarter 23,094 2,303 $ 441 $ 350 --
1st Quarter 21,373 11,045 $ 413 $ 316 --
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
Revenues. Revenues for the quarter ended September 30, 1998 were $26.1
million, an increase of $8.8 million or 51% over revenues of $17.3 million for
the quarter ended September 30, 1997. This was primarily attributable to a $7.4
million increase in stumpage sales and a $1.2 million increase in log sales to
meet the increased cash requirements, primarily distributions to Unitholders, of
operating as a Master Limited Partnership.
Page 9 of 18
<PAGE>
Stumpage sales for the quarter ended September 30, 1998 were $13.1 million
dollars on volumes of 27.9 million board feet ("MMBF"), compared to third
quarter 1997 stumpage sales of $5.7 million on volumes of 10.1 MMBF. The
increase in stumpage sales volume is primarily the result of a strategy, which
the Company initiated in the second quarter of 1998, to expand its use of
stumpage sales to meet the needs of its customers and improve sales prices
realized by the Company. On a volume basis, these sales were 49% of total 1998
third quarter sales compared to 28% of total sales volume for the same period in
1997. While total stumpage sales volume in the third quarter 1998 substantially
increased over total stumpage sales volume in the third quarter of 1997, the
quality of timber sold and, therefore, the average price realized, was notably
lower in the third quarter of 1998. Third quarter 1997 stumpage sales were
concentrated in high grade old growth ponderosa pine resulting in an average
sales price of $569 per thousand board feet ("MBF"). In the third quarter of
1998, the average stumpage sales price per MBF was $470, reflecting lower prices
generally and a lower grade mix of timber. Accordingly, the volume of stumpage
sold, in terms of MMBF, increased in the third quarter of 1998 at a rate greater
than the rate of increase in dollars received from such sales. The increase in
stumpage sales, in terms of both MMBF and sales dollars, resulted in a
significant increase in the rate of consumption of the standing timber
inventory.
Third quarter 1998 log sales were $12.5 million on volumes of 29.0 MMBF as
compared to the same period in 1997 when log sales were $11.3 million on volumes
of 25.9 MMBF. The average third quarter 1998 log sales price was $431 per MBF
compared to an average of $436 per MBF for the third quarter of 1997. The
Company was able to maintain a relatively stable average selling price for its
logs by shifting the mix of its sales from lower priced pine logs to higher
priced fir logs. Of particular benefit was relatively high white fir log sales
volume to a customer for whom prices are set based on a product price index. The
index peaked during the third quarter of 1998 and provided above-market sales
values in July and August.
Operating Costs. Operating costs were $15.8 million for the quarter ended
September 30, 1998, an increase of $4.7 million or 43% over operating costs of
$11.1 million for the quarter ended September 30, 1997. This increase was
primarily the result of a $3.2 million increase in depreciation, depletion and
road amortization ("DD&A") expenses along with increases to cost of goods sold
("COGS") and selling, general and administrative ("SG&A") expenses of $.9 and
$.6 million, respectively. As a percentage of sales, operating costs declined in
the third quarter of 1998 to 61% compared to 64% in the third quarter of 1997
due to the higher proportion of stumpage sales, which typically have higher
margins than log sales, during the third quarter of 1998.
DD&A expense was $8.6 million for the quarter ended September 30, 1998, a
$3.2 million or 60% increase over DD&A expense of $5.4 million for the quarter
ended September 30, 1997. This increase was primarily due to increased log and
stumpage sales and the increase in the Company's depletion rate per MBF, which
resulted from the Ochoco timberlands acquisition in July 1997.
COGS was $5.0 million for the quarter ended September 30, 1998, compared
to $4.1 million for the same period of 1997. The $.9 million increase occurred
as the third quarter 1998 log sales volumes increased 3.1 MMBF to 29.0 MMBF from
the 25.9 MMBF log sales volume level of the third quarter 1997.
SG&A expenses for the quarter ended September 30, 1998 were $2.0 million,
an increase of 44% over comparable expenses of $1.4 million for the quarter
ended September 30, 1997. This increase was primarily due to a one time charge
of $.2 million associated with a shelf registration related to the subordinated
units, expenses associated with evaluating and
Page 10 of 18
<PAGE>
pursuing acquisition opportunities, and the increased cost of operating as a
publicly traded company.
Interest Expense. Interest expense was $5.6 million for the quarter ended
September 30, 1998 and related primarily to the $225.0 million aggregate
principal amount of senior unsecured notes that the Company issued to the public
on November 13, 1997 (the "Notes"). Interest expense of $6.9 million for the
quarter ended September 30, 1997 related primarily to $315.0 million of term
debt and $83.0 million of revolving debt incurred in connection with the
acquisition of the Klamath Falls and Ochoco timberlands in August 1996 and July
1997, respectively. This debt was retired in November 1997 using proceeds from
the sale of Notes and Units to the public in November 1997.
Financing Fees. The Company deferred $6.7 million of fees incurred in
connection with the issuance of the Notes. These fees will be amortized over the
term of the Notes, which are due in November 2007. The amortization of these
fees during the quarter ended September 30, 1998 was $.2 million. During the
quarter ended September 30, 1997, the Company recognized $.8 million of expense
related to debt guarantee fees and amortization of deferred financing fees.
Other (Income) Expense, Net. Other (income) expense, net was $1.2 million
in the third quarter of 1998. In the third quarter of 1997 this item was under
$.1 million. The increase in expense during the third quarter of 1998 is due to
a $1.3 million charge related to an unrealized loss, as of September 30, 1998,
on an unhedged financial instrument.
Extraordinary Item. During the third quarter of 1997, the Company
refinanced certain long-term borrowings resulting in a $3.6 million
extraordinary loss on extinguishment of debt related to the write-off of
existing unamortized deferred financing fees and other related fees.
Nine months Ended September 30, 1998 Compared To Nine months Ended September 30,
1997
Revenues. Revenues for the nine months ended September 30, 1998 were $55.7
million, an increase of $14.6 million or 36% over revenues of $41.1 million for
the nine months ended September 30, 1997. This increase was primarily
attributable to an $8.6 million increase in stumpage sales, a $.6 million
decrease in log sales, and a $6.3 million increase in timberland sales.
Stumpage sales for the nine months ended September 30, 1998 were $18.6
million on volumes of 40.7 MMBF, compared to the same period in 1997 when
stumpage sales were $10.0 million on volumes of 23.4 MMBF. The increase in
stumpage sales volumes was primarily the result of a strategy, which the Company
initiated in the second quarter of 1998, to expand its use of stumpage sales to
meet the needs of its customers and improve sales prices realized by the
Company. The average stumpage sales price per MBF for the nine months ended
September 30, 1998 was $458 compared to an average stumpage sales price per MBF
of $428 for the same period in 1997, reflecting an increased mix of higher value
timber and enhanced marketing efforts.
Log sales for the nine months ended September 30, 1998 were $29.7 million
on volumes of 69.3 MMBF compared to log sales of $30.3 million on volumes of
70.3 MMBF for the same period of 1997. The average log sales price per MBF for
the nine months ended September 30,1998 was $428 compared to an average log
sales price per MBF of $431 for the same period in 1997, reflecting weaker
markets, primarily for ponderosa pine logs.
Page 11 of 18
<PAGE>
Revenue from a planned sale of timberland during the nine months ended
September 30, 1998 was $6.3 million. There were no such timberland sales during
the nine months ended September 30, 1997.
Operating Costs. Operating costs were $42.0 million for the nine months
ended September 30, 1998, an increase of $13.6 million or 48% over operating
costs of $28.4 million for the nine months ended September 30, 1997. This
increase was primarily the result of a $4.5 million increase in DD&A expense,
increases to COGS and the cost of timberland sold of $.3 million and $5.9
million, respectively, and an increase in SG&A expenses of $3.1 million,
partially offset by a $.2 million decrease in silviculture expenses.
DD&A expense was $16.5 million for the nine months ended September 30,
1998, a $4.5 million or 38% increase over DD&A expense of $12.0 million for the
nine months ended September 30, 1997. This increase was primarily attributable
to a net increase in log and stumpage sales volumes and an increase in the
Company's depletion rate per MBF, which resulted from the Ochoco timberlands
acquisition in July 1997.
During the nine months ended September 30, 1998, the Company sold 15,304
acres of timberland with a cost basis of $5.9 million. No sales of timberland
were made during the nine months ended September 30, 1997.
SG&A expenses were $7.4 million for the nine months ended September 30,
1998, an increase of $3.1 million or 72% over comparable expenses of $4.3
million for the nine months ended September 30, 1997. This increase was
primarily due to the one-time expenses of $1.1 million related to severance
costs and the repurchase of member interests in the Managing Member that were
incurred in the first quarter of 1998, combined with increased costs associated
with of operating as a publicly traded company and implementing the Company's
strategy to pursue accretive acquisitions of timberland.
Interest Expense. Interest expense was $16.7 million for the nine months
ended September 30, 1998 and related primarily to the $225.0 million aggregate
principal amount of the Notes. Interest expense of $17.8 million for the nine
months ended September 30, 1997 related primarily to $315.0 million of term debt
and $83.0 million of revolving debt incurred in connection with the acquisition
of the Klamath Falls and Ochoco timberlands in August 1996 and July 1997,
respectively. This debt was retired in November 1997 using proceeds from the
sale of Notes and Units to the public in November 1997.
Financing Fees. The Company deferred $6.7 million of fees incurred in
connection with the issuance of the Notes. These fees will be amortized over the
term of the Notes, which are due in November 2007. The amortization of these
fees during the first nine months of 1998 was $0.5 million. During the nine
months ended September 30, 1997, the Company recognized $3.0 million of expense
related to debt guarantee fees and amortization of deferred financing fees.
Other (Income) Expense, Net. Other (income) expense, net was $1.1 million
for the nine months ended September 30, 1998. During the same period in 1997,
this item was under $.1 million. The increase in expense during the first nine
months of 1998 is due to a $1.3 million charge related to an unrealized loss, as
of September 30, 1998, on an unhedged financial instrument.
Extraordinary Item. During the nine months ended September 30, 1997, the
Company refinanced certain long-term borrowings resulting in a $3.6 million
extraordinary loss on extinguishment of debt related to the write-off of
existing unamortized deferred financing fees and other related fees.
Page 12 of 18
<PAGE>
Members' Equity
During the nine months ended September 30, 1998, members' equity declined
$20.4 million dollars from $147.1 million to $126.7 million. This decline is the
result of the Company's net loss and distributions to its Members during this
period, which were $4.2 million and $16.1 million, respectively. The Company
expects to continue to incur operating losses and make distributions to its
Members. As a result, the Company anticipates that members' equity will continue
to decline.
Financial Condition and Liquidity
During the nine months ended September 30, 1998, net cash provided by
operating activities totaled $16.4 million. During this period the Company
distributed $16.1 million to its Members, and cash and cash equivalents
increased $.3 million compared to December 31, 1997.
The Company has a $100.0 million unsecured revolving credit facility (the
"Bank Credit Facility") with a group of banks, which consists of a $75.0 million
acquisition facility and a $25.0 million working capital facility and is subject
to restrictions and covenants that limit the amount available for borrowing in
amounts which vary from time to time. The Bank Credit Facility will expire
November 19, 2000. At that time, the Company may elect to convert amounts
borrowed under the acquisition facility to a term loan payable in sixteen equal
quarterly installments, and amounts borrowed under the working capital facility
will be due and payable. As of September 30, 1998, there were no outstanding
borrowings under the Bank Credit Facility.
The agreements governing the Notes and the Bank Credit Facility contain
restrictive covenants, including limitations on harvest levels, land sales, cash
distributions, and the amount of future indebtedness. In addition, these
agreements require the Company to maintain certain financial ratios. As of
September 30, 1998, the Company was in compliance with these covenants and
ratios.
Through the first nine months of 1998, the Company funded its operations
and met its cash obligations for distributions to its Members and debt
service from cash on hand and cash generated from current operations. Cash
required to make distributions to all Members at current levels and to pay
interest on the Notes is $26.2 million and $21.7 million, respectively, per
year. The Managing Member expects that future cash distributions and interest
payments will be funded from cash on hand, cash generated from current
operations, and borrowings under the Bank Credit Facility.
During the first nine months of 1998, the market for the Company's logs
and timber has generally declined. To meet its working capital requirements, the
Company has been harvesting and selling logs and stumpage at a rate in excess of
both 1997 levels and the Managing Member's estimate of the long-term sustainable
annual harvest level for its current timberlands of approximately 110 MMBF per
year. During the first nine months of 1998 the Company harvested 110 MMBF and
currently anticipates that the total harvest volume for 1998 will be 158 MMBF,
excluding volume of 26.6 MMBF included in the second quarter 1998 sale of
timberland. Under its loan agreements, the Company's average annual harvest
volume over any period of four consecutive years cannot exceed 150 MMBF (as
adjusted for timberland sales and purchases). The agreements also limit one-year
harvest levels and average annual harvest levels for consecutive two and three
year periods. Because of these limitations and the long term sustainable harvest
level of the timberlands, unless prices improve, costs are reduced, new markets
are developed or the Company is able to implement a favorable recapitalization
or make accretive acquisitions, the Company's ability in the future to make
distributions at current levels will likely be adversely affected. The Company
continues to evaluate means to improve cash flows, including the factors
mentioned above. However, there can be no assurance that prices will improve or
that the Company will be able to take any of these actions.
Page 13 of 18
<PAGE>
Capital expenditures, for the nine months ended September 30, 1998 totaled
$.6 million. As the Company does not currently own and does not plan to own or
operate 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 and silvicultural
expenditures. It is not currently anticipated that the Company will either
maintain log inventories (although small volumes of log inventories may be
maintained for short periods of time) or incur material capital expenditures for
machinery and equipment. The Company anticipates that capital expenditures will
be $1.0 million for the year ended December 31, 1998. Capital expenditures will
be funded from cash on hand and cash generated from current operations.
Year 2000 Issues
Year 2000 issues arise from computer programs, including programs that are
embedded in non-information technology systems, that employ two digits instead
of four to define the applicable year. As a result, such programs may interpret
a year 2000 date as a date in 1900. This could lead to a system failure when
using date sensitive software.
The Company has evaluated its financial and operational systems and
applications for compliance with Year 2000 requirements. In the course of this
evaluation, the Company obtained certifications from vendors that its timber
inventory and timberland resource management systems are Year 2000 compliant.
Further, in connection with the Company's scheduled programs to replace certain
other systems, specifically its financial reporting system and local and wide
area networks, the Company included Year 2000 compliance among its key criteria
in selecting the replacement applications. The installation of these replacement
systems is substantially complete. The Company has replaced or upgraded its
computers to assure its business systems are supported by machines that comply
with Year 2000 requirements. The Company has no converting facilities and
believes it has no material Year 2000 issues with respect to its non-information
technology systems.
The Company has engaged a third party consultant to assist it with further
evaluation of its Year 2000 preparedness. The scope of the engagement includes a
determination of whether any additional testing of internal systems that have
been certified as Year 2000 compliant by vendors is necessary, as well as an
assessment of issues associated with third parties. The Company has received
Year 2000 compliance certifications from certain third parties with whom it has
a material relationship. However, the Company has not evaluated the potential
Year 2000 issues for all third parties with whom it maintains material
relationships. This phase of its assessment, which includes identifying and
surveying significant suppliers, service providers, and customers, is in
progress and expected to be completed by December 1998.
Page 14 of 18
<PAGE>
Information gained from the assessment of Year 2000 issues associated with
third parties will define the next phase of the Company's preparation for and
remediation of Year 2000 issues. Depending upon the outcome of the third party
assessment phase, the Company's activities in the next phase will be the
development of appropriate remediation or contingency plans. Such plans could
include identifying replacement suppliers and developing marketing strategies to
sustain sales should a significant customer experience a business interruption
due to Year 2000 issues. This phase of the Company's Year 2000 preparation is
expected to be completed by the first quarter of 1999.
The Company replaced its non-Year 2000 compliant systems in accordance
with a scheduled program. Although Year 2000 compliance was an important factor
in the selection of the replacement systems, it was not a determining factor in
either the decision to replace the systems or the timing of the replacement.
Therefore the Company believes the costs associated with addressing its internal
Year 2000 issues will not be material. Until the Company completes its
assessment of the potential Year 2000 issues with third parties, it is unable to
estimate the cost associated with addressing issues associated with third
parties.
The Company believes it has taken the necessary steps to enable it to
conduct its internal business and fulfill its obligations in the Year 2000.
However, the Company is still in the process of evaluating whether and how the
potential Year 2000 issues of its important suppliers, service providers, and
customers may affect its financial condition and results of operations.
Therefore, the Company is unable to describe the potential risks that may be
associated with the Year 2000 issues of third parties with whom it maintains
material relationships. Identification of material risks should be complete by
December 1998 and plans to address those risks should be in place by the end of
the first quarter of 1999.
Page 15 of 18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is no pending litigation and, to the knowledge of the Company, there
is no threatened litigation, the unfavorable resolution of which would have a
material adverse effect on the business or financial condition of the Company.
ITEMS 2, 3, 4 AND 5 OF PART II are not applicable and have been omitted.
Page 16 of 18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
+3.1 -- Second Amended and Restated Operating Agreement of U.S.
Timberlands Klamath Falls, L.L.C.
*3.2 -- Certificate of Incorporation of U.S. Timberlands Finance Corp.
*3.3 -- Bylaws of U.S. Timberlands Finance Corp.
+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 Company, L.P. and certain other parties
*10.4 -- Form of U.S. Timberlands Company, L.P. 1997 Long-Term Incentive
Plan
*10.5 -- Employment Agreement for Mr. Rudey
++10.6 -- 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
27.1 -- Financial Data Schedule
* Incorporated by reference to the same numbered Exhibit to the Co-Registrants'
Registration Statement on Form S-1 filed November 13, 1997.
+ Incorporated by reference to the same numbered Exhibit to the Co-Registrants'
Current Report on Form 8-K filed January 15, 1998.
++ Incorporated by reference to the same numbered Exhibit to the Co-Registrants'
Annual Report on Form 10-K filed March 31, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
June 30, 1998.
Page 17 of 18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
co-registrants have duly caused this report to be signed on their behalf by the
undersigneds thereunto duly authorized.
Date: November 16, 1998 U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
By: U.S. Timberlands Services Company, L.L.C.
as Manager
By: /s/ ALLEN E. SYMINGTON
-------------------------------------------
Allen E. Symington
President and Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
By: /s/ JOHN C. MCDOWELL
-------------------------------------------
John C. McDowell
Vice President-Finance and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
U.S. TIMBERLANDS FINANCE CORP.
By: /s/ ALLEN E. SYMINGTON
-------------------------------------------
Allen E. Symington
President and Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
By: /s/ JOHN C. MCDOWELL
-------------------------------------------
John C. McDowell
Vice President-Finance and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
Page 18 of 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
FINANCIAL STATEMENTS OF U.S. TIMBERLANDS KLAMATH FALLS, L.L.C. AND U.S.
TIMBERLANDS FINANCE CORP. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,936
<SECURITIES> 0
<RECEIVABLES> 8,795
<ALLOWANCES> 100
<INVENTORY> 0
<CURRENT-ASSETS> 19,466
<PP&E> 1,481
<DEPRECIATION> 287
<TOTAL-ASSETS> 366,904
<CURRENT-LIABILITIES> 15,155
<BONDS> 225,000
0
0
<COMMON> 0
<OTHER-SE> 126,749
<TOTAL-LIABILITY-AND-EQUITY> 366,904
<SALES> 55,667
<TOTAL-REVENUES> 55,667
<CGS> 11,712
<TOTAL-COSTS> 41,951
<OTHER-EXPENSES> 1,644
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,685
<INCOME-PRETAX> (4,227)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,227)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,227)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
