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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
U.S. TIMBERLANDS FINANCE CORP.
(Exact name of co-registrant as specified in its charter)
Delaware 93-1217136
Delaware 91-1851612
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
625 Madison Avenue, Suite 10-B, New York, NY 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Co-Registrants telephone number, including area code: 212-755-1100
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 [ ]
<PAGE>
PART l. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended June 30,
-----------------------------------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
Revenues $ 20,296 $ 18,622
----------------- ----------------
Costs and expenses:
Cost of goods sold 2,774 4,249
Cost of timberland sales - 5,917
Depletion, depreciation and road amortization 5,268 3,957
Selling, general and administrative 2,489 1,760
----------------- ----------------
Total costs and expenses 10,531 15,883
----------------- ----------------
Operating income 9,765 2,739
Interest expense 5,495 5,635
Interest income (99) (94)
Financing fees 169 169
Other income - net (257) (85)
----------------- ----------------
Net income (loss) $ 4,457 $ (2,886)
================= ================
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT)
(UNAUDITED)
Six Months Ended June 30,
-----------------------------------------------
1999 1998
--------------------- ---------------------
Revenues $ 31,425 $ 26,378
----------------- ----------------
Costs and expenses:
Cost of goods sold 4,796 6,899
Cost of timberland sales - 5,917
Depletion, depreciation and road amortization 9,252 6,716
Selling, general and administrative 4,839 5,390
----------------- ----------------
Total costs and expenses 18,887 24,922
----------------- ----------------
Operating income 12,538 1,456
Interest expense 10,965 11,098
Interest income (351) (270)
Financing fees 338 338
Other income - net (1,139) (110)
----------------- ----------------
Net income (loss) $ 2,725 $ (9,600)
================= ================
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1999 1998
--------------------- ---------------------
(UNAUDITED) *
ASSETS
Current assets:
Cash and cash equivalents $ 1,005 $ 4,824
Accounts and current portion of notes receivable - net 4,490 2,706
Prepaid expenses and other current assets 144 1,539
----------------- -----------------
Total current assets 5,639 9,069
----------------- -----------------
Timber, timberlands and roads - at cost
Timber 331,035 329,520
Timberlands 43,118 43,118
Logging roads 1,803 1,803
Less accumulated depletion and road amortization (50,847) (41,848)
----------------- -----------------
Timber, timberlands and roads - net 325,109 332,593
----------------- -----------------
Seed and nursery stock 929 1,883
----------------- -----------------
Property, plant and equipment - at cost
Equipment 674 637
Building and land improvements 843 843
Less accumulated depreciation (399) (326)
----------------- -----------------
Property, plant and equipment - net 1,118 1,154
----------------- -----------------
Notes receivable 829 -
Deferred financing fees 5,661 5,998
Other assets 1,000 -
----------------- -----------------
Total assets $ 340,285 $ 350,697
================= =================
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ 4,886 $ 6,052
Deferred revenue 1,764 1,614
Short-term debt 1,000 -
----------------- -----------------
Total current liabilities 7,650 7,666
----------------- -----------------
Long-term debt 225,000 225,000
MEMBERS' EQUITY
Managing member's interest 1,076 1,180
Non-managing members' interest 106,559 116,851
----------------- -----------------
Total managing and non-managing members' interest 107,635 118,031
----------------- -----------------
Total liabilities and members' interest $ 340,285 $ 350,697
================= =================
*Derived from audited Consolidated Balance Sheet as of December 31, 1998.
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended June 30,
-----------------------------------------------
1999 1998
--------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,725 $ (9,600)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depletion, depreciation, road amortization and cost
of timberland sold 9,252 12,633
Financing fees 338 338
Other non-cash items 150 -
Working capital changes - net (1,756) (950)
----------------- ----------------
Net cash provided by operating activities 10,709 2,421
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Timber and road additions (1,516) (218)
Purchase of property, plant and equipment - net (36) (28)
Capitalized seed and nursery costs - net 975 (63)
(Increase) decrease in notes receivable - net (829) 177
Increase in other assets (1,000) -
----------------- ----------------
Net cash used in investing activities (2,406) (132)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowing 1,000 -
Distributions to members (13,122) (9,580)
----------------- ----------------
Net cash used in financing activities (12,122) (9,580)
----------------- ----------------
Decrease in cash and cash equivalents (3,819) (7,291)
Cash and cash equivalents - beginning of period 4,824 10,625
----------------- ----------------
Cash and cash equivalents - end of period $ 1,005 $ 3,334
================= ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 10,893 $ 10,588
================= ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per Unit amounts or as otherwise indicated)
(Unaudited)
1. ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Organization
The accompanying consolidated financial statements include the accounts of
U.S. Timberlands Klamath Falls, L.L.C. ("USTK"), a Delaware limited liability
company, and its wholly owed subsidiary, U.S. Timberlands Finance Corp.
("Finance Corp."), collectively referred to hereafter as the Company. Finance
Corp. serves as co-obligor with USTK for $225.0 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 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 substantially all of the equity interest in USTK and to
acquire and own the business and assets of U.S. Timberlands Management Company,
L.L.C. U.S. Timberlands Services Company, L.L.C. (the "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 activity of the Company is growing trees and the sale of logs
and standing timber to third party wood processors. The Company's timberlands
are located in Oregon, east of the Cascade Range. Logs harvested from the
Company's timberlands are sold to unaffiliated domestic conversion facilities.
These logs are processed for sale as lumber; molding products; doors; mill work;
commodity, specialty, and overlaid plywood products; laminated veneer lumber;
engineered wood I-beams; particleboard; hardboard; paper and other wood
products. These products are used in residential, commercial, and industrial
construction; home remodeling and repair; general industrial applications; and a
variety of paper products. The Company also owns and operates its own seed
orchard and nursery, which produce approximately five million genetically
selected conifer seedlings each year. Approximately half of the annual seedling
production is used by the Company for its own reforestation programs; the
balance is sold to other forest products companies.
Basis of Presentation
These consolidated financial statements have been prepared by the Company,
without audit by independent public accountants, pursuant to the rules and
regulations of the United States Securities and Exchange Commission. In the
opinion of management, the consolidated financial statements include all normal
recurring adjustments necessary to present fairly the information required to be
set forth therein. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from these statements pursuant to such
rules and regulations and, accordingly, should be read in conjunction with the
consolidated financial statements included in the Company's 1998 Annual Report
on Form 10-K. Certain reclassifications have been made to the 1998 amounts
presented for comparability purposes and have no impact on net income. Operating
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<PAGE>
results for the three and six month periods ended June 30, 1999 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 1998 Annual Report on Form 10-K.
2. SHORT-TERM DEBT
Please see Management's Discussion and Analysis - Financial Condition and
Liquidity for a description of changes in the Company's short-term debt.
3. SUBSEQUENT EVENT
On July 28, 1999, the Board of Directors of the Managing Member authorized
the Master Partnership to make a distribution of $0.50 per Unit. The total
distribution by the Company to the Master Partnership will be $6,494,751
(including $64,948 to the Managing Member) and will be paid on August 13, 1999
to Unitholders of record on August 5, 1999. All of the cash necessary to make
such distribution will be distributed to the Master Partnership by USTK. In
addition, on August 13, 1999 USTK will distribute $66,273 to the Managing
Member.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
Certain information contained in this report may constitute forward-looking
statements within the meaning of the federal securities laws. Although the
Company believes that expectations reflected in such forward-looking statements
are based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved. Forward-looking information is subject to certain
risks, trends and uncertainties that could cause actual results to differ
materially from those projected. Such risks, trends and uncertainties include
the highly cyclical nature of the forest products industry, general economic
conditions, competition, price conditions or trends for the Company's products,
the possibility that timber supply could increase if governmental, environmental
or endangered species policies change, and limitations on the Company's ability
to harvest its timber due to adverse natural conditions or increased
governmental restrictions. These and other risks are described in the Company's
other reports and registration statements, which are available from the United
States Securities and Exchange Commission.
Overview
The Company's principal operations consist of growing and harvesting timber
and selling logs, standing timber and related by-products to third party wood
processors. These logs and by-products are processed for sale as lumber; molding
products; doors; mill work; commodity, specialty, and overlaid plywood products;
laminated veneer lumber; engineered wood I-beams; particleboard; hardboard;
paper and other wood products. These products are used in residential,
commercial, and industrial construction; home remodeling and repair; general
industrial applications; and a variety of paper products. The results of the
Company's operations and its ability to pay quarterly distributions to its
Unitholders depend upon a number of factors, many of which are beyond its
control. These factors include general economic and industry conditions,
domestic and export prices, supply and demand for logs, seasonality, government
regulations affecting the manner in which timber may be harvested, and
competition from other supplying regions and substitute products.
Seasonality
The Company's log and standing timber sales volumes are generally at their
lowest levels in the first and second quarter of each year. In the first
quarter, heavy snowfalls in higher elevations prevent access to many areas of
the Company's timberlands. This limited access, along with spring break-up
conditions (when warming weather thaws and softens roadbeds) in March or April,
restricts logging operations to lower elevations and areas with rockier soil
types. As a result of these constraints, the Company's sales volumes are
typically at their lowest in the first quarter, improving in the second quarter
and at their highest during the third and fourth quarters. Most customers in the
region react to this seasonality by carrying sufficiently high log inventories
at the end of the calendar year to carry them to the second quarter of the
following year.
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<PAGE>
Current Market Conditions
Strong lumber and plywood demand has led to increased prices for finished
products during the second quarter 1999. A combination of dry spring weather and
increased log prices has led to increased log and stumpage volumes in response
to firm mill needs. Inventories at most mill locations are high going into the
summer season. Continued dry weather and scheduled mill downtime will keep log
inventories high for third quarter. Log export prices and demand have increased
slightly.
The strong lumber and plywood markets have affected log and stumpage
pricing. The circumstances driving the log pricing and shortage have also
impacted finished product pricing. Prices for #3 Ponderosa Pine shop are up 17%
from a year ago. Lodgepole Pine stud prices are up 39% from the second quarter
of 1998. Douglas Fir #2 & Btr. green studs are up 54% and White Fir plywood
sheathing prices are up 60% from last year at this time. These price increases
during the second quarter of 1999 may differ from the Company's actual results
for the same quarter as the Company's pricing is typically agreed to prior to
actual delivery.
Results of Operations
Selected operating statistics for the Company:
<TABLE>
<CAPTION>
Sales Volume (MBF) Price Realization (MBF)
------------------ -----------------------
Timber Timber Timberland
Period Logs Stumpage Deeds Logs Stumpage Deeds Sales ($000)
------ ---- -------- ----- ---- -------- ----- ------------
1999
<S> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended June 30 15,376 -- 26,898 $455 -- $484 --
Three Months Ended March 31 11,996 1,921 17,759 $395 $440 $308 --
1998
Three Months Ended June 30 23,832 2,506 -- $432 $570 -- $6,276
Three Months Ended March 31 16,409 1,984 -- $418 $447 -- --
</TABLE>
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
REVENUES Revenues for the quarter ended June 30, 1999 were $20.3 million,
an increase of $1.7 million or 9% over revenues of $18.6 million for the quarter
ended June 30, 1998. This increase in revenues was attributable to an $11.6
million increase in timber deed and stumpage sales partially offset by a $3.3
million decrease in log sales and a $6.3 million decrease in timberland sales.
Log sales for the quarter ended June 30, 1999 were $7.0 million on volumes
of 15.4 million board feet ("MMBF") as compared to the same period in 1998 when
log sales were $10.3 million on volumes of 23.8 MMBF. The decrease in log sales
volume was caused by weather. Logging operations were delayed this year due to a
heavy snow pack that prolonged the spring break-up. The average second quarter
1999 log sales price was $455 per MBF compared to an average of $432 per MBF for
the first quarter of 1998. The following explanation of changes in sales prices
may differ from those Current Market Conditions described previously, as most
pricing is agreed to prior to actual delivery. The increase in the average log
sales price was primarily attributable to a 30% increase in White Fir prices.
The increase in White Fir log prices was directly attributable to increases in
the prices for White Fir finished products. Pine and Douglas Fir prices were
essentially flat between the second quarter of 1999 and 1998.
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<PAGE>
Timber deed and stumpage sales for the second quarter were $13.0 million on
volumes of 26.9 MMBF as compared to the same period in 1998 when deed and
stumpage sales were $1.4 million on volumes of 2.5 MMBF. The increase in timber
deed and stumpage volume was primarily the result of a strategy, which the
Company initiated in the second quarter of 1998, to expand its use of timber
deeds and stumpage sales to meet the needs of its customers and improve sales
prices realized by the Company. In addition, due to the prolonged spring
break-up, management made a decision to expand the timber deed sales volume in
the second quarter of 1999.
There were no timberland sales in the second quarter of 1999, as compared
to a $6.3 million timberland sale in the same period in 1998.
OPERATING COSTS Operating costs were $10.5 million for the quarter ended
June 30, 1999, a decrease of $5.4 or 34% from operating costs of $15.9 million
for the quarter ended June 30, 1998. This decrease was primarily due to a $1.5
million decrease in cost of goods sold ("COGS"), and a $5.9 million decrease in
the cost of timberland sales. These reductions were partially offset by a $1.3
million increase in depreciation, depletion and road amortization ("DD&A")
expenses and a $0.7 million increase in selling, general and administrative
expenses ("SGA").
COGS for the quarter ended June 30, 1999 were $2.8 million, a decrease of
$1.5 million or 36% from COGS of $4.2 million for the same period in 1998. This
decrease was due to a 35% decrease in log sales volume to 15.4 MMBF in the
second quarter of 1999 from 23.8 MMBF in the same period in 1998.
The Company had no timberland sales during the quarter ended June 30, 1999,
as compared to a sale of 15,304 acres with a cost of $5.9 million during the
same period in 1998.
SG&A expenses for the quarter ended June 30, 1999 were $2.5 million, an
increase of $0.7 or 39% from comparable expenses of $1.8 million for the same
period in 1998. This increase was primarily due to $0.7 million in severance
expenses related to the closure of the Seattle office. As a percentage of
revenues, SG&A increased to 12% in the second quarter of 1999, as compared to
9% in the second quarter of 1998.
DD&A expense was $5.3 million for the second quarter of 1999, a $1.3
million or 33% increase over DD&A expense of $4.0 million for the same period in
1998. This increase was due to a 61% increase in sales volume from log, timber
deed and stumpage sales to 42.3 MMBF in the second quarter of 1999, as compared
to 26.3 MMBF for the same period in 1998. This increase in sales volume was
partially offset by a decrease in the Company's depletion rate per MBF, which
resulted from the annual recalculation of the depletion rate in the first
quarter of 1999.
OTHER INCOME Other income was $0.3 million for the second quarter of 1999,
an increase of $0.2 million from the same period in 1998. This increase was due
to income related to an unrealized gain, as of June 30, 1999, from marking to
market an unhedged financial instrument.
MEMBERS' EQUITY During the three months ended June 30, 1999 the members'
equity in the Company declined $2.1 million from $109.7 million to $107.6
million. This decline is the result of the Company's $4.5 million net income
offset by the Company's $6.6 million of distributions to its members during this
period. The Company expects to continue to make distributions to its Members in
excess of its operating earnings. As a result, the Company anticipates that
members' equity will continue to decline.
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<PAGE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
REVENUES Revenues for the six months ended June 30, 1999 were $31.4
million, an increase of $5.0 million or 19% over revenues of $26.4 million for
the six months ended June 30, 1998. This increase in revenues was attributable
to a $17.0 million increase in timber deed and stumpage sales partially offset
by a $5.4 million decrease in log sales and a $6.3 million decrease in
timberland sales.
Log sales for the six months ended June 30, 1999 were $11.7 million on
volumes of 27.4 MMBF as compared to the same period in 1998 when log sales were
$17.2 million on volumes of 40.2 MMBF. The decrease in log sales volume was
caused by weather. Logging operations were delayed this year due to a heavy snow
pack that prolonged the spring break-up. The average log sales price for the
first six months of 1999 was $429 per MBF compared to $426 per MBF for the same
period in 1998. The following explanation of changes in sales prices may differ
from those Current Market Conditions described previously, as most pricing is
agreed to prior to actual delivery. The increase in the average log sales price
was primarily attributable to a 25% increase in White Fir prices. The increase
in White Fir log prices was directly attributable to increases in the prices for
White Fir finished products. Pine and Douglas Fir prices were slightly lower in
the first six months of 1999, as compared to the same period in 1998.
Timber deed and stumpage sales for the six months were $19.3 million on
volumes of 46.6 MMBF, as compared to the same period in 1998 when deed and
stumpage sales were $2.3 million on volumes of 4.5 MMBF. The increase in timber
deed and stumpage volume was primarily the result of a strategy, which the
Company initiated in the second quarter of 1998, to expand its use of timber
deed and stumpage sales to meet the needs of its customers and improve sales
prices realized by the Company. In addition, due to the prolonged spring
break-up, management made a decision to expand the timber deed sale volume in
the second quarter of 1999.
There were no timberland sales in the first six months of 1999, as compared
to a $6.3 million timberland sale in the same period in 1998.
OPERATING COSTS Operating costs were $18.9 million for the six months ended
June 30, 1999, a decrease of $6.0 or 24% from operating costs of $24.9 million
for the same period in 1998. This decrease was primarily due to a $2.1 million
decrease in COGS, a $5.9 million decrease in the cost of timberland sales and a
$0.5 million decrease in general and administrative expenses. These reductions
were partially offset by a $2.5 million increase in DD&A expenses
COGS for the six months ended June 30, 1999 were $4.8 million, a decrease
of $2.1 million or 30% from COGS of $6.9 million for the same period in 1998.
This decrease was due to a 32% decrease in log sales volume to 27.4 MMBF in the
first six months of 1999 from 40.2 MMBF in the same period in 1998.
The Company had no timberland sales during the first six months of 1999, as
compared to a sale of 15,304 acres with a cost of $5.9 million during the same
period in 1998.
SG&A expenses for the six months ended June 30, 1999 were $4.8 million, a
decrease of $0.6 million or 11% from comparable expenses of $5.4 million for the
same period in 1998. This decrease was primarily due to a one-time expense of
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$1.1 million in the first quarter of 1998 for severance and the repurchase of
member interest in the Manager. This decrease was partially offset by $0.7
million in severance expenses recorded in the second quarter of 1999 related to
the closure of the Seattle office. As a percentage of revenues, SG&A decreased
to 15% in the first six months of 1999, as compared to 20% in same period of
1998.
DD&A expense was $9.3 million for the six months of 1999, a $2.6 million or
39% increase over DD&A expense of $6.7 million for the same period in 1998. This
increase was due to an increase in sales volume from log, timber deed and
stumpage sales to 73.9 MMBF in the first six months of 1999, as compared to 44.8
MMBF for the same period in 1998. The increase in sales volume was partially
offset by a decrease in the Company's depletion rate per MBF, which resulted
from the annual recalculation of the depletion rate in the first quarter of
1999.
OTHER INCOME Other income was $1.1 million for the six months of 1999, an
increase of $1.0 million from the same period in 1998. This increase was due to
income related to an unrealized gain, as of June 30, 1999, from marking to
market an unhedged financial instrument.
MEMBERS' EQUITY During the six months ended June 30, 1999 the members'
equity in the Company declined $10.4 million from $118.0 million to $107.6
million. This decline is the result of the Company's $2.7 million net income
offset by the Company's $13.1 million of distributions to its Members during
this period. The Company expects to continue to make distributions to its
Members in excess of its operating income. As a result, the Company anticipates
that members' equity will continue to decline.
Financial Condition and Liquidity
OPERATING ACTIVITIES Cash flows provided by operating activities during the
six months ended June 30, 1999 were $10.7 million, as compared to cash flows
provided by operating activities of $2.4 million during the same period in 1998.
The $8.3 million increase in cash flows provided by operating activities was
primarily due to a $5.0 million increase in the proceeds from sales, a $2.1
million decrease in COGS and a $0.6 million decrease in SG&A expenses.
INVESTING ACTIVITIES Cash flows used by investing activities were $2.4
million during the first six months of 1999, as compared to cash flows used by
investing activities of $0.1 million during the same period in 1998. During the
first quarter of 1999, $1.0 million of other assets were established. The $0.5
million of net additions to timber, roads and seed and nursery stock were
primarily capitalized seedling and nursery costs. The notes receivable from
timber deed sales increased by $0.8 million.
FINANCING ACTIVITIES Cash flows used in financing activities were $12.1
million for the first six months 1999, as compared to cash flows used in
financing activities of $9.6 million during the same period in 1998. This
increase is primarily due to the Company paying $13.1 million in distributions
to Members in the six months ended of 1999 as compared to $9.6 million during
the same period in 1998. There were no cash flows from financing activities in
the first three months of 1998, as the Company's first distribution was not paid
until May 15, 1998. The Company had $1.0 million of outstanding borrowings on
the Affiliate Credit Facility at June 30, 1999. There was no need to borrow
funds in the first six months of 1998.
The Company had a $100.0 million unsecured revolving credit facility (the
"Bank Credit Facility") with a group of banks, which consisted of a $75.0
million acquisition facility and a $25.0 million working capital facility and
was subject to restrictions and covenants that limited the amount available for
borrowing in amounts which varied from time to time. Effective April 6, 1999,
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the Company terminated the $75.0 million acquisition facility. Effective June
30, 1999, the Company terminated the $25.0 million working capital facility and
entered into a credit agreement with an affiliate of the Managing Member (the
"Affiliate Credit Facility"). The Affiliate Credit Facility allows the Company
to borrow up to $12.0 million under terms and covenants substantially consistent
with the former Bank Credit Facility. The Affiliate Credit Facility will expire
on June 30, 2000. At that time, amounts borrowed will be due and payable. As of
June 30, 1999, $1.0 million was outstanding under the Affiliate Credit Facility.
The Company is currently in discussions with several banks to replace the
Affiliate Credit Facility. The Company also has the ability to generate cash
flow through the acceleration of planned log and timber deed sales. In addition,
the Company's plan is to retain investment banks to assist it in raising money
for acquisitions.
The agreements governing the Company's 9-5/8% senior notes (the "Notes")
and the Affiliate Credit Facility contain restrictive covenants, including
limitations on harvest levels, land sales, cash distributions and the amount of
future indebtedness. In addition, these agreements require the Company to
maintain certain financial ratios. Under the Notes, the Company's average annual
harvest volume over any period of four consecutive years cannot exceed 150 MMBF
(as adjusted for timberland sales and purchases). The Notes also limit one-year
harvest levels and average annual harvest levels for consecutive two-and
three-year periods. As of June 30, 1999 the Company was in compliance with the
covenants and ratios pertaining to the Notes and Affiliate Credit Facility.
Through the first six months of 1999, 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 and borrowings under the
Bank Credit Facility and Affiliate Credit Facility. 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 cash distributions and interest payments will be funded from cash
on hand, cash generated from current operations and borrowings.
Cash required to meet the Company's debt service and quarterly cash
distributions will be significant. To meet its working capital requirements, the
Company has been harvesting and selling logs, stumpage and timber deed sales at
a rate in excess of the Managing Member's estimate of the long-term sustainable
annual harvest level for its current timberlands. The Managing Member expects
that the debt service and quarterly cash distributions will be funded from
operations and borrowings. Given projected harvest levels, the long term
sustainable harvest levels of the timberlands and the harvest restrictions in
the Notes, unless prices improve, costs are reduced, new markets are developed
or the Company makes accretive acquisitions, the Company's ability in the future
to make distributions at current levels may be adversely affected. The Company
continues to evaluate means to improve cash flows, including the factors
mentioned above. However, there can be no assurance that prices will improve or
that the Company will be able to take any of these actions.
13 of 19
<PAGE>
Year 2000 Issues
The Company is aware of the "Year 2000" issue associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The Year 2000 issue is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of a two-digit
year value to 00. The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
recognize such information could generate erroneous data or cause a system to
fail.
Since early 1998, the company has been assessing its computer hardware and
information systems needs and upgrading its systems as appropriate. In 1998, the
Company completed the installation of several major hardware and software
upgrades: general ledger, accounts payable, accounts receivable, log accounting
and telecommunications. Along with this assessment and upgrade of its systems,
the Company is also reviewing its systems and applications to ensure its
computer and information systems will function properly at Year 2000. The
Company had substantially completed this internal review and upgrade as of June
30, 1999. Due to changing status and ongoing recommended modifications by
vendors, system assessments and testing will continue through the end of this
year. At this time, management of the Company believes that the specific cost of
achieving Year 2000 compliance for its current systems will not have a material
effect on the Company's consolidated financial statements.
Like other companies, the Company relies on its customers for revenues and
on its vendors for products and services of all kinds; these third parties all
face the Year 2000 issue. An interruption in the ability of any of them to
provide goods or services, or to pay for goods and services provided to them, or
an interruption in the business operations of customers causing a decline in
demand for services, could have a material adverse effect on the Company.
In addition, there is a risk, the probability of which the Company is not
in a position to estimate, that the Year 2000 will cause wholesale, perhaps
prolonged, failures of electrical generation, banking, telecommunications or
transportation systems in the United States or abroad, disrupting the general
infrastructure of the economy. The effect of such disruptions on the Company
could be material.
The Company is in the process of identifying and surveying its key vendors
and customers regarding their progress on the Year 2000 issue. The Company's
efforts to determine the readiness of its key vendors and customers are expected
to be ongoing through year-end 1999. However, because so many entities are
exposed to the risk of failure not only of their own systems, but the systems of
other entities, the ultimate effect of the Year 2000 issue is subject to a high
degree of uncertainty.
The Company believes that its preparations currently underway are adequate
to assess and manage the risks presented by the Year 2000 issue, and does not
have a formal contingency plan at this time.
The statements in this section regarding the Year 2000 and the Company's
responses to it are forward-looking statements. They are based on assumptions
that the Company believes to be reasonable in light of its current knowledge and
experience. A number of events could cause actual results to differ materially
from those described in the forward-looking statements made on behalf of the
Company.
14 of 19
<PAGE>
SFAS No. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financing Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company will adopt SFAS No. 133 as of
July 1, 1999. The Company believes that adoption of this statement will not have
a material impact on the Company.
15 of 19
<PAGE>
PART ll. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is no pending litigation and, to the knowledge of the Company, there
is no threatened litigation, the unfavorable resolution of which could have a
material adverse effect on the business or financial condition of the Company.
ITEMS 2, 3, 4 AND 5 OF PART II are not applicable and have been omitted.
16 of 19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
+3.1 Amended and Restated Agreement of Limited Partnership of
U.S. Timberlands Company, L.P.
+3.2 Second Amended and Restated Operating Agreement of U.S.
Timberlands Klamath Falls, L.L.C.
**3.3 Amendment No. 1 to Amended and Restated Agreement of
Limited Partnership of U.S. Timberlands Company, L.P.
+10.2 Indenture among U.S. Timberlands Klamath Falls, L.L.C.,
U.S. Timberlands Finance Corp. and State Street Bank and
Trust Company, as trustee
+10.3 Contribution, Conveyance and Assumption Agreement among
U.S. Timberlands Company, L.P. and certain other parties
*10.4 Form of U.S. Timberlands Company, L.P. 1997 Long-Term
Incentive Plan
*10.5 Employment Agreement for Mr. Rudey
*10.9 Supply Agreement between U.S. Timberlands Klamath Falls,
L.L.C. and Collins Products LLC
***16 Letter from Arthur Andersen, LLP dated December 8, 1998
*21.1 List of Subsidiaries
27.1 Financial Data Schedule
* Incorporated by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-1 filed November 13, 1997.
** Incorporated by reference to the same numbered Exhibit to the Registrant's
Quarterly report on Form 10-Q filed May 15, 1998.
*** Incorporated by reference to Exhibit 1 to the Registrant's Form 8-K filed
on December 8, 1998.
+ Incorporated by reference to the same numbered Exhibit to the Registrant's
Current Report on Form 8-K filed January 15, 1998.
++ Incorporated by reference to the same numbered Exhibit to the Registrant's
Annual Report on Form 10-K filed March 31, 1998.
(b.) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
June 30, 1998.
17 of 19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 16, 1999 U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
By: U.S. Timberlands Services Company, L.L.C.
as Manager
By: /s/ Greg G. Byrne
--------------------------
Greg G. Byrne
Chief Financial Officer
(Chief Financial Officer,
Principal Accounting Officer
and Duly Authorized Officer)
U.S. TIMBERLANDS FINANCE CORP.
By: /s/ Greg G. Byrne
--------------------------
Greg G. Byrne
Chief Financial Officer
(Chief Financial Officer,
Principal Accounting Officer
and Duly Authorized Officer)
<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 SIX MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
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<SECURITIES> 0
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<TOTAL-ASSETS> 340,285
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0
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