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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-24976
CROWN PACIFIC PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
121 S.W. Morrison Street, Suite 1500 Portland, Oregon 97204
(Address of principal executive offices) (Zip Code)
(503) 274-2300
(Registrant's telephone number including area code)
Delaware 93-1161833
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
Common Units, Representing New York Stock Exchange
Limited Partner Interests
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to 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 this Form 10-K. [ ]
The aggregate market value of the Units of the Registrant held by
non-affiliates of the Registrant was $460,459,890 as of February 14, 1997.
As of February 14, 1997, there were 21,331,189 Common Units and 5,773,088
Subordinated Units outstanding. DOCUMENTS INCORPORATED BY REFERENCE: None.
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CROWN PACIFIC PARTNERS, L.P.
TABLE OF CONTENTS
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PART I PAGE
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity
and Related Unitholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 24
PART III
Item 10. Directors and Executive Officers of the Managing
General Partner 24
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management 28
Item 13. Certain Relationships and Related Transactions 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 30
Signatures 33
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PART I
ITEM 1. BUSINESS
GENERAL. Crown Pacific Partners, L.P. (the "Partnership"), a Delaware
limited partnership, through its 99% owned subsidiary, Crown Pacific Limited
Partnership (the "Operating Partnership"), was formed in 1994 to acquire, own
and operate timberlands and wood product manufacturing assets located in the
northwest United States. These assets were formerly owned by Crown Pacific
Limited Partnership ("CPLP") and Crown Pacific Inland Limited Partnership
("CP Inland"). The Partnership's business consists primarily of growing and
harvesting timber for sale as logs in domestic and export markets and the
manufacturing and selling of lumber and other wood products.
Crown Pacific Management Limited Partnership (the "Managing General
Partner") manages the businesses of the Partnership and the Operating
Partnership. The Managing General Partner owns a 0.99% general partner
interest in the Partnership and the remaining 1% general partner interest in
the Operating Partnership. Crown Pacific, Ltd. ("CPL"), the Special General
Partner of the Partnership, and the Managing General Partner comprise the
General Partners of the Partnership. The Special General Partner owns a
0.01% general partner interest and a 10% limited partnership interest in the
Partnership. All management decisions related to the Partnership are made by
the Managing General Partner. Unitholders have voting rights for certain
issues as outlined in the Partnership Agreement. As used herein, "Former
Entities" and "Predecessors" refer to the combined entities of CPLP, CP
Inland, CPL and two additional related entities: Crescent Creek Logging,
Inc. and Crown Pacific Leasing Limited Partnership. "Partnership" and "Crown
Pacific" refer to the Partnership and the Operating Partnership taken as a
whole, and include the activities of the Former Entities.
For a discussion of the Partnership's timberlands, see
"Business-Timberlands" and "Business- Timberland Management." For a
discussion of the Partnership's manufacturing facilities ("Manufacturing
Facilities"), see "Properties -Manufacturing Facilities."
The Partnership has pursued a plan of growth through strategic
acquisitions of timberlands and other assets since its inception. The
following table summarizes the significant acquisitions during the
Partnership's and Former Entities' history:
ACQUISITION DATE CONSIDERATION
Central Oregon timberlands April 1988 $35.6 million
Prineville, Oregon sawmill November 1988 $6.3 million
Hamilton timberlands July 1989 $237.8 million
Central Oregon timberlands and Gilchrist, October 1991 $131.5 million
Oregon sawmill
Central Oregon timberlands June 1992 $8.8 million
Eastern Washington timberlands December 1992 $10.1 million
Redmond, Oregon plywood and September 1993 $29.4 million
remanufacturing facilities
Inland Region timberlands and sawmills October 1993 $238.0 million
Western Washington, Tract 17 timberlands July 1995 $18.0 million
Olympic Timberlands and Eastside timberlands May 1996 $205.0 million
RECENT ACQUISITIONS. On May 15, 1996, the Partnership completed the purchase of
approximately 207,000 acres of timberland in Oregon and Washington, containing
approximately 1,485 MMBF of predominantly second growth merchantable timber,
from Cavenham Forest Industries Inc. ("Cavenham") for $205 million (the
"Cavenham Acquisition"). The Cavenham properties are located in close proximity
to the Partnership's existing operations, requiring only minimal additional
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administrative cost. The Partnership believes that the Cavenham Acquisition
has benefited the Partnership in several ways. First, the majority of the
logs harvested from the newly-acquired Oregon timberlands (the "Eastside
Timberlands") are processed by the Partnership's existing Oregon
Manufacturing Facilities and are used to offset higher cost external log
purchases, which has improved the operating margin of the Partnership's
Oregon operations. Second additional volume available from the newly-acquired
Olympic Peninsula timberlands in Washington (the "Olympic Timberlands") has
given the Partnership (i) more log volume that can be sold in the export
market (which has historically commanded a premium over the domestic market),
(ii) more flexibility in harvest planning with the Partnership's existing
northwest Washington timberlands (the "Hamilton Timberlands"), which are
approximately 60 miles away by water and (iii) the ability to negotiate more
favorable terms for sales in both the export and domestic markets from the
Washington region. Third, due to the high growth rates in the Olympic
Timberlands, the Cavenham Acquisition has increased the average growth rate
of the Partnership's timberlands.
The Partnership acquired the assets of a studmill located in Marysville,
Washington in September 1996 for $2.7 million. This facility will enable the
Partnership to earn higher margins from sales of non-export quality timber
harvested from the Olympic Timberlands. The facility is located near a
water-way, which provides a cost-effective alternative method of transporting
logs into the mill.
In September 1996, the Partnership also acquired for $3 million
substantially all of the assets of a company located in Eugene, Oregon that
operates as a trader and wholesaler of lumber and other wood products.
Through this operation, Crown Pacific is able to sell its and other
manufacturers' products to customers who are generally unable to buy products
directly from the Partnership's Manufacturing Facilities. These customers
typically require sales orders of varying sizes, have needs for other
value-added services such as remanufacturing, require information concerning
market trends and conditions and desire a "one-stop shopping" approach in
their purchasing activities.
RECENT DISPOSITIONS. Crown Pacific has historically engaged in the sale or
disposal of timberland and other manufacturing facilities not integral to its
forest products operations and strategies. In June 1996, the Albeni Falls,
Idaho mill was closed and the assets sold. In October 1996, the Redmond,
Oregon plywood manufacturing facility was closed and the assets sold. The
Partnership's Thompson Falls, Montana sawmill was closed in December 1995 due
to a fire and was subsequently sold in June 1996 (see Note 3 of Notes to
Consolidated Financial Statements).
On February 25, 1997, the Partnership entered into a letter of intent to
sell its remanufacturing facility in Redmond, Oregon for $2.5 million, plus
approximately $6 million for the facility's inventories. The transaction is
expected to close on or before April 1, 1997.
TIMBERLANDS. The Partnership owns or controls approximately 738,000 acres of
timberlands, which contain a total merchantable timber inventory of
approximately 4,723 MMBF, located in Oregon, Washington, Idaho and Montana.
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The following table summarizes the estimated volume and acreage of the
Partnership's timberlands:
Volume
Timberlands (MMBF) Acreage
----------- -------- -------
Oregon Timberlands:
Central Oregon 728 227,000
Eastside (former Cavenham, south and
northeast Oregon) 466 124,000
Washington Timberlands:
Hamilton (northwest Washington) 836 102,000
Olympic (former Cavenham, northwest 969 83,000
Washington)
Inland Timberlands (Idaho, east Washington 1,724 202,000
and northwest Montana)
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4,723 738,000
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The Partnership believes it is one of the largest nongovernmental
holders of mature Ponderosa pine in the United States. The Partnership's
Ponderosa pine, as well as substantial quantities of export-quality Douglas
fir and hemlock located on the Hamilton and Olympic Timberlands, have
historically commanded premium prices over other softwood species. The
Partnership also has significant holdings of other softwood species,
including white fir, lodgepole pine, cedar and sugar pine. Most of the
timber on the Timberlands is softwood. Due to its long fiber, strength,
flexibility and other characteristics, softwood is generally preferred over
hardwood for construction lumber and plywood.
The Timberlands are comprised principally of mature stands, with over
50% of the Partnership's merchantable timber in the Oregon and Inland Regions
being at least 80 years old. In northwest Washington, where timber is
harvested at a much earlier age because of high growth rates, over 70% of the
Partnership's merchantable timber is at least 40 years old. Growth rates
have been estimated by an independent regional timber appraisal firm at
between 2.5% and 3.25% per annum on the Oregon Timberlands and 7.0% per annum
on the Washington Timberlands.
The Partnership's substantial timber resources reduce its reliance on
third-party log sources to supply its Manufacturing Facilities, which the
Partnership believes gives it a significant competitive advantage over lumber
manufacturers without a supply of fee timber. During 1996, 1995 and 1994,
Crown Pacific's Timberlands provided the Oregon Manufacturing Facilities with
54%, 35% and 44%, respectively, and the Inland Manufacturing Facilities with
47%, 40% and 34%, respectively, of their log requirements. The increase in
1996 resulted from the acquisition of the Eastside Timberlands, the closure
of two Inland Region manufacturing facilities and the plywood manufacturing
facility and capital improvements to the Manufacturing Facilities that have
reduced log requirements through more efficient processing.
TIMBERLAND MANAGEMENT. Particular forestry practices vary by geographic
region and depend on factors such as soil productivity, weather, terrain,
tree size, age and stocking. Crown Pacific actively manages its timber
operations based on these factors and other relevant information in order to
maximize the long-term value of its timber assets. The Partnership's
management practices begin with the development of harvest plans for each of
its tree farms. These plans are regularly reviewed and updated to reflect
forestry considerations, market conditions, contractual and financing
obligations and regulatory limitations.
Consistent with prudent forestry practices, Crown Pacific attempts to
harvest any trees that are dead, dying, downed, diseased or deformed.
Prudent forestry practices also indicate that "thinning", a process by which
smaller trees are selectively removed from among larger trees or where the
number
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of trees of equal size on a tract is reduced, helps to increase the
overall growth rate of the remaining stand of trees. Commercial thinning is
generally performed when the trees that are harvested produce merchantable
timber, but pre-commercial thinning is also practiced extensively on the
Partnership's Timberlands.
Although the vast majority of Crown Pacific's Timberlands regenerate
naturally due to selective harvesting practices, the Partnership is engaged
in active reforestation programs that generally exceed reforestation
requirements applicable to the Timberlands. These programs are designed to
promote better health and growth rates and facilitate greater future harvest
flexibility. Active reforestation is practiced primarily in the Washington
Timberlands due to the Partnership's even aged forestry management in that
region, an approach that is necessary given the difficult logging conditions
and uniform ages and species of trees harvested in that region. The
Partnership maintains a 40 acre seed orchard on Whidbey Island in Washington
to help support these programs.
The legal title to the Timberlands is subject to existing easements,
rights of way, flowage and flooding rights, servitudes, cemeteries, camping
sites, hunting and other leases, licenses and permits, none of which
materially adversely affect the value of the Timberlands or materially
restrict the harvesting of timber or other operations of the Partnership. In
addition, under the terms of the Partnership's senior notes and bank credit
facilities, the Partnership is not permitted to pledge, assign or transfer
its Timberlands, except under limited circumstances.
Forests are subject to a number of hazards, including damage by fire,
insects and disease. These hazards, along with severe weather conditions and
other natural disasters, can reduce the productivity of the Partnership's
Timberlands. Such hazards are unpredictable and there can be no assurance
that Crown Pacific's losses will be limited. Consistent with practices of
other forest products companies, the Partnership does not maintain insurance
against losses to standing timber on the Timberlands. Even if such insurance
were available, the cost would be prohibitive to the Partnership.
PRODUCTS, COMPETITION AND SEASONALITY. Most of the timber harvested by Crown
Pacific is utilized by its manufacturing facilities for the production of
lumber and, until the sale of the remanufacturing facility, remanufactured
wood products. The remainder, primarily from the Washington Timberlands, is
sold in third party domestic and export log markets. The Partnership's
markets are highly competitive with respect to price, quality of products,
distribution and other factors. Crown Pacific expects its products to
experience increasing competition from engineered wood products and other
substitute products. During 1996, total sales to customers involved in
exporting activities was $20.3 million, or 5.0% of revenues, and no customer
accounted for 10% or more of total revenues.
i. LOGS. The Partnership competes in the domestic market with other
log suppliers, including numerous private land and timber owners in the
northwest United States, many of whom have significantly greater financial
resources than Crown Pacific, as well as with the States of Idaho, Montana
and Washington and United States government agencies, such as the United
States Forest Service (the "USFS"), the Bureau of Land Management and the
Bureau of Indian Affairs (the "BIA"). Competitive factors with respect to
the domestic log market generally include price, species and grade, proximity
to wood processing facilities and ability to meet current and future delivery
requirements.
Crown Pacific competes in the export log market with other U.S.
companies, as well as those in Chile, New Zealand, Mexico, Russia and
Scandinavia, many of whom have abundant timber resources. Principal
competitive factors in the export market are quality, size and species.
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Domestic log sales volumes are generally at their lowest point in the
second quarter of each year during spring breakup, when warming weather thaws
and softens roadbeds, restricting access to harvest sites. Export log sales
are affected by variations in inventory, both domestically and in the
countries where such logs are sold, as well as by weather conditions. Total
log sales, including stumpage sales, were 26.9% of revenues for the year
ended December 31, 1996.
ii. LUMBER. Crown Pacific produces an array of lumber products at its
five mills in Oregon, Idaho and Washington (see Item 2. Properties). The
Partnership's two Oregon facilities produce shop-grade lumber products
primarily for industrial remanufacturers who produce doors, windows and other
specialty products. Products produced at the Oregon facilities generally
command premium prices due to the higher quality timber in that region.
The Partnership's two facilities in Idaho produce 1" boards and 2"
dimension commodity-grade lumber for various construction applications,
including stud walls, roof trusses and joists, decking, laminated beams and
remanufactured items. Crown Pacific's Washington facility produces
commodity-grade studs for the construction industry. Total lumber sales were
43.8% of revenues for the year ended December 31, 1996.
Domestic demand for lumber and manufactured wood products is directly
affected by the level of residential construction activity. In the winter,
demand generally subsides, increasing in spring as construction activity
resumes.
Crown Pacific competes in the domestic lumber markets primarily with
other U.S. and Canadian companies. Competitive factors in the
commodity-grade lumber market are based on pricing strategies, while sales of
shop grade lumber are based on quality, species and price.
iii. WHOLESALE PRODUCTS. In September 1996, the Partnership acquired
substantially all of the assets of a company located in Eugene, Oregon, which
operates as a trader and wholesaler of lumber and other wood products. Many
of the products sold from the wholesale operation are manufactured by the
Partnership; however, a substantial amount of the sales are from products
manufactured by other companies (see discussion of 1996 ACQUISITION
DEVELOPMENTS in ITEM 1. BUSINESS). During the year ending December 31,
1996, these sales were approximately 8.3% of total revenues. This operation
generates lower margins than the other parts of the Partnership's business.
Crown Pacific competes in the wholesale sales market with other
wholesale companies and forest products companies.
iv. REMANUFACTURED PRODUCTS. Crown Pacific's remanufacturing facility
in Redmond, Oregon converts high-quality lumber, primarily small pieces that
are not readily marketable, into blemish-free strips of lumber that are
stronger than raw lumber. These strips are used to produce various sizes of
solid and finger joint millwork, including veneered frames and jambs for the
window and door manufacturing markets. This operation also supplies certain
specialty products to domestic customers, who resell to export markets,
including the furniture market and domestic retail home centers. Sales of
remanufactured products were 7.6% of revenues for the year ended December 31,
1996. Sales of specialty remanufactured products are strongly influenced by
product quality, distribution and ability to meet future delivery
requirements.
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The demand for remanufactured products is generally higher in the spring
and summer seasons when construction markets are more active than during
winter and fall months when construction activity tends to slow due to
inclimate weather and other conditions.
On February 25, 1997, the Partnership entered into a letter of intent to
sell substantially all of the assets and related inventories of its
remanufacturing facility. Crown Pacific estimates that the gain or loss on
the sale will be insignificant, and the transaction is expected to close on
or before April 1, 1997. The sale of this facility is not expected to
materially adversely affect the Partnership's financial results of
operations.
v. CHIPS AND BY-PRODUCTS. All of Crown Pacific's manufacturing
facilities produce wood chips and other by-products during their conversion
processes. Chips are typically sold to regional pulp and paper mills, while
other by-products are sold to particle board manufacturers or used as fuel in
the Partnership's manufacturing facilities. Sales of chips and other
by-products were 3.4% of revenues in 1996.
vi. PLYWOOD AND OTHER. Sales of plywood from the Partnership's plywood
facility that was sold in October 1996, sales of timberlands and hauling
revenue accounted for approximately 10% of total revenues in 1996.
SOURCES AND AVAILABILITY OF RAW MATERIALS. The supply of Pacific Northwest
timber provided by the USFS has decreased significantly from the late 1980s
as a result of environmental regulations and endangered species concerns by
federal authorities (see "FEDERAL AND STATE REGULATION"). Reductions in
timber supply have resulted in a number of regional mill closures, including
some by the Partnership and its Predecessors during the past several years.
Crown Pacific believes that these supply reductions will continue and give
the Partnership a competitive advantage over many smaller forest products
companies due to the ability of the Partnership to supply its Manufacturing
Facilities with timber harvested from its Timberlands.
For the year ended December 31, 1996, logs from Crown Pacific's
Timberlands represented 60.9% of all logs used in the Manufacturing
Facilities or sold to third parties, compared to 44.6% in 1995 and 44.4% in
1994. Crown Pacific supplements logs from its Timberlands with logs
purchased from third parties, including private landowners, the States of
Idaho, Montana and Washington, certain United States government agencies and
foreign sources for use in its Manufacturing Facilities. The Partnership
expects its domestic sources to remain fairly stable in the face of the
decline in the supply of federal timber. Reductions in federal timber
supplies have also increased demand and pricing for privately owned timber.
As of December 31, 1996, Crown Pacific had approximately 145 MMBF of timber
under contract from external sources, principally the USFS, which may be
harvested primarily over the next two years. In addition, the Partnership
imports logs, primarily Radiata pine from New Zealand as a lower quality
substitute for Ponderosa pine in its Oregon sawmills. During 1996, Crown
Pacific imported 7.1 MMBF of Radiata pine logs.
In 1996, the U.S. and Canadian governments announced a five-year lumber
trade agreement effective April 1, 1996. This agreement is intended to reduce
the volume of Canadian lumber exported into the U.S. through the assessment
of an export tariff on annual lumber exports to the U.S. in excess of certain
volumes from the four major producing provinces. The lumber trade agreement
has only recently been enacted and therefore its effect is uncertain.
However, the agreement may limit the amount of lumber imported from Canada
and could result in increased prices for logs and lumber.
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FEDERAL AND STATE REGULATION.
i. GENERAL. Crown Pacific's operations are subject to numerous
federal, state and local laws and regulations, including those relating to
its Timberland activities, the environment, endangered species, health and
safety, log exports and product liability regulations. Although the Managing
General Partner believes that the Partnership 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 Crown Pacific's operations. Crown Pacific maintains appropriate
compliance programs and periodically conducts internal regulatory audits of
its manufacturing facilities to monitor compliance with such laws and
regulations. In addition, extensive due diligence with respect to
environmental compliance was conducted in connection with the acquisition of
the various Manufacturing Facilities. The Manufacturing Facilities have been,
are currently, and may in the future be the subject of compliance or
enforcement proceedings under environmental laws and regulations. The
Managing General Partner anticipates that pending compliance matters will be
satisfactorily resolved without any material expenditure or substantial
impairment of activities or operations.
Environmental laws and regulations have changed substantially and
rapidly over the last 20 years, and the Managing General Partner anticipates
there will be continuing changes. The trend in environmental regulation 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 Crown Pacific and it is
possible that the costs of compliance with environmental laws and regulations
will continue to increase.
Crown Pacific's activities are also subject to federal and state laws
and regulations regarding forestry operations. In addition, the operations of
the Manufacturing Facilities and 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 their
respective employees. Crown Pacific conducts internal safety audits to
identify potential violations of law or unsafe conditions. The Managing
General Partner believes that Crown Pacific is in material compliance with
safety and health laws and regulations.
There can be no assurance that future legislative, administrative or
judicial actions, which are becoming increasingly stringent, will not
adversely affect Crown Pacific or its ability to continue its activities and
operations as currently conducted. As of the date hereof, the Managing
General Partner is not aware of any pending legislative, administrative or
judicial action that could materially and adversely affect the Partnership.
ii. TIMBERLANDS. In addition to federal environmental laws, the
operation of the Timberlands is subject to specific laws and regulations in
the States of Washington, Oregon, Idaho and Montana which are intended to
regulate and restrict the growing, harvesting, processing and reforestation
of timber on forest lands. The States of Oregon, Idaho and Montana require
prior notification before beginning harvesting activities. The State of
Washington is more restrictive, requiring a rigorous regulatory review taking
from 15 to 30 days or more prior to harvesting, depending upon the
environmental and other sensitivities of the proposed logging site.
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.
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iii. AIR QUALITY. Crown Pacific's manufacturing facilities emit
regulated substances that are subject to the requirements of the federal
Clean Air Act, as amended, and comparable state statutes. Most of the
Partnership's manufacturing facilities are required to obtain federal
operating permits under Title V of the 1990 Clean Air Act Amendments. Title
V requires that major industrial sources of air pollution obtain federally
enforceable permits which contain the applicable air quality restrictions for
the facility. All of the required applications for Title V permits have been
filed in a timely manner; one has been issued and two are currently being
processed by the regulatory authorities. The Managing General Partner
believes that additional costs associated with these requirements at existing
facilities will be incidental to ongoing operating expenses.
iv. WATER QUALITY AND WASTEWATER. The federal Clean Water Act and
comparable state statutes regulate discharges of process wastewater, and
require National Pollutant Discharge Elimination System ("NPDES") permits for
discharge of industrial wastewater and stormwater into regulated public
waters. Permit applications or renewals are pending for a majority of the
Partnership's locations although the application process in Oregon is being
revised by the regulatory authorities. Crown Pacific believes these permits
will be issued or renewed at costs incidental to ongoing operating expenses
and that its manufacturing facilities are materially in compliance with NPDES
wastewater and stormwater requirements.
The Partnership's manufacturing facilities, its maintenance shop at
Hamilton, Washington and its common carrier subsidiary, Yellowstone Trucking,
may be required in the future under the Clean Water Act to install equipment
that separates oil and water contained within the runoff resulting from the
washing of vehicles. Crown Pacific has obtained estimates with respect to the
expense of installing such equipment, if required, which indicate that the
total cost should not exceed $450,000 to be incurred over several years. The
precise amount that may be incurred in any given year will be determined as
the regulatory authorities initiate their respective compliance schedules.
The only known installation during 1997 is estimated to cost approximately
$110,000.
v. SOLID AND HAZARDOUS WASTE DISPOSAL. Crown Pacific's manufacturing
facilities generate hazardous and non-hazardous solid wastes, including wood
waste and boiler ash, which are subject to the Resource Conservation and
Recovery Act and comparable state statutes. Crown Pacific periodically
reviews its waste disposal practices to ensure compliance with applicable
laws. The Partnership's manufacturing facilities have in the past utilized
off-site facilities, including landfills, for the disposal of hazardous
wastes. The Managing Partner does not believe that the results of any
regulatory involvement at any such disposal sites will have a material
adverse effect on the Partnership's operations or financial position;
however, there can be no assurance that Crown Pacific will not incur future
environmental expenditures for remedial activities associated with any of
these sites.
vi. SUPERFUND. The Comprehensive Environmental Response, Compensation
and Liability Act, 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 of or arranged for the disposal of
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.
In the course of its ordinary operations, the Partnership's
manufacturing facilities have disposed of
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and are expected to continue disposing of hazardous wastes, consisting
primarily of wood waste and boiler ash at various off-site disposal
facilities. Crown Pacific has not received notification that it may be
potentially responsible for any cleanup costs under Superfund. Based on
environmental compliance auditing programs, the Managing General Partner is
not aware of any activities by Crown Pacific or any conditions on the
Timberlands or at its manufacturing facilities that would be likely to result
in Crown Pacific being named a potentially responsible party.
vii. REMEDIATION AND COMPLIANCE ACTIVITY. While Crown Pacific maintains
a comprehensive environmental program designed to prevent the discharge of
materials that could cause contamination to soil or water, contamination of
soil and water has occurred in the past and may occur in the future. As Crown
Pacific becomes aware of these sites, it cooperates with the appropriate
environmental agencies to design and implement necessary response measures.
All known contamination sites at the Partnership's facilities have been or
are being voluntarily addressed.
Crown Pacific's maintenance shop adjoining the Hamilton Timberlands has
been subject to the Washington Department of Ecology (DOE) Independent
Remedial Action Program. In connection with that program, the Partnership's
environmental consultant has recommended to the DOE termination of quarterly
monitoring and remedial action for an indefinite period due to insignificant
contaminant levels and unwarranted additional expense. In the absence of a
risk-based closure program applicable to that site, the DOE concurred with
that recommendation.
Crown Pacific had a Phase I Environmental Site Assessment ("ESA") and a
Phase II ESA prepared in 1996 for its Eastside and Olympic Timberlands
acquired in the Cavenham Acquisition. All necessary remedial actions as a
result of these environmental assessments have been completed by the
Partnership at a cost of approximately $40,000.
In connection with the acquisition of the studmill in Marysville,
Washington in 1996, the Partnership completed soil remediation efforts and
monitoring of groundwater for two quarters. Based on the results of these
actions, the Managing General Partner estimates that future remediation costs
will not exceed $50,000.
viii. 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 (the "Owl"), marbled murrelet, mountain
caribou, grizzly bear, bald eagle and various anadromous fish species.
During 1994, Crown Pacific received reports from an independent
consulting firm regarding certain endangered species in the Inland
Timberlands and regarding the Owl on the Hamilton and Central Oregon
Timberlands. The reports indicated that the Owl was unlikely to be found on
the Inland Timberlands, that only 3,500 acres of the Central Oregon
Timberlands were potentially suitable Owl habitat and that the likelihood of
the Owl inhabiting these lands was very low and that only 1,640 acres of the
current Hamilton Timberlands were suitable habitat for the Owl. An eagle
management plan will be required for the Olympic Timberlands, but this is not
expected to significantly affect Crown Pacific's operations.
Approximately 550 acres of the Hamilton Timberlands that were acquired
in 1995 are believed to be occupied by marbled murrelets and approximately
504 additional acres are considered suitable habitat for the marbled
murrelets. Crown Pacific is engaged in negotiations to sell a portion of the
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affected Timberlands to a local Indian tribe.
During 1995, Crown Pacific began developing a Habitat Conservation Plan
(the "HCP") for the Hamilton Timberlands in conjunction with the United
States Fish and Wildlife Service (the "USFWS"). This plan was initiated by
Crown Pacific in order to allow for more predictable harvests in the area.
After the HCP is completed and accepted by the USFWS, it will serve as the
basis for regulating the Partnership's harvesting activities in that region.
Crown Pacific believes that the HCP will be obtained by the end of 1997 at a
cost not exceeding $500,000. Crown Pacific is not currently considering the
development of HCPs with respect to its other Timberlands.
Anadromous fish species are being analyzed by the USFWS and the State of
Washington as potentially endangered or threatened. Certain of these species
are found in rivers or streams that cross or border the Timberlands,
particularly in Washington. The presence of these species has not materially
affected, and is not expected to materially affect, Crown Pacific's
operations and related financial results even if they are considered
endangered or threatened. The Partnership anticipates that the listing of
anadromous or other fish species as threatened or endangered will primarily
affect the availability of timber from federal lands, a resource the
Partnership has already assumed will be in decline.
Based on the reports described above and management's knowledge of the
Timberlands, the Partnership does not believe that there are any species
protected under the Endangered Species Act that would materially and
adversely affect Crown Pacific's ability to harvest the Timberlands in
accordance with its 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 within the Timberlands.
ix. SAFETY AND HEALTH. Crown Pacific's activities are subject to
federal and state laws and regulations regarding forestry operations,
including the federal Occupational Safety and Health Act and comparable state
statutes relating to the health and safety of their respective employees. The
Partnership conducts internal safety audits to identify potential violations
of law or unsafe conditions. Crown Pacific believes that its operations are
in material compliance with these safety and health laws and regulations.
There can be no assurance that future legislative, administrative or judicial
actions, which are becoming increasingly stringent, will not adversely affect
the Partnership's operations and related financial results.
x. LOG EXPORTS. Federal laws prohibit the export of unprocessed timber
acquired from federal lands in the western United States, or the substitution
of unprocessed federal timber from the western United States for unprocessed
private timber that is exported. Persons owning timber-processing facilities
may seek authorization from the United States Department of Agriculture for a
"sourcing area", within which the person may purchase federal timber while
exporting unprocessed private timber originating from outside the sourcing
area. A sourcing area must be geographically and economically separate from
any geographic areas where the person or its affiliates harvest private
timber for export. Crown Pacific has been granted sourcing areas which allow
it to purchase available federal timber to supply its manufacturing
facilities located in Oregon and Idaho, while selling logs for export from
its Washington Timberlands. These sourcing areas are reviewed by the federal
government every five years. The next regular review of Crown Pacific
sourcing areas is scheduled in 1999.
Various parties, including one of the Partnership's competitors,
initiated litigation in July 1995 in U.S. District Court in Idaho seeking to
overturn the federal government's approval of Crown Pacific's
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sourcing areas. These parties' principal contention is that the sourcing
areas are not geographically and economically separate from the region from
which Crown Pacific sells logs for export. Although not named as a defendant,
the Partnership has intervened in the proceeding. In November 1996, the
plaintiffs and the federal government as defendant entered into a Stipulation
of Settlement. As part of the settlement, the USFS agreed that Crown
Pacific's previously-approved sourcing areas would be remanded for review by
the USFS. Pending the review, the remand does not affect the status of the
sourcing areas granted. Additionally, the parties to the litigation
acknowledged that a new, more restrictive federal regulation regarding
sourcing areas has been promulgated by the USFS. Legislation has been
implemented, however, that bars the USFS from expending any funds to enforce
or implement this regulation to review sourcing areas prior to September 30,
1997. Accordingly, the parties to the litigation agreed that the USFS review
of Crown Pacific's previously-approved sourcing areas would be delayed until
a reasonable time, not to exceed 45 days, after funds for review of sourcing
areas are appropriated. The Partnership believes that, if and when its
sourcing areas are reviewed by the USFS, the outcome will be favorable to the
Partnership. However, even if the USFS review of Crown Pacific's
previously-approved sourcing areas is resolved against Crown Pacific and any
administrative and/or judicial appeal of the USFS's adverse ruling is upheld,
the Partnership believes that its ability or inability to acquire federal
timber would not have a material impact on its financial results or
operations because it has previously assumed that federal timber would not be
available in significant quantities to be counted on to supply its
manufacturing facilities.
Congress has also prohibited the USFS from adopting any policies that
would restrain domestic transportation or processing of timber from private
lands. If the new regulation is subsequently adopted in its current form, it
would restrict Crown Pacific's ability to bring logs harvested from private
lands outside its sourcing areas into the sourcing areas for conversion. Even
if the regulation is subsequently enacted in its current form, the
Partnership does not expect it to materially adversely affect its financial
results of operations. In addition, while the export of logs harvested from
state land is generally prohibited, proposals made from time to time either
to ban or tax the export of unprocessed logs harvested from private lands
have been unsuccessful.
xi. PRODUCT LIABILITY AND REGULATION. All of the states in the United
States and many foreign jurisdictions in which Crown Pacific sells its
products have, through some combination of legislation and judicial decision,
provided for the liability of the manufacturer and supplier of defective
materials for resulting personal injury and property damage. The operations
of Crown Pacific entail exposure to product liability in connection with both
the export and domestic sales of logs and lumber products. Crown Pacific has
not been subject to any material litigation relating to product liability.
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INCOME TAX CONSIDERATIONS.
i. PARTNERSHIP STATUS. Beneficial owners of Units in the Partnership
are considered partners for federal income tax purposes. Accordingly, the
Partnership pays no federal income taxes, and Unitholders are required to
report their share of the Partnership's income, gains, losses and deductions
in their federal income tax returns. Cash distributions to Unitholders are
taxable only to the extent that they exceed the tax basis in their Units.
ii. LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES. Under the
passive loss limitations, Partnership losses are available to offset future
income generated by the Partnership and cannot be used to offset income from
other activities, including other passive activities or investments. Any
losses unused by virtue of the passive loss rules may be deducted when the
Unitholder disposes of all of his or her Units in a fully taxable transaction
with an unrelated party.
iii. STATE TAX INFORMATION. The Partnership conducts significant
operations in four states, three of which (Idaho, Oregon and Montana) have a
state income tax. The Partnership also has a minor amount of income allocable
to the states of California and New York. A Unitholder may be required to
file state income tax returns in California, Idaho, Oregon, Montana and New
York if their share of the Partnership's income attributable to those states
exceed de minimis filing exceptions.
iv. SECTION 754 ELECTION. The Partnership has made an election under
Section 754 of the Internal Revenue Code (the "Code"), which generally
permits a Unitholder to adjust his or her share of the basis in the
Partnership's properties ("Inside Basis") pursuant to Section 743(b) of the
Code to fair market value (as reflected by his or her Unit price), as if he
or she had acquired a direct interest in the Partnership's assets. A
Unitholder's allocable share of Partnership income, gains, losses and
deductions is determined in accordance with the Unitholder's unique basis
under this election. In the case of the Partnership Units, the Section
743(b) adjustment acts in concert with the Section 704(c) allocation (and
curative allocations) in providing the purchaser with a fair market value
Inside Basis. Such election is irrevocable and may not be changed without
the consent of the Internal Revenue Service ("IRS"). The Section 743(b)
adjustment is attributed solely to a purchaser of Units and is not added to
the basis of the Partnership's assets associated with all of the Unitholders.
v. TAX-EXEMPT ENTITIES. Certain entities otherwise exempt from federal
income taxes (such as individual retirement accounts ("IRAs"), employee
benefit plans and other charitable or exempt organizations) may be subject to
federal income tax if their Unrelated Business Taxable Income ("UBTI") for
their taxable year exceeds $1,000. Substantially all of a Unitholders'
allocable share of taxable income from the Partnership will be classified as
UBTI.
vi. TIMBER INCOME. Section 631 of the Code provides special rules by
which gains from the sale of timber or cut logs, which would otherwise be
taxable as ordinary income, are treated as capital gains from the sale of
property used in a trade or business. Effective January 1, 1995, the
Partnership elected to apply the provisions of Section 631 to the income
generated from the sale of timber and cut logs. It is estimated that
substantially all of the Partnership's income will qualify for Section 631,
the effect of which characterizes the income generated from the harvesting of
timberlands as capital gain to the Unitholder.
EMPLOYEES. At December 31, 1996, the Partnership had approximately 200
salaried and 1,050 hourly employees, including approximately 225 employees at
the remanufacturing facility, which is scheduled to be sold on or before
April 1, 1997. The Managing General Partner believes that the Partnership's
employee relations are good. The Partnership's wage scale and benefits are
generally competitive with other forest products companies.
FORWARD-LOOKING STATEMENTS. The information contained in this report includes
certain forward-looking statements that are based on assumptions that in the
future may prove not to have been accurate. Those statements, and Crown
Pacific Partners, L.P.'s business and prospects, are subject to a number of
risks, including the volatility of timber and lumber prices, factors limiting
harvesting of timber including contractual obligations, weather and access
limitations, the substantial capital expenditures required to fund its
operations, environmental risks, operating risks normally associated with the
timber industry, competition, government regulation, including federal income
tax treatment of limited partnerships, and the ability of the Partnership to
implement its business strategy. These and
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other risks are described in this and other of the Partnership's reports and
registration statements that are available from the United States Securities
and Exchange Commission.
ITEM 2. PROPERTIES
TIMBERLANDS. The Partnership's timberlands are described above under
"TIMBERLANDS in ITEM 1. BUSINESS.
MANUFACTURING FACILITIES. During 1996, the Partnership operated six lumber
mills, one of which was closed during the year, a plywood plant, which was
also closed in 1996 (see Note 3 of Notes to Consolidated Financial
Statements), one lumber remanufacturing facility and a chip plant. The
Partnership currently operates five lumber mills that are located in Oregon,
Idaho and Washington. The two Oregon facilities are located in central
Oregon and are two of the largest producers of premium grade pine boards in
the United States. The two Idaho mills are located in northern Idaho near the
Inland Timberlands and produce a diverse line of lumber products, including
1" boards and 2" dimension lumber products. The Washington mill in
Marysville produces studs. The remanufacturing facility and chip plant are
located in Central Oregon.
In December 1995, the mill located in Thompson Falls, Montana suffered a
fire and was closed. The assets of the facility were sold in 1996. Damage
to the facility, including business interruption losses, was covered by the
Partnership's insurance policies. Also in 1996, substantially all of the
assets of the Partnership's mill located in Albeni Falls, Idaho were sold.
The Partnership's plywood facility in Redmond, Oregon was closed and the
assets were sold in 1996 (see Note 3 of Notes to Consolidated Financial
Statements).
The following table summarizes the annual production and capacity of the
Partnership's lumber and remanufacturing facilities (amounts in MMBF) as of
December 31, 1996:
Description of Production 1996 1995 1994
Facility Capacity (4) Production Production Production
-------- ----------- ---------- ---------- ----------
Oregon lumber mills 150 145 146 134
Inland lumber mills (1) 175 218 243 287
Washington lumber mill (2) 30 5 - -
Remanufacturing facility (3) 20 22 19 18
(1) Amounts include production at facilities no longer operated by the
Partnership.
(2) The facility at Marysville, Washington was purchased on September 16,
1996 and amount includes production since that time.
(3) The Partnership has entered into a letter of intent to sell the assets
and related inventories of its remanufacturing facility in Redmond,
Oregon.
(4) Estimated 1997 capacity.
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ITEM 3. LEGAL PROCEEDINGS
There is no pending litigation involving the Partnership, and to the
knowledge of the Managing General Partner there is no threatened litigation,
the unfavorable resolution of which would have a material adverse effect on
the business, the financial position or results of operations of the
Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of the limited partners in the
fourth quarter of 1996. In February 1997, the Managing General Partner
solicited the consent of the limited partners to amend the Partnership
Agreement. The amendment will permit the Partnership to issue an additional
20 million Common Units without a vote of the Unitholders. In March 1997,
the proposed amendment was approved by the requisite number of limited
partners.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS.
The Partnership's Common Units are traded principally on the New York
Stock Exchange. As of December 31, 1996, there were approximately 27,000
beneficial owners of 21,331,189 outstanding Common Units. The Subordinated
Units are not publicly traded. As of December 31, 1996, there were five
beneficial owners of 5,773,088 outstanding Subordinated Units.
Trading price data for the Common Units, as reported by the New York
Stock Exchange, and declared distribution information for 1996 and 1995 was
as follows:
1st 2nd 3rd 4th
1996 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
High $21.00 $21.38 $21.75 $22.38
Low 18.13 19.50 19.00 20.50
Cash Distribution
Per Unit $0.524 $0.524 $0.524 $0.524
1st 2nd 3rd 4th
1995 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
High $21.50 $20.00 $21.13 $20.25
Low 18.00 17.00 19.38 17.38
Cash Distribution
Per Unit $0.51 $0.51 $0.51 $0.51
Cash distributions, if any, are expected to be paid quarterly from
"Available Cash" as defined in the Partnership Agreement. In addition, the
Partnership's debt agreements have certain restrictive covenants limiting
cash distribution amounts.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended December 31,
1994
Partnership 1993 1992
1996 1995 and Former Former Former
Partnership Partnership Entities (10) Entities Entities
----------- ----------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA (IN MILLIONS):
Revenues (1) ......................................... $401.6 $383.4 $397.3 $220.6 $135.8
Depreciation, depletion and amortization (2 and 4).... 39.8 35.0 40.9 31.2 34.1
Operating income (2 and 3)............................ 61.0 48.2 47.3 58.8 30.9
Income before extraordinary item (2 and 3)............ 20.5 17.3 19.7 38.9 15.5
Income per Unit before extraordinary item (2 and 3)... 0.94 0.94 1.07 N/A N/A
Extraordinary item - loss on debt extinguishment (4).. -- -- (16.2) -- (7.9)
Net income (2, 3 and 4)............................... 20.5 17.3 3.6 38.9 7.6
Net income per Unit (2, 3, 4 and 11).................. $0.94 $0.94 $0.19 N/A N/A
Cash distribution per Unit (4 and 5).................. $2.10 $2.04 $0.055 N/A N/A
CASH FLOW AND OTHER DATA (IN MILLIONS):
EBITDDA (6)........................................... $99.2 $83.3 $87.0 $85.9 $62.8
Additions to timber and timberlands (7)............... 227.6 31.2 15.8 11.2 3.5
Additions to equipment................................ 14.7 10.4 14.8 1.9 5.8
Cash flow from operating activities................... 65.1 23.0 57.5 59.7 45.5
BALANCE SHEET DATA (AT YEAR END, IN MILLIONS)
Working capital....................................... $65.2 $66.7 $51.7 $2.3 $0.7
Total assets (7)...................................... 675.8 476.5 461.5 738.4 462.2
Long-term debt (7).................................... 392.0 326.0 300.0 480.4 357.6
Partners' and shareholders' equity (8)................ 240.0 107.1 119.4 98.6 68.4
OPERATING DATA (UNAUDITED)
Fee timber harvest (MMBF)............................. 297 202 215 152 155
External log sourcing (MMBF) (9)...................... 191 251 269 106 16
Lumber production (MMBF) (9).......................... 344 390 421 199 126
Plywood production (MMSF 3/8" basis) (9).............. 76 113 142 45 --
</TABLE>
- ---------------------------------
See Footnotes on following page.
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FOOTNOTES FOR ITEM 6. SELECTED FINANCIAL DATA:
(1) Total revenues from the Partnership's Inland sawmills and plywood
facility that were closed in 1996 were $37.1 million. Total revenues
from Inland sawmills closed in 1996 were $50.6 million, $61.8 million
and $60.7 million for 1995, 1994 and 1993, respectively. See
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(2) See effect of update of timber inventory system in Note 4 of Notes to
Consolidated Financial Statements.
(3) See effect of LIFO liquidation in Note 2 of Notes to Consolidated
Financial Statements.
(4) See effect of debt extinguishment at DEBT ISSUANCE COSTS in Note 1 of
Notes to Consolidated Financial Statements.
(5) Amount in 1994 represents distributions for the Partnership's 10-day
period ended December 31, 1994. See Notes 1 and 8 of Notes to
Consolidated Financial Statements.
(6) EBITDDA is defined as net income before interest, amortization of debt
issuance costs, income taxes, depreciation, depletion and amortization
and extraordinary items. EBITDDA is provided because management believes
EBITDDA provides useful information for evaluating the Partnership's
ability to service debt and support its future cash distributions to
Unitholders. EBITDDA should not be construed as an alternative to
operating income, as an indicator of the Partnership's operating
performance, as an alternative to cash flows from operating activities
or as a measure of liquidity.
(7) See 1996 acquisition of Cavenham timberlands in Note 4 of Notes to
Consolidated Financial Statements. Included in total assets and long-term
debt for the years ended December 31, 1992 and 1993 was $220 million
related to the purchase of certain timberlands in 1989. The Former
Entities issued twenty-two $10 million installment notes to the seller
secured by unconditional letters of credit. The deposited funds were
restricted such that they could only be used to repay the notes. As a
result, both the assets and liabilities remained on the Former Entities'
balance sheets.
(8) See effects of the Partnership's public offerings at Note 8 of Notes to
Consolidated Financial Statements.
(9) See Note 3 of Notes to Consolidated Financial Statements related to
closures of mill and plywood facilities.
(10) Certain of the 1994 information relates to combination of the Former
Entities and the Partnership. See Note 1 of Notes to Consolidated
Financial Statements.
(11) Per Unit amounts in 1994 are on a pro-forma basis for the entire year.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
INDUSTRY CONDITIONS. Crown Pacific's principal operations consist of the
growing and harvesting of timber, the sale of logs and the processing and
sale of lumber and other wood products (see ITEM 1. BUSINESS).
The Partnership's ability to implement its business strategy over the
long term and its results of operations depend upon a number of factors, many
of which are beyond its control. These factors include general industry
conditions, domestic and international prices and supply and demand for logs,
lumber and other wood products, seasonality and competition from other
supplying regions and substitute products.
SUPPLY. Environmental and other similar concerns and governmental
policies have substantially reduced the volume of timber under contract to be
harvested from federal lands. The resulting supply decrease caused prices
for logs and lumber to increase significantly, reaching peak levels during
late 1993 and early 1994. Even though prices have declined from these record
levels, current prices still exceed pre-1993 levels. The low supply of timber
from federal lands, which is expected to continue for the foreseeable future,
has benefited forest products companies with private timber holdings such as
the Partnership through higher stumpage and log prices. Additionally, many
manufacturing facilities without a sufficient supply of fee timber were
forced to close, including, in 1996, two Crown Pacific sawmills in the Inland
Region that were closed or sold. Increased supplies of logs harvested from
private lands and logs imported from foreign countries have only partially
offset the lost volume from federal lands and have not replaced the mature,
high-quality timber found in greater quantities on federal lands. However,
in 1996 an increase in the supply of smaller logs, particularly in the
Washington Region, resulted in an approximately 7.0% decrease in domestic log
prices.
Historically, Canada has been a significant source of lumber for the
U.S. market. In 1996, the U.S. and Canadian governments announced a five-year
lumber trade agreement effective April 1, 1996. This agreement is intended to
reduce the volume of Canadian lumber exported into the U.S. through the
assessment of an export tariff on annual lumber exports to the U.S. in excess
of 14,700 MMBF from the four major producing provinces. In 1996, the trade
agreement helped to contribute to an approximately 18.5% increase in lumber
prices in the Inland Region.
DEMAND. Changes in general demographic and economic factors, including
interest rates for home mortgages and construction loans, have historically
caused fluctuations in housing starts and in turn in demand (and therefore
prices) for lumber and commodity wood products. Domestic demand for lumber
and manufactured wood products is directly affected by the level of
residential construction activity. In addition to housing starts, demand for
wood products is also significantly affected by repair and remodeling
activities and industrial uses, demand for which has historically been less
cyclical. Domestic demand for logs, lumber and other wood products is
seasonal. In the winter, demand generally subsides, increasing in the spring
as construction activity resumes. Severe weather conditions, storms and
natural disasters can also affect demand. The Partnership is also affected
by international demand factors, which are cyclical and seasonal as well.
The strength of the economy in Japan and other Asian countries and the
relative strength of the United States dollar directly affect the demand for
exported logs from the Partnership's Washington Region. In 1996, demand for
lumber increased due to increased housing starts and remodeling activity, but
demand for plywood was adversely affected by competition from substitute wood
products such as oriented strand board ("OSB") and medium density fiberboard
("MDF"). Demand for lumber and plywood continued to be affected in 1996 by
changes in purchasing by distributors and retailers to a just-in-time
inventory system. In 1996, the Partnership closed its plywood manufacturing
facility in Redmond, Oregon.
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EFFECTS OF INFLATION. Crown Pacific has experienced increased costs due to
the effect of inflation on the cost of labor, materials, supplies, energy,
plant and equipment. Certain of these increases directly affect income
through increased operating costs. During the period from 1992 through early
1994, raw material (primarily logs) prices increased significantly and
exceeded inflation. Conversely, raw material prices have generally decreased
from early 1994 prices (although 1996 prices were higher than in 1995) and
operating costs have increased at approximately the same rate as inflation.
Improved operating efficiencies as a result of recent capital expenditures
have partially offset these cost increases.
EFFECTS OF ACQUISITIONS. Each acquisition has been accounted for using the
purchase method of accounting. Accordingly, the historical financial and
operating data from one period to the next are not necessarily comparable and
are not indicative of future operating results.
RESULTS OF OPERATIONS. (1996 compared to 1995)
Net sales in 1996 increased $18.2 million, or 4.7%, over sales in 1995, to
$401.6 million. The $18.2 million increase was principally due to increased
sales of logs, including stumpage, and sales related to the Partnership's
wholesale operations, which were acquired in September 1996. Sales increases
in 1996 were partially offset by decreases in prices of plywood, wood chips
and other residuals and the closure of mills.
Lumber sales represented 43.8% of sales in 1996, compared to 47.9% in
1995. External lumber prices in the Oregon and Inland regions increased 3.1%
and 18.5%, respectively, in 1996 from 1995 price levels. Price increases
were due to strong U.S. housing and residential and commercial remodeling
markets.
Total lumber sales volumes decreased 11.2% in 1996, compared to 1995.
Sales volumes of Oregon lumber decreased slightly to 129.7 MMBF in 1996,
compared to 131.3MMBF in 1995. Sales volumes in the Inland region decreased
by 18.4% to 209.4 MMBF in 1996, due to closures of two of the Partnership's
mills in 1996. Sales volumes of lumber from the Partnership's newly acquired
studmill in Marysville, Washington were 5.3 MMBF for 1996 (see Note 3 of
Notes to Consolidated Financial Statements). Lumber volumes are expected to
decrease further in 1997 as a result of the closing of some facilities in
1996. See discussion of capacity at "Properties".
External log sales represented approximately 26.9% of sales in 1996,
compared to 22.4% in 1995. Pricing for external logs sold domestically
decreased approximately 7.3%. Decreases in pricing were offset by increases
in sales volumes, including stumpage, of 66.8% in 1996, compared to 1995.
Volume increases were attributed to log sales from the newly acquired
Cavenham timberlands (see Note 4 of Notes to Consolidated Financial
Statements).
Increases in total revenues for 1996 were partially offset by a 37.0%
decrease in plywood sales as a result of the sale of the Partnership's
plywood manufacturing facility in September 1996. Revenues from wood chips
and other residual products also declined by approximately 60% due to
declining market prices of wood chips.
Sales from the Partnership's newly acquired wholesale operations were
8.3% of sales in 1996 and primarily include sales of lumber and other wood
products. Crown Pacific anticipates that sales from its wholesale operations
will increase as a percentage of total sales in 1997.
Cost of sales as a percentage of sales decreased slightly to 80.2% in
1996, compared to 81.8% in 1995, due to a higher utilization of fee timber in
1996, compared to 1995, which was partially offset by
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<PAGE>
lower margin sales from the Partnership's wholesale operation.
Selling, general and administrative expenses decreased 13.9% in 1996
from 1995 levels principally due to reductions related to plant closures in
1996 and other miscellaneous decreases in 1996, compared to 1995.
Interest expense increased 25.1% in 1996, due to increases in long-term
debt related to the acquisition of the Cavenham timberlands in May 1996 (see
Notes 4 and 5 of Notes to Consolidated Financial Statements).
The Partnership pays no significant income taxes and does not include a
provision for income taxes in its financial statements.
Weighted average Units outstanding in 1996 increased by 3.6 million due
to the Partnership's second public offering of 8.97 million Common Units in
August 1996.
RESULTS OF OPERATIONS. (1995 compared to 1994)
Crown Pacific revenues totaled $383.4 million and $397.3 million for the
years ended December 31, 1995 and 1994, respectively. The $13.9 million
decrease in revenues was primarily due to lower lumber prices and lower sales
volumes of external logs and stumpage, offset in part by higher by-product
sales and by the $10.2 million sale of non-strategic central Washington
timberland property. Lumber prices in the Oregon and Inland regions were 9%
and 13% lower, respectively, than the 1994 period resulting from lower demand
caused by lower residential construction activity and increased Canadian
lumber production. External log and stumpage sales volumes were 29% lower
during 1995 as compared to the 1994 period primarily due to higher harvest
volumes of lower quality commercially thinned logs in 1994, which are
generally not suited for the export market. In addition, fee harvest levels
were 6% lower in 1995 as compared to the 1994 period primarily due to
reductions in the commercial thinning program.
Cost of products sold totaled $313.5 million and $328.9 million for the
years ended December 31, 1995 and 1994, respectively. The $15.4 million
decrease in cost of products sold was primarily due to lower sales volumes of
logs and stumpage coupled with a lower fee harvest and lower depletion costs.
Also included in the 1995 cost of products sold was the $6.5 million cost
basis related to the sale of the non-strategic central Washington timberland
property.
Interest expense totaled $31.1 million and $23.9 million for the years
ended December 31, 1995 and 1994, respectively. The higher 1995 interest
expense was primarily due to generally higher interest rates caused by a
larger portion of fixed rate borrowings in 1995 as compared to the prior year
period.
Amortization of debt issuance costs was $0.5 million and $2.2 million
for the years ended December 31, 1995 and 1994, respectively. The 1995
amortization relates to financings that have occurred since the Partnership's
initial public offering. The 1994 amortization relates to the various debt
financings of the Former Entities, for which significantly higher financing
costs were incurred. The Former Entities' capitalized financing costs were
subsequently written off either prior to or simultaneously with the
Partnership's initial public offering.
As a result of the 1994 refinancing of certain Former Entities'
long-term debt issues, either prior to or simultaneously with the
Partnership's initial public offering in December 1994, the Partnership and
the Former Entities reported, in 1994, a $16.2 million non-cash charge to
record the write-off of certain
Page 21
<PAGE>
debt issuance costs. These costs were previously capitalized on the Former
Entities' balance sheets.
The capital structure of the Former Entities included mandatorily
redeemable preferred equity interests. During 1994, $8.6 million of
accretion and income were allocated to these interests. These interests were
redeemed simultaneously with the Partnership's initial public offering in
December 1994.
LIQUIDITY AND CAPITAL RESOURCES.
Crown Pacific's primary source of liquidity has been cash from
operations. Net cash provided by operating activities was $65.1 million,
$21.9 million and $57.5 million for the years ended December 31, 1996, 1995
and 1994, respectively. Net cash provided by operating activities in 1995
was unusually low due to cash requirements related to the Partnership's
initial public offering on December 22, 1994. The increase in cash provided
by operating activities for 1996 is primarily due to an increase in net
income, an increase in depletion, depreciation and amortization expense, a
decrease in inventories, a decrease in amounts paid related to trade accounts
payable and accrued expenses due to 1995 balances being unusually high as a
result of the 1994 Offering and a decrease in the change in accounts and
notes receivable, excluding non cash transactions.
Working capital remained relatively stable at $65.2 million and $66.7
million as of December 31, 1996 and 1995, respectively.
On May 15, 1996, the Partnership purchased 207,000 acres of timberland
located in Oregon and Washington for $205 million (the "Cavenham
Acquisition"), plus $5 million for financing and closing costs. In
connection with the Cavenham Acquisition, the Partnership borrowed $250
million from its bank credit facility (the "Acquisition Facility"). In
August 1996, Crown Pacific sold 8,970,750 Common Units to the public and
issued $91 million of senior notes in a private placement to repay a portion
of the Acquisition Facility. Net proceeds from the equity offering,
including $3.3 million in capital contributions from the General Partners,
were $165.2 million. The proceeds from the public offering were used to
repay the remaining portions of the borrowings outstanding under the
Acquisition Facility and to redeem the Special Allocation Units for $4.1
million. Debt and equity issuance costs in 1996 related to these and other
transactions were approximately $11.9 million.
In January 1997, the Board of Control of the Managing General Partner
declared the fourth quarter 1996 distribution of $0.524 per Unit. The
distribution equaled $14.3 million (including $0.1 million to the General
Partners) and was paid on February 14, 1996 to Unitholders of record on
February 3, 1996. For the year ended December 31, 1996, the Partnership
declared an aggregate distribution of $2.096 per Unit. The Partnership paid
cash distributions of $41.3 million during 1996.
Cash required to meet the Partnership's quarterly cash distributions (as
required by the Partnership Agreement), capital expenditures and interest and
principal payments on indebtedness will be significant. The Managing General
Partner expects that the debt service will be funded from current operations.
The Partnership expects to make cash distributions from current funds and
cash generated from operations. Capital expenditures are expected to be
funded by current funds, cash generated from operations, sales of
non-strategic properties, and bank borrowings.
CAPITAL EXPENDITURES. Timber and timberland capital expenditures were $227.6
million, $31.2 million and $15.8 million in the years ended December 31,
1996, 1995 and 1994, respectively. The expenditures were primarily for the
purchase of timberlands, timber deeds, construction of logging roads
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<PAGE>
and reforestation. Expenditures in 1996 relate primarily to the Cavenham
Acquisition.
Property, plant and equipment capital expenditures were $14.7 million,
$10.4 million and $14.8 million for the years ended December 31, 1996, 1995
and 1994, respectively. The expenditures were primarily made to increase the
efficiency of the Partnership's manufacturing facilities by decreasing
production costs and increasing recovery rates. Crown Pacific funded its
capital expenditures primarily from property sales and cash generated from
operations.
The Managing General Partner anticipates that the Partnership will spend
approximately $11.6 million in 1997 on the construction of logging roads,
purchase of logging equipment and reforestation of its Timberlands. Capital
expenditures of $3.4 million are planned for the Partnership's manufacturing
facilities. Amounts spent at Crown Pacific's manufacturing facilities will
be for improvement in product recovery, reduction in production costs and
computer software. It is anticipated that the planned 1997 capital
expenditures will be funded primarily from property sales and cash generated
from operations.
The Partnership has a $40 million revolving credit facility with a group
of banks for working capital purposes and stand-by letters of credit that
expires on September 30, 1999. The credit facility bears a floating rate of
interest, 9% at December 31, 1996, and among other provisions, requires the
Partnership to repay all outstanding indebtedness under the facility for at
least 30 consecutive days during any twelve-month period. The line of credit
is secured by the Partnership's inventories and receivables. At December 31,
1996 and 1995, the Partnership had $15.0 million and $19.1 million,
respectively, outstanding under this facility. On December 31, 1996, the
Partnership borrowed $15 million from this facility and repaid the amount in
full on January 6, 1997.
On August 6, 1996 the Partnership renegotiated the terms of its
Acquisition Facility with a group of banks to provide for a $125 million
three-year revolving line of credit for the acquisition of additional timber,
timberlands and related assets. The Acquisition Facility is unsecured and
bears a floating rate of interest. At the end of the revolving period, the
Partnership may elect to convert any outstanding borrowings under this
facility to a four-year term loan, requiring quarterly principal payments
equal to 6.25% of the outstanding principal balance on the conversion date.
There were no borrowings against this facility at December 31, 1996.
On August 13, 1996, the Partnership issued $91 million of new senior
notes (the "New Senior Notes"). The proceeds from the New Senior Note
issuance were used to repay a portion of the bank indebtedness incurred in
connection with the Cavenham Acquisition under the Acquisition Facility. The
New Senior Notes bear an average interest rate of 8.17%, are unsecured and
require semi-annual interest payments on August 1 and February 1 of each year
through 2013. The New Senior Notes are redeemable prior to maturity, subject
to a premium on redemption based on interest rates of U.S. Treasury
securities having a similar average maturity as the New Senior Notes, plus 50
basis points. The New Senior Note agreements require the Partnership to make
annual principal payments in varying amounts beginning in 2003 and continuing
through 2013.
The Partnership's 9.78% and 9.60% Senior Notes (the "Existing Senior
Notes") are unsecured and require semi-annual interest payments on June 1 and
December 1 of each year, through 2009. The Existing Senior Notes are
redeemable prior to maturity, subject to a premium on redemption based on
interest rates of U.S. Treasury securities having a similar average maturity
as the Existing Senior Notes, plus 50 basis points. The Existing Senior Note
agreements require the Partnership to make annual principal payments of $37.5
million on December 1 of each year beginning in 2002 and continuing through
2009.
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<PAGE>
All of the Partnership's Senior Note agreements and bank lines of credit
contain certain restrictive covenants, including limitations on harvest
levels, land sales, cash distributions and the amount of future indebtedness.
The Partnership was in compliance with such covenants at December 31, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data filed as part of this
report follow the signature page of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER.
Set forth below is certain information concerning the directors and
executive officers of the Managing General Partner. As the general partners
of the Managing General Partner, Fremont and a corporation owned by Messrs.
Stott and Krage elect directors of the Managing General Partner on an annual
basis. All officers of the Managing General Partner serve at the discretion
of the directors of the Managing General Partner.
ROBERT JAUNICH II, 56, Chairman of the Board of Control of the Managing
General Partner since its formation. Mr. Jaunich has been Chairman of the
Board of Directors of the Special General Partner since 1991. Mr. Jaunich is
a member of the Managing General Partners' Executive Committee. Since 1991,
he has been Managing Director of direct investments of Fremont. From 1986
until he joined Fremont, Mr. Jaunich was a member of the chief executive
office and Executive Vice President of Swiss-based Jacob Suchard AG, one of
the world's top four chocolate, sugar confectionery and coffee companies. Mr.
Jaunich currently serves on the board of directors of Consolidated
Freightways, Inc. and on the boards of various other private companies.
PETER W. STOTT, 52, Director of the Board of Control since its formation
and a member of the Executive Committee. He has been President and Chief
Executive Officer of the Managing General Partner since its inception in
1994. Mr. Stott served as Chief Executive Officer and in various other
capacities for predecessors of the Partnership from 1988 until 1994. Mr.
Stott is also Chairman and founder of Market Transport, Ltd., a temperature
controlled regional motor carrier company located in Portland, Oregon, which
employs over 350 people. Mr. Stott has been involved in the ownership and
operations of timberlands since 1983. Mr. Stott is a member of the Board of
Trustees for the Nature Conservancy and a member of the Board of Directors
for Liberty Northwest Insurance Company.
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<PAGE>
JAMES A. BONDOUX, 56, Director of the Board of Control since its
formation and of the Special General Partner since 1991. Mr. Bondoux is a
member of the Managing General Partner's Executive Committee and Compensation
Committee. He has been a managing principal of Fremont since December 1984
concentrating on private ventures and special situation equity investments.
RICHARD B. KELLER, 68, was elected Director of the Board of Control in
January 1995 and is a member of the Compensation Committee. Mr. Keller has
been President of Keller Enterprises, Inc. since 1975. He was Senior Vice
President of Western Kraft Corporation, a division of Willamette Industries,
Inc. from 1970 to 1975 and held various positions with Western Kraft from
1954. Mr. Keller started his career in the forest products industry at
Georgia-Pacific Corporation where he served as an Assistant to the Vice
Chairman. Mr. Keller currently serves on the Board of Directors of Northwest
Natural Gas Company, a publicly owned natural resource service provider.
JOHN W. LARSON, 59, was elected Director of the Board of Control in
January 1995 and is a member of the Audit Committee. He was Chief Operating
Officer of Chronicle Publishing from 1990 to 1993. Since 1993, Mr. Larson
has been a private investor. He was a General Partner in J.H. Whitney and
Company from 1984 to 1989 and served as Director of McKinsey and Company from
1965 to 1984.
CHRISTOPHER G. MUMFORD, 51, was elected Director of the Board of Control
in January 1995 and is a member of the Audit Committee. He has been a General
Partner of Scarff, Sears & Associates in San Francisco since 1986 and a
Managing Director of Questor Partners Fund, L.P., since 1996. In addition to
his duties with these private investment partnerships, Mr. Mumford was
Executive Vice President and Chief Financial Officer of Arcata Corporation
from 1982 to 1994, and has served as a director of several other privately
owned companies.
WILLIAM L. SMITH, 55, was elected Director of the Board of Control in
January 1995 and is a member of the Compensation Committee. Mr. Smith is
President of William Smith Properties, Inc., which he founded in 1983. Mr.
Smith has 25 years of experience managing timberland and developing
recreational properties, including his service as President of Brooks
Resources Corporation, a publicly owned real estate development company
formed as a spin-off from Brooks Scanlon, Inc., a publicly owned timber and
sawmill company, from 1973 to 1983.
ROGER L. KRAGE, 49, has been Secretary and General Counsel of the
General Partners since 1994 and served in comparable capacities for the
Partnership's predecessors from 1988 to 1994. Mr. Krage has been involved in
the legal, administrative, financial and risk management aspects of the
forest products business for over 16 years. In addition to overseeing the
legal affairs of Crown Pacific, he is closely involved with corporate
planning and execution.
RICHARD D. SNYDER, 49, Vice President and Chief Financial Officer of the
Managing General Partner. Mr. Snyder joined Crown Pacific in 1992 as
Treasurer and Chief Financial Officer and has served as Assistant to the
President. Mr. Snyder has over 26 years experience in the accounting and
finance profession focusing extensively on the forest products industry.
From 1981 through 1992, Mr. Snyder was Vice President of Finance for Gregory
Forest Products. Mr. Snyder worked for seven years as a CPA with the
accounting firm of Arthur Andersen & Co. before serving five years at
Georgia-Pacific as Director of Corporate Finance.
G.P. ("PAT") HANNA, 68, Senior Vice President of the Managing General
Partner, oversees Crown Pacific's timberland and manufacturing operations.
Mr. Hanna, who joined Crown Pacific in 1989 from Willamette Industries, Inc.,
has over 35 years experience in managing timberlands. He was the Raw
Materials Manager for Willamette Industries, Inc. from 1974 to 1989; and from
1969 until 1974, he was the Timber Contract Supervisor and Resident Forester
for that company.
W. R. ("RAY") JONES, 44, Vice President of Land and Timber of the
Managing General Partner. Mr.
Page 25
<PAGE>
Jones joined Crown Pacific in 1992 as Procurement and Acquisition Forester
and as Divisional Land and Timber Manager in Central Oregon. Mr. Jones has
over 20 years of experience in timber land management, procurement and
acquisitions. From 1985 through 1992 Mr. Jones was Timber Manager for
Triangle Veneer, Inc., and was a log buyer and woodlands forester for Pope
and Talbot from 1979 through 1984. Prior to 1979, Mr. Jones was a service
forester and Forest Practices officer for the Oregon Department of Forestry.
L. JAMES WEEKS, 55, Vice President of Marketing and Sales of the
Managing General Partner. Mr. Weeks joined Crown Pacific in 1996 to oversee
all marketing and sales activities of the Partnership. Mr. Weeks has over 27
years experience in the forest products industry, primarily in sales and
marketing related functions. Mr. Weeks was formerly President of
Maywood-Anderson Forest Products Company, a wholesale sales company, and was
with that firm from 1982 through 1996 in several executive capacities. Crown
Pacific acquired Maywood-Anderson in September 1996. Mr. Weeks was President
of Mallery-Weeks Lumber Company from 1979 through 1982 and held various
management positions with Wickes Forest Industries from 1969 through 1978.
Mr. Weeks is a past member of the Board of Governors of the Western Wood
Products Association.
P.A. ("TONY") LEINEWEBER, 52, Vice President of the Managing General
Partner, joined Crown Pacific in 1990 to oversee its administrative,
personnel, risk management and public relations functions. Mr. Leineweber has
over 20 years experience in managing these corporate functions.
MARK B. CONAN, 36, Controller and Treasurer of the Managing General
Partner. Mr. Conan joined Crown Pacific in 1993 as Tax Director and
Assistant Treasurer. Mr. Conan has over 14 years experience in the
accounting and finance profession, focusing primarily on taxation, mergers
and acquisitions. Mr. Conan was a Senior Manager at the accounting firm of
Price Waterhouse LLP from 1983 though 1993.
EMPLOYMENT AGREEMENTS. The Managing General Partner entered into employment
agreements with Mr. Stott and Mr. Krage in December, 1994. Each agreement has
a term of three years and includes confidentiality provisions and, in the
case of Mr. Stott's agreement, noncompete provisions and an involuntary
termination provision pursuant to which the executive officer will receive
severance pay equal to up to six months base salary. In Mr. Stott's
agreement, the confidentiality provisions continue for 18 months following
the later to occur of Mr. Stott's termination of employment or his
resignation or removal from the Board, and, unless Mr. Stott is terminated
without cause, the noncompete provisions continue until the earlier to occur
of (i) December 31, 1999 or (ii) the later to occur of December 31, 1998 or
the date on which Fremont and its affiliates dispose of substantially all of
their Subordinated Units to an unaffiliated third party. In the case of Mr.
Krage's agreement, the confidentiality provisions continue for 18 months
following Mr. Krage's termination of employment.
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<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. Section 16(a) of the
Exchange Act requires the Managing General Partner's directors and executive
officers, and persons who own more than ten percent of the Partnership's
Common Units, to file reports of ownership and changes in ownership with the
Commission and the NYSE. Based on the Partnership's review of the copies of
such reports received by the Partnership and on written representations
received by the Partnership, the Partnership believes that no director,
officer or holder of more than ten percent of the Common Units failed to file
on a timely basis the reports required by Section 16(a) of the Exchange Act
during fiscal 1996, except Mr. Walter Ray Jones, Vice President of Land and
Timber of the Managing General Partner, who failed to file a Form 3, due in
July 1996; The Form 3 was filed in January 1997.
ITEM 11. EXECUTIVE COMPENSATION.
Item 11 will be filed by amendment to this Form 10-K on Form 10-K/A.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table reflects the ownership by the persons indicated as of
February 14, 1997:
<TABLE>
<CAPTION>
Percentage of Percentage of
Common Common Subordinated Subordinated
Units Units Units Units
Beneficially Beneficially Beneficially Beneficially
Name of Beneficial Owner Owned Owned Owned Owned
- ------------------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Fremont Investors, Inc. (2)(4) -- -- 3,562,825 61.7%
SVE II, Inc. (1) -- -- 2,711,318 47.0%
Sequoia Ventures Inc. (2) -- -- 1,466,758 25.4%
Robert Jaunich II (5) 9,000 * 5,029,583 87.1%
Peter W. Stott (3) 222,694 1.0% 3,403,904 59.0%
James A. Bondoux (6) -- -- 2,711,318 47.0%
Richard B. Keller 606,868 2.8% -- --
John W. Larson 24,085 * -- --
Christopher G. Mumford 1,576 * -- --
Roger L. Krage (7) 195,382 * 50,919 0.9%
Richard D. Snyder 200 * -- --
G. P. Hanna 1,000 * -- --
W. R. Jones 465 * -- --
P.A. Leineweber 500 * -- --
Mark B. Conan 450 * -- --
Directors and executive officers as a
group (12 persons) (8) 671,305 2.9% 743,505 12.9%
</TABLE>
* Less than 1% of the class.
(1) Current address is 121 S.W. Morrison Street, Suite 1500, Portland,
Oregon 97204. Fremont controls SVE II.
(2) Current address is 50 Fremont Street, Suite 3700, San Francisco,
California 94105. Mr. Stephen D. Bechtel, Jr., through the ownership of
stock and his position as trustee of various trusts (in which he disclaims
any beneficial interest), is entitled to vote more than 50% of the stock
in Fremont. As a result of the foregoing, Mr. Bechtel may be deemed to
control Fremont. Mr. Bechtel is the largest single stockholder in Sequoia
Ventures Inc. ("Sequoia"). Accordingly, Mr. Bechtel may be deemed to
control Sequoia. Fremont controls SVE II.
(3) Includes: (i) 2,711,318 Subordinated Units beneficially owned by SVE
II, Inc., of which Mr. Stott is a director and stockholder but disclaims
beneficial ownership with respect to such Units, (ii) 195,000 Common Units
beneficially owned by SK Partners, of which Mr. Stott is a general partner
and owns a 92% interest, and (iii) 22,500 Common Units owned by Columbia
Investments II, LLC., a wholly owned company of Mr. Stott's. Current
address is 121 S.W. Morrison Street, Suite 1500, Portland, Oregon 97204.
Page 28
<PAGE>
(4) Includes 2,711,318 Subordinated Units owned by SVE II, Inc.
(5) Includes (i) 851,507 Subordinated Units owned by Fremont Investors, Inc,
of which Mr. Jaunich serves as a director, (ii) 1,466,758 Subordinated
Units beneficially owned by Sequoia Ventures Inc., of which Mr. Jaunich
is a director, and (iii) 2,711,318 Subordinated Units beneficially owned
by SVE II, Inc., of which Mr. Jaunich is a director. Mr. Jaunich disclaims
beneficial ownership of all such Units other than 9,000 Common Units owned
directly by him. Current address is 50 Fremont Street, Suite 3700, San
Francisco, California 94105.
(6) Includes 2,711,318 Subordinated Units beneficially owned by SVE II,
Inc., of which Mr. Bondoux is a director. Mr. Bondoux disclaims beneficial
ownership of such Units. Current address is 50 Fremont Street, Suite 3700,
San Francisco, California 94105.
(7) Includes 195,000 Common Units owned by SK Partners, of which Mr. Krage
is a general partner and owns an 8% interest. Current address is 121 S.W.
Morrison Street, Suite 1500, Portland, Oregon 97204.
(8) Includes only interests directly owned by such persons. With respect to
beneficial ownership which may be attributed to Messrs. Stott, Krage,
Jaunich and Bondoux, see the footnotes above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As provided by the Partnership Agreement, the Partnership reimburses the
General Partners for the direct costs incurred to manage the Partnership.
These cost reimbursements totaled $3.7 million in 1996.
Crown Pacific paid $75,000 to a company owned by William L. Smith, a
member of the Partnership's Board of Control, for services rendered in
connection with the sale of the Partnership's plywood operation in 1996 (see
Note 3 of Notes to Consolidated Financial Statements). The Managing General
Partner believes the fees paid were equivalent to those that would be paid
under an arms-length transaction.
In May 1996, the Partnership sold the remaining equipment of the closed
Thompson Falls sawmill to Crescent Creek Company, a company owned by Mr.
Stott and Mr. Hanna, officers of the Managing General Partner, for $200,000.
The Managing General Partner believes the amount paid was equivalent to the
amount that would be paid under an arms-length transaction.
Page 29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The following financial statements and the Report of Independent
Accountants are filed a part of this report on the pages indicated:
PAGE
----
Report of Independent Public Accountants 35
Consolidated Statement of Income 36
Consolidated Balance Sheet 37
Consolidated Statement of Cash Flows 38
Consolidated Statement of Changes in Partners' Capital
and Shareholders' Equity 39
Notes to Consolidated Financial Statements 40
Supplemental Financial Information N/A
(a)(2) FINANCIAL STATEMENT SCHEDULES
Not applicable
(a)(3) EXHIBITS
The exhibits to this report have been included only with the copies of
this report filed with the Securities and Exchange Commission. Copies of
individual exhibits will be furnished to stockholders upon written request to
Investor Relations, Crown Pacific Partners, L.P., 121 S.W. Morrison Street,
Suite 1500, Portland, Oregon 97204 and payment of a reasonable fee.
EXHIBIT NO. DESCRIPTION
- ------------ -----------
*3.1 Form of Second Amended and Restated Agreement of Limited
Partnership of Crown Pacific Partners, L.P. (Filed as Exhibit
A to Part I of Registrant's Registration Statement on Form
S-1 No. 83-85066).
*3.2 Form of Agreement of Limited Partnership of Crown Pacific
Limited Partnership (Filed as Exhibit 3.2 to the Registrant's
Statement on Form S-1 No. 83-85066).
*4.1 Note Purchase Agreement dated as of December 1, 1994 (Filed
as Exhibit 10.3 to Registrant's Registration Statement on
Form S-1 No. 33-85066).
*4.2 Note Purchase Agreement relating to 9.78% Senior Notes due
2009 (Filed as Exhibit 10.3 to Registrant's Report on Form
10-K for the year ended December 31, 1995).
*4.3 Note Purchase Agreement relating to 9.6% Senior Notes due
2009 (Filed as Exhibit 10.2 to Registrant's Report on Form
10-K for the year ended December 31, 1995).
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<PAGE>
*4.4 Amended and Restated Facility B Credit Agreement dated as of
May 13, 1996 (Filed as Exhibit 4.3 to the Registrant's
Registration Statement on Form S-3 No. 333-05099).
*4.5 Amended and Restated Credit Agreement dated as of May 13,
1996 (Filed as Exhibit 4.4 to the Registrant's Registration
Statement on Form S-3 No. 333-05099).
*4.6 Form of Amended and Restated Facility B Credit (Filed as
Exhibit 4.5 to the Registrant's Statement on Form S-3
No. 333-05099).
*4.7 Form of Amended and Restated Credit Agreement (Filed as
Exhibit 4.6 to the Registrant's Statement on Form S-3
No. 333-05099).
*10.1 Amended Credit Agreement with respect to a working capital
credit facility and acquisition credit facility among Crown
Pacific Limited Partnership and certain banks in the amount
up to $40,000,000 and up to $100,000,000, respectively (Filed
as Exhibit 10.1 to Registrant's Report on Form 10-K for the
year ended December 31, 1995).
*10.3 Form of Purchase Rights Agreement (Filed as Exhibit 10.2 to
the Registrant's Registration Statement on Form S-1 No.
83-85066).
*10.4 1994 Unit Option Plan (Filed as Exhibit 10.5 to Registrant's
Report on Form 10-K for the year ended December 31, 1995).
10.5 1997 Distribution Equivalent Rights Plan approved on March
25, 1997.
*10.6 Lease dated April 2, 1979 between Fred Hodecker, Inc. and
Whittier Moulding company (a Former Entities' interest of
Crown Pacific) (Filed as Exhibit 10.6 to the Registrant's
statement on Form S-1 No. 33-85066).
*10.7 Log Purchase Agreement dated October 27, 1993 between CP
Inland and Boise Cascade Corporation (Filed as Exhibit 10.7
to the Registrant's Registration Statement on Form S-1 No.
33-85066).
*10.8 Log Purchase Agreement dated October 28, 1993 between CP
Inland and Potlatch Corporation (Filed as Exhibit 10.8 to the
Registrant's Registration Statement on Form S-1 No.
33-85066).
*10.9 Employment Agreement with Peter W. Stott (Filed as Exhibit
10.10 to the Registrant's Registration Statement on Form S-1
No. 33-85066).
*10.10 Employment Agreement with Roger L. Krage (Filed as Exhibit
10.11 to the Registrant's Registration Statement on Form S-1
No. 33-85066).
*21.1 List of Subsidiaries (Filed as Exhibit 21.1 to the
Registrant's Registration Statement on Form S-1 No.
33-85066).
23.1 Consent of Price Waterhouse LLP.
Page 31
<PAGE>
24.1 Powers of Attorney, pursuant to which amendments to this
Report may be filed, included on the signature page contained
in Part IV of this Report.
27 Financial Data Schedule.
- -----------------
* Incorporated herein by reference to the indicated filing.
(b) REPORTS ON FORM 8-K
The Partnership did not file any Current Reports on Form 8-K during the
last quarter of 1996.
Page 32
<PAGE>
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.
CROWN PACIFIC PARTNERS, L.P.
-------------------------------
(Registrant)
By: Crown Pacific Management
Limited Partnership,
as Managing General Partner
By: /s/ Peter W. Stott
-------------------------
Peter W. Stott
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officer and
members of the Board of Control of Crown Pacific Management Limited
Partnership, the Managing General Partner of Crown Pacific Partners, L.P.
hereby constitutes and appoints Peter W. Stott and Roger L. Krage or either
of them (with full power to each of them to act alone), his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and on his behalf and in his name, place and stead,
in any and all capacities, to sign, execute and file this report under the
Securities Exchange Act of 1934, as amended, and any or all amendments, with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises in
order to effectuate the same, as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and
confirming that all such attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on the behalf of
the registrant and, in the capacities and on the dates indicated, on behalf
of, as applicable, Crown Pacific Management, L.P., the registrant's Managing
General Partner.
By: /s/ Robert Jaunich II Chairman of the Board of March 28, 1997
-------------------------- Control
Robert Jaunich II
By: /s/ Peter W. Stott President and Chief Executive March 28, 1997
-------------------------- Officer & Member, Board of
Peter W. Stott Control, Executive Committee,
Crown PacificManagement, L.P.
Page 33
<PAGE>
By: /s/ Richard D. Snyder Vice President &
-------------------------- Chief Financial Officer, March 28, 1997
Richard D. Snyder Crown Pacific
Management, L.P.
By: /s/ John W. Larson Member, Board March 28, 1997
-------------------------- of Control, Audit Committee
John W. Larson
By: /s/ Christopher G. Mumford Member, Board March 28, 1997
--------------------------- of Control, Audit Committee
Christopher G. Mumford
Page 34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Control of
Crown Pacific Management Limited Partnership
and the Partners of Crown Pacific Partners, L.P.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in partners' capital and
shareholders' equity and of cash flows present fairly, in all material
respects, the financial position of Crown Pacific Partners, L.P. and its
subsidiaries and affiliates at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the partnership's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
- -----------------------------
PRICE WATERHOUSE LLP
Portland, Oregon
January 24, 1997
Page 35
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1994
1996 1995 PRE-IPO &
PARTNERSHIP PARTNERSHIP PARTNERSHIP
---------- ---------- ----------
<S> <C> <C> <C>
Revenues......................................... $401,579 $383,383 $397,326
Operating costs:
Cost of products sold ......................... 321,935 313,490 328,882
Selling, general and administrative expenses... 18,636 21,653 21,148
---------- ---------- ----------
Operating income ................................ 61,008 48,240 47,296
Interest expense ................................ 38,852 31,053 23,894
Amortization of debt issuance costs ............. 594 508 2,184
Other (income) expense, net...................... 1,021 (599) (1,034)
---------- ---------- ----------
Income before provisions for income taxes........ 20,541 17,278 22,252
Provision for income taxes ..................... -- -- 2,514
---------- ---------- ----------
Income before extraordinary item................. 20,541 17,278 19,738
Extraordinary item - loss on extinguishment
of debt........................................ -- -- (16,178)
---------- ---------- ----------
Net income....................................... 20,541 17,278 3,560
Accretion and income relative to mandatorily
redeemable partnership interests............... -- -- (8,624)
---------- ---------- ----------
Net income (loss) allocated to partnership and
shareholders' interest......................... $ 20,541 $ 17,278 $ (5,064)
---------- ---------- ----------
---------- ---------- ----------
Net income per Unit (pro forma for 1994):
Income before extraordinary item ............. $ 0.94 $ 0.94 $ 1.07
Extraordinary item............................ -- -- (0.88)
---------- ---------- ----------
Net income per Unit........................... $ 0.94 $ 0.94 $ 0.19
---------- ---------- ----------
---------- ---------- ----------
Weighted average Units outstanding ............. 21,690,655 18,133,527 18,133,527
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 36
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT UNIT INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
---------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 16,818 $ 10,292
Accounts receivable ............................. 42,810 32,576
Notes receivable ................................ 5,605 5,571
Inventories...................................... 35,746 46,747
Deposits on timber cutting contracts ............ 4,771 9,399
Prepaid and other current assets................. 2,674 5,395
---------- --------
Total current assets........................... 108,424 109,980
Property, plant and equipment, net.................. 43,679 40,920
Timber, timberlands and roads, net.................. 511,869 320,063
Other assets........................................ 11,789 5,542
---------- --------
Total assets................................... $ 675,761 $476,505
---------- --------
---------- --------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Notes payable................................... $ 15,000 $ 19,100
Accounts payable................................ 11,363 10,938
Accrued expenses................................ 10,470 10,469
Accrued interest................................ 5,369 2,736
Current portion of long-term debt............... 1,000 --
---------- --------
Total current liabilities.................... 43,202 43,243
Long-term debt..................................... 392,000 326,000
Other non-current liabilities....................... 561 206
---------- --------
435,763 369,449
---------- --------
Commitments and contingent liabilities
Partners' capital:
General partners................................ 2,708 (152)
Limited partners (27,104,277 Units and
18,133,527 Units outstanding at December
31, 1996 and 1995, respectively)............. 237,290 107,208
---------- --------
Total partners' capital......................... 239,998 107,056
---------- --------
Total liabilities and partners' capital......... $ 675,761 $476,505
---------- --------
---------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 37
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1994
1996 1995 PRE-IPO &
PARTNERSHIP PARTNERSHIP PARTNERSHIP
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 20,541 $ 17,278 $ 3,560
Adjustments to reconcile net income to
net cash provided by operating activities:
Extraordinary item - loss on extinguishment of debt..... - - 16,178
Depletion, depreciation and amortization................ 39,847 34,959 40,870
Gain on sale of property................................ (8,097) (6,816) (3,278)
Other................................................... (785) 5,034 (4,995)
Net change in current assets and current liabilities:
Restricted cash.......................................... - - 2,062
Accounts and notes receivable............................ (2,120) (17,406) 1,452
Inventories.............................................. 10,748 692 7,940
Prepaid and other current assets......................... 5,246 2,207 1,824
Accounts payable and accrued expenses.................... (314) (14,068) (8,128)
------------ ---------- --------
Net cash provided by operating activities.................. 65,066 21,880 57,485
------------ ---------- --------
Cash flows from investing activities:
Additions to timberlands.................................. (214,761) (26,218) (6,173)
Additions to timber cutting rights........................ (12,842) (4,993) (9,621)
Additions to property, plant and equipment................ (14,660) (10,437) (14,799)
Proceeds from sales of property........................... 9,060 11,538 15,679
Principal payments received on notes...................... 11,516 1,096 -
Acquisition of businesses, net of cash.................... (6,028) - -
Other investing activities................................ (9) (617) 3,517
----------- -------- -------
Net cash used in investing activities...................... (227,724) (29,631) (11,397)
----------- -------- -------
Cash flows from financing activities:
Proceeds from sale of partnership interests............... 161,922 - 197,463
Retirement of equity interests............................ (4,100) - (3,327)
Net (decrease) increase in short-term borrowing........... (5,517) 15,592 -
Proceeds from issuance of long-term debt.................. 343,000 68,600 527,963
Repayments of long-term debt.............................. (276,000) (42,600) (545,224)
Distributions to partners................................. (41,294) (29,342) (219,350)
Capital contributions..................................... 3,329 - -
Debt and equity issuance costs............................ (11,883) - (4,139)
Other financing activities................................ (273) (628) (1,697)
----------- ------- -------
Net cash provided by (used in) financing activities........ 169,184 11,622 (48,311)
----------- ------- -------
Net increase (decrease) in cash and cash equivalents....... 6,526 3,871 (2,223)
Cash and cash equivalents at beginning of period........... 10,292 6,421 8,644
----------- -------- -------
Cash and cash equivalents at end of period................. $ 16,818 $ 10,292 $ 6,421
----------- -------- -------
----------- -------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 38
<PAGE>
CROWN PACIFIC PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL AND SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CPL CPLP CP INLAND
------------------------ ------------------------------------------ ------------------------
PREFERRED
RETAINED GENERAL LIMITED LIMITED GENERAL LIMITED
COMMON EARNINGS PARTNERSHIP PARTNERSHIP PARTNERSHIP PARTNERSHIP PARTNERSHIP
STOCK (DEFICIT) INTEREST INTERESTS INTERESTS INTEREST INTERESTS
---------- -------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993.... $21,752 $(12,974) $ 5,117 $ 13,295 $ 46,036 $ 10 $ 34,736
Equity issuance costs..........
Issuance of partnership Units
in initial public offering...
Net income (loss) for the year. 4,620 1,960 2,979 16,910 71 (11,867)
Distributions.................. (4,679) (15,913) (96,458) (81) (47,897)
Accretion of mandatorily
redeemable partnership
interests................... (4,666)
Allocation of distributions in
excess of (less than)
historical recorded costs:
Mandatory redeemable
preferred interests......
Other partnership interests. (2,398) (361) 33,512 29,694
Elimination of CPL from
combined group.............. (21,752) 8,354
-------- -------- --------- --------- --------- ----- ----------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
-------- -------- --------- --------- --------- ----- ----------
-------- -------- --------- --------- --------- ----- ----------
<CAPTION>
CP LEASING CP PARTNERS
------------------------- -------------------------
GENERAL LIMITED GENERAL LIMITED
PARTNERSHIP PARTNERSHIP PARTNERSHIP PARTNERSHIP TOTAL TOTAL
INTEREST INTEREST INTEREST INTEREST ELIMINATIONS EQUITY
--------- --------- --------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993.... $ (85) $ -- $ -- $ -- $ (9,255) $ 98,632
----------
----------
Equity issuance costs.......... (4,139)
Issuance of partnership Units
in initial public offering... 197,463
Net income (loss) for the year. 101 1,525 (35) (3,431)
Distributions.................. (16) (1,525)
Accretion of mandatorily
redeemable partnership
interests...................
Allocation of distributions in
excess of (less than)
historical recorded costs:
Mandatory redeemable
preferred interests...... (4,314)
Other partnership interests. (66,147)
Elimination of CPL from
combined group.............. 9,255
-------- --------- --------- --------- ---------
Balances, December 31, 1994.... $ 0 $ 0 (35) 119,432 $ 0 $ 119,397
-------- --------- --------- ----------
-------- --------- --------- ----------
Equity issuance costs.......... (277)
Net income for the year........ 173 17,105
Distributions.................. (290) (29,052)
--------- ---------
Balances, December 31, 1995.... (152) 107,208 $ 107,056
---------
---------
Equity issuance costs.......... (7,456)
Issuance of partnership
Units....................... 161,922
Contribution of capital........ 3,329
Redemption of Special
Allocation Units............ (4,100)
Net income for the year........ 205 20,336
Distribution................... (674) (40,620)
--------- --------
Balances, December 31, 1996.... $ 2,708 $237,290 $ 239,998
--------- -------- ---------
--------- -------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF OPERATIONS. Crown Pacific Partners, L.P. (the
"Partnership"), a Delaware limited partnership, through its 99% owned
subsidiary, Crown Pacific Limited Partnership (the "Operating Partnership"),
was formed in 1994 to acquire, own and operate timberlands and wood product
manufacturing assets located in the Northwest United States. These assets
were formerly owned by Crown Pacific Limited Partnership ("CPLP") and Crown
Pacific Inland Limited Partnership ("CP Inland"). The Partnership's business
consists primarily of growing and harvesting timber for sale as logs in
domestic and export markets and the manufacturing and selling of lumber and
other wood products.
Crown Pacific Management Limited Partnership (the "Managing General
Partner") manages the businesses of the Partnership and the Operating
Partnership. The Managing General Partner owns a 0.99% general partner
interest in the Partnership and the remaining 1% general partner interest in
the Operating Partnership. Crown Pacific, Ltd. ("CPL"), the Special General
Partner of the Partnership, and the Managing General Partner comprise the
General Partners of the Partnership. The Special General Partner owns a
0.01% general partner interest and a 10% limited partnership interest in the
Partnership. All management decisions related to the Partnership are made by
the Managing General Partner. Unitholders have voting rights for certain
issues as outlined in the Partnership Agreement. As used herein, "Former
Entities" refer to the combined entities of CPLP, CP Inland, CPL and two
additional related entities: Crescent Creek Logging, Inc. and Crown Pacific
Leasing Limited Partnership. "Partnership" and "Crown Pacific" refer to the
Partnership and the Operating Partnership taken as a whole.
BASIS OF PRESENTATION. Effective December 22, 1994, the Partnership
completed an initial public offering (the "Offering") of 9,850,000 common
limited partnership units. Concurrent with the Offering, the Partnership
consummated an offer and consent solicitation to acquire substantially all of
the assets of the Former Entities in exchange for cash and 8,283,527 limited
partnership units. The acquired assets were recorded at their historical
cost and not treated as a purchase for accounting purposes since less than
80% of the limited partnership interests were sold to the general public and
because the General Partners or their affiliates were also the general
partners of the Former Entities.
The operating results of the separate Former Entities were not
consolidated prior to the Offering; however, due to significant common
ownership, management and asset transfers among the Former Entities, the
operating results for the period prior to the Offering were combined to
reflect the results of operations, cash flows and financial position of the
Former Entities taken as a whole.
The Partnership's results of operations from December 22, 1994 through
December 31, 1994 were not significant compared to the results of the
combined Former Entities prior to the Offering. In order to present a
comparable Statement of Income for 1994, the ten-day operating results of the
Partnership have been combined with those of the Former Entities for the year
ended December 31, 1994.
Page 40
<PAGE>
Operating results of the Partnership for the period December 22, 1994
through December 31, 1994 were as follows (in thousands):
Revenues $ 9,647
Operating loss (323)
Loss before extraordinary item (1,159)
Extraordinary item - loss on extinguishment of debt (2,376)
Net loss (3,535)
Pro forma net loss per Unit $ (0.19)
Included in the net loss for the ten-day period was an extraordinary
loss related to the refinancing of certain debt assumed by the Partnership
from the Former Entities (see DEBT ISSUANCE COSTS below).
PRINCIPLES OF CONSOLIDATION. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.
Certain eliminations are also reflected in the Pre-IPO Consolidated Statement
of Changes in Partners' Capital and Shareholders' Equity, which relate to
CPL's investment in CPLP, its equity in the income of CPLP and elimination of
profit on intercompany sales. The reconciliation of net income (loss) in the
Pre-IPO periods is as follows (in thousands):
Period from Period from
Dec. 22 thru Jan. 1 thru
Dec. 31, 1994 Dec. 22, 1994
--------------- --------------
Net (loss) income per the Consolidated
Statement of Income $ (3,535) $ 7,095
CPL's equity in the net income of CPLP -- 9,271
Minority interest 69 --
Net income allocated to mandatorily redeemable
limited partnership interests -- (3,958)
Elimination of intercompany profit and other -- 3,891
-------- --------
Net (loss) income per the Consolidated
Statement of Changes in Partners' Capital
and Shareholders' Equity $ (3,466) $ 16,299
-------- --------
-------- --------
REVENUE RECOGNITION. The Partnership recognizes revenue from log sales
upon delivery to the customer. Revenue from lumber, plywood and millwork
sales is recognized upon shipment. Sales of real property, including
standing timber, are recognized when title transfers, upon receipt of a
sufficient down payment and when the collectibility of any outstanding
receivable from the purchaser is assured. The allowance for doubtful
accounts was $0.25 million and $0.09 million at December 31, 1996 and 1995,
respectively.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist primarily
of funds invested in overnight repurchase agreements. The Partnership
considers all highly liquid investments that have original maturities of
three months or less to be cash equivalents.
INVENTORIES. Inventories, consisting of lumber, plywood and logs, are
stated at the lower of LIFO cost or market. Supplies and inventories
maintained at nonmanufacturing locations are valued at the lower of average
cost or market.
DEPOSITS ON TIMBER CUTTING CONTRACTS. The Partnership purchases timber
under cutting contracts with government agencies and private land owners.
Title to the timber does not pass until the timber is harvested and measured.
Therefore, timber remaining under contract is considered to be a commitment
and is not recorded as an asset or liability until it is harvested and
measured. Deposits are generally
Page 41
<PAGE>
required to be made on these contracts and are applied to the purchase of
timber as it is harvested.
PROPERTY, PLANT AND EQUIPMENT. Buildings, machinery and equipment,
including additions and improvements that add to productive capacity or
extend useful life, are recorded at cost, while maintenance and repairs are
expensed currently. Upon retirement or disposal of assets, the cost and
related accumulated depreciation are removed from their respective accounts
and any gain or loss is reflected in earnings.
Depreciation is calculated for financial reporting purposes using the
straight-line method based on estimated useful lives as follows:
Buildings and leasehold improvements 15 to 25 years
Machinery and equipment 3 to 10 years
TIMBER AND TIMBERLANDS. Timber and timberlands, including logging
roads, are stated at cost less depletion for timber previously harvested and
accumulated amortization related to roads. Costs of the Partnership's
logging roads and timber harvested are determined based on the volume of
timber harvested in relation to the amount of estimated recoverable timber.
The Partnership estimates its timber inventory using statistical information
and data obtained from physical measurements, site maps, photo-types and
other information-gathering techniques. These estimates are updated annually
and may result in adjustments of timber volumes and depletion rates, which
are recognized prospectively (see Note 4). Changes in these estimates have no
impact on the Partnership's cash flow. Timber purchased through cutting
contracts is recorded as cutting rights and depleted throughout the harvest.
DEBT ISSUANCE COSTS. Debt issuance costs, including $3.1 million of
costs in 1996 related to debt incurred for the Cavenham timberlands (see Note
4), are a component of other assets and include all costs and fees incurred
that are directly related to obtaining credit facilities. These costs are
amortized over the term of the related credit agreement. In conjunction with
the 1994 refinancing of the Former Entities' borrowings, $16.2 million, or
$0.88 on a pro forma per Unit basis, of deferred debt issuance costs were
written off as an extraordinary charge. Unamortized debt issuance costs were
$7.1 million and $4.6 million at December 31, 1996 and 1995, respectively.
INCOME TAXES. The Partnership is not subject to federal income tax as
its income or loss is included in the tax returns of the individual
Unitholders.In 1994, income taxes for CPL were calculated in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." This statement requires that the balance sheet amounts for deferred
income taxes be computed based upon the tax effect of aggregate temporary
differences arising prior to year end and reversing subsequent to year end.
Such effects were calculated based upon tax rates enacted. CPLP, CP Inland
and CP Leasing were limited partnerships and Crescent Creek Logging, Inc. was
a Subchapter S corporation and were not liable for federal or state income
taxes.
ACCRUED EXPENSES. Included in Accrued Expenses are accrued payroll and
profit sharing expenses of $4.8 million and $4.9 million for the years ended
December 31, 1996 and 1995, respectively (see Note 9).
PER UNIT INFORMATION. Net income per Unit is calculated using the
weighted average number of Common and Subordinated Units outstanding, divided
into net income (loss), after adjusting for the 1% General Partner interest.
The weighted average number of Units outstanding was 21,690,655 for the year
ended December 31, 1996 and 18,133,527 for the years ended December 31, 1995
and 1994.
Page 42
<PAGE>
Net income per Unit in 1994 was calculated on a pro forma basis,
combining the Former Entities' results of operations with those of the
Partnership's for its ten-day period ended December 31, 1994 and assuming
that the Partnership's Units were outstanding for the entire year.
SALES TO EXPORTERS. The Partnership sells logs to domestic customers
engaged in exporting activities. Total sales to those customers were $20.3
million, $11.1 million and $11.0 million for the years ended December 31,
1996, 1995 and 1994, respectively.
STOCK-BASED COMPENSATION. Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) allows
companies to choose whether to account for stock-based compensation on a fair
value method, or to continue accounting for such compensation under the
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). The Partnership has chosen to
continue to account for unit-based compensation using APB 25 (see Note 9).
If the accounting provisions of SFAS 123 had been adopted as of the beginning
of 1996, the effect on 1996 net income would have been immaterial.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates, including those related to timber volumes, and assumptions that
affect the amounts reported in the consolidated financial statements and
related notes to financial statements. Actual results could differ from
these estimates and changes in such estimates may affect amounts reported in
future periods.
FINANCIAL INSTRUMENTS. All of the Partnership's significant financial
instruments are recognized in its consolidated balance sheet. Carrying values
approximate fair market value, unless otherwise noted (see Note 5).
CONCENTRATION OF RISK. The Partnership is subject to credit risk
through short-term cash investments and trade and notes receivable. The
Partnership restricts investment of short-term cash investments to high
credit quality financial institutions. At times, such investments may be in
excess of the FDIC insurance limit. Credit risk on trade receivables is
mitigated by control procedures to monitor the credit worthiness of
customers. The Partnership may mitigate credit risk related to notes
receivable by obtaining asset lien rights or other secured interests or
performing credit worthiness procedures or both.
ENVIRONMENTAL COSTS. The Partnership expenses environmental costs
incurred related to its operations and for which no current or future benefit
is discernible. Expenditures that extend the life of the timberlands and
related properties are capitalized and amortized over their estimated useful
lives.
FINANCIAL STATEMENT RECLASSIFICATIONS. Certain amounts in prior years
have been reclassified to conform with current year presentation and had no
impact on net income or partners' and shareholders' equity.
Page 43
<PAGE>
2. INVENTORIES
Inventories consisted of the following (in thousands):
December 31,
1996 1995
------- --------
Finished goods $ 9,068 $12,557
Work in process 6,417 2,680
Logs 16,123 27,169
Supplies 1,534 3,600
LIFO adjustment 2,604 741
------- --------
Total inventories $35,746 $46,747
------- --------
------- --------
In 1996, the liquidation of LIFO inventories decreased cost of sales
and, therefore, increased net income by $1.0 million.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
December 31,
1996 1995
------- --------
Land $ 3,885 $ 2,688
Buildings and leasehold improvements 6,102 6,063
Machinery and equipment 41,040 45,103
Construction in progress 12,579 3,667
------- --------
63,606 57,521
Less: accumulated depreciation (19,927) (16,601)
------- --------
Property, plant and equipment, net $43,679 $40,920
------- --------
------- --------
In September 1996, the Partnership acquired substantially all of the
assets of a company located in Eugene, Oregon, which operates as a trader of
lumber and other wood products for $3.0 million. In addition, in September
1996, the Partnership acquired substantially all of the assets of a studmill
in Marysville, Washington for $2.7 million.
In 1996, the Partnership disposed of substantially all of the assets of
the Thompson Falls, Montana and Albeni Falls, Idaho sawmills. Additionally,
in 1996, the Partnership disposed of substantially all of the assets of its
Redmond, Oregon plywood facility. The Partnership's aggregate net loss
related to these disposals was insignificant.
Page 44
<PAGE>
4. TIMBER, TIMBERLANDS AND ROADS
Timber, timberlands and roads consisted of the following (in thousands):
December 31,
1996 1995
------- --------
Timber, timberlands and logging roads, net $497,491 $313,259
Timber cutting rights 14,378 6,804
-------- --------
Total timber and timberlands, net $511,869 $320,063
-------- --------
-------- --------
On May 15, 1996, the Partnership purchased 207,000 acres of Northwest
timberland from Cavenham Forest Industries for $205 million (the "Cavenham
Acquisition"). The Cavenham Acquisition, along with existing acquisition line
borrowings, were financed with a $250 million bank credit facility (the
"Acquisition Facility"), which was subsequently repaid with the proceeds of a
new equity offering (see Note 8) and placement of senior notes on August 13,
1996 (see Note 5).
The Partnership's annual update of its timber inventory system (See Note
1) resulted in an increase of timber volumes, which reduced estimated
depletion rates and decreased the depletion cost for the year ended December
31, 1995 by $7.4 million, or $0.41 per Unit. The adjustment in 1996 was not
significant.
5. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
December 31,
1996 1995
-------- --------
9.78% Senior Notes due 2002 - 2009 $275,000 $275,000
9.60% Senior Notes due 2002 - 2009 25,000 25,000
8.17% Senior Notes due 2003 - 2013 91,000 --
Term Note due 1997 - 1998, variable rate:
5.57% at December 31, 1996 2,000 --
Revolving Acquisition Line of Credit -- 26,000
-------- --------
393,000 326,000
Less: current portion (1,000) --
-------- --------
Long-term debt, excluding current portion $392,000 $326,000
-------- --------
-------- --------
The Partnership has a $40 million revolving credit facility with a group
of banks for working capital purposes and stand-by letters of credit that
expires on September 30, 1999. The credit facility bears a floating rate of
interest, 9% at December 31, 1996, and among other provisions, requires the
Partnership to repay all outstanding indebtedness under this facility for at
least 30 consecutive days during any twelve-month period. The line of credit
is secured by the Partnership's inventories and receivables. At December 31,
1996 and 1995, the Partnership had $15.0 million and $19.1 million,
respectively, outstanding under this facility. On December 31, 1996, the
Partnership borrowed $15 million from this facility and repaid the amount in
full on January 6, 1997.
On August 6, 1996 the Partnership renegotiated the terms of its
Acquisition Facility with a group of banks to provide for a $125 million
three-year revolving line of credit for the acquisition of additional timber,
timberlands and related assets. The Acquisition Facility is unsecured and
bears a floating rate of interest. At the end of the revolving period, the
Partnership may elect to convert any outstanding borrowings under this
facility to a four-year term loan, requiring quarterly principal payments
equal to
Page 45
<PAGE>
6.25% of the outstanding principal balance on the conversion date. There
were no borrowings against this facility at December 31, 1996.
On August 13, 1996, the Partnership issued $91 million of new senior
notes (the "New Senior Notes"). The proceeds from the New Senior Note
issuance were used to repay a portion of the bank indebtedness incurred in
connection with the Cavenham Acquisition under the Acquisition Facility. The
New Senior Notes bear an average interest rate of 8.17%, are unsecured and
require semi-annual interest payments on August 1 and February 1 of each year
through 2013. The New Senior Notes are redeemable prior to maturity, subject
to a premium on redemption based on interest rates of U.S. Treasury
securities, having a similar average maturity as the New Senior Notes, plus
50 basis points. The New Senior Note agreements require the Partnership to
make annual principal payments in varying amounts beginning in 2003 and
continuing through 2013.
The Partnership's 9.78% and 9.60% senior notes (the "Existing Senior
Notes") are unsecured and require semi-annual interest payments on June 1 and
December 1 of each year, through 2009. The Existing Senior Notes are
redeemable prior to maturity, subject to a premium on redemption based on
interest rates of U.S. Treasury securities, having a similar average maturity
as the Existing Senior Notes, plus 50 basis points. The Existing Senior Note
agreements require the Partnership to make annual principal payments of $37.5
million on December 1 of each year beginning in 2002 and continuing through
2009.
All of the Partnership's senior note agreements and bank lines of credit
contain certain restrictive covenants, including limitations on harvest
levels, land sales, cash distributions and the amount of future indebtedness.
The Partnership was in compliance with such covenants at December 31, 1996.
On December 31, 1996, the estimated aggregate fair value of the
Partnership's senior notes was approximately $430.9 million and was carried
at $391 million. The fair value was calculated in accordance with the
requirements of SFAS No. 107, "Disclosures About the Fair Value of Financial
Instruments," and was estimated by discounting the future cash flows using
rates currently available to the Partnership for debt instruments with
similar terms and remaining maturities. All other long-term debt amounts
approximate market value.
6. SUPPLEMENTAL CASH FLOW INFORMATION
The Partnership and/or Former Entities made the following cash payments
(in thousands):
Year ended December 31,
1996 1995 1994
------ ------ ------
Interest $35,936 $28,932 $24,795
Income taxes -- -- $ 1,388
Page 46
<PAGE>
7. FORMER ENTITIES - MANDATORILY REDEEMABLE PREFERRED STOCK
AND LIMITED PARTNERSHIP INTERESTS
CPLP'S CLASS D LIMITED PARTNERSHIP INTEREST. CPLP issued new Class D
Limited Partnership Interests in 1993. The Class D interests included an
aggregate annual cumulative priority distribution subject to certain
restrictions. The Class D Limited Partnership Interests were redeemed on
December 22, 1994 as part of the Partnership's initial public offering (see
Note 8) for the redemption price plus a premium of $3.0 million.
CP INLAND'S CLASS B PREFERRED LIMITED PARTNERSHIP INTEREST. CP Inland
Class B Preferred Limited Partnership Interests entitled the holders to an
aggregate annual cumulative priority distribution. The Class B Preferred
Limited Partnership Interests were redeemed on December 22, 1994 as part of
the Partnership's initial public offering (see Note 8) for the redemption
price, plus a premium of $1.3 million.
The changes in the mandatorily redeemable limited partnership interests
were as follows (in thousands):
Balance at December 31, 1993 $ 52,325
Allocation of net income 3,958
Distributions (2,946)
Accretion 4,666
Redemption (62,317)
Allocation of redemption in excess of cost 4,314
---------
Balance at December 31, 1994 $ --
---------
---------
8. PARTNERS' AND SHAREHOLDERS' EQUITY, INCOME AND DISTRIBUTIONS
PARTNERSHIP EQUITY. On December 22, 1994, the Partnership sold
9,850,000 Common Units in an initial public offering (the "1994 Offering").
Simultaneous to the 1994 Offering, 2,510,439 Common Units, 5,773,088
Subordinated Limited Partnership Units ("Subordinated Units") and 10,000
Special Allocation Units ("SAUs") were issued to certain existing partners of
CPLP and CP Inland.
During August 1996, the Partnership sold 8,970,750 additional Common
Units in a second public offering (the "1996 Offering"). Proceeds from the
1996 Offering were $165.2 million, including $3.3 million from the General
Partner, and were used to redeem the SAUs for $4.1 million and to retire a
portion of the debt incurred to fund the Cavenham Acquisition (see Notes 4
and 5). An additional 2,647,470 Common Units were sold in the 1996 Offering
by certain selling Unitholders.
The Partnership had 21,331,189 and 12,360,439 Common Units outstanding
at December 31, 1996 and 1995, respectively. The Partnership also had
5,773,088 Subordinated Units outstanding at December 31, 1996 and 1995 and
10,000 SAUs outstanding at December 31, 1995.
PARTNERSHIP INCOME. Generally, 99% of the Partnership's income and
losses is allocated to the holders of Common and Subordinated Units, 0.99% is
allocated to the Managing General Partner, and .01% is allocated to the
Special General Partner.
CASH DISTRIBUTIONS. In accordance with the Partnership Agreement, the
Managing General Partner is required to make quarterly cash distributions
from Available Cash. Generally, cash distributions are paid in order of
preference: first to Common Unitholders; second, to the extent cash remains
available, to Subordinated Unitholders; and third, prior to the SAU
redemption, to holders of SAUs.
The Partnership agreement also sets forth certain cash distribution
hurdle rates for the General Partner to meet in order to increase its share
of the available cash flow. To the extent that the annual distribution
exceeds $2.26 per Unit, the General Partner receives 15% of the excess cash
flow rather than the base amount of 2%. The General Partner can receive a
maximum of 50% of the available cash
Page 47
<PAGE>
flow if the annual distribution exceeds $3.62 per Unit.
The Subordinated Units are subordinated in right of distributions to the
holders of Common Units. Provided that certain increases in cash
distributions are paid to the holders of Common and Subordinated Units, 50%
of the Subordinated Units will convert to Common Units in 1999 and the
remaining 50% will convert to Common Units in 2000.
The Managing General Partner declared distributions of $2.10 per Unit
and $2.04 per Unit for the years ended December 31, 1996 and 1995,
respectively, and $0.055 per Unit for the ten-day period ended December 31,
1994.
The Partnership's 1996 and 1995 consolidated distributions to partners
included $0.4 million and $0.3 million, respectively, paid to the Managing
General Partner for its 1% share of the Operating Partnership's distributions
for those years. The remaining 99% of the Operating Partnership's
distributions were eliminated in consolidation.
FORMER ENTITIES. Net income or loss was allocated to the Former
Entities' interests pursuant to their respective partnership agreements. In
addition to the distributions made pursuant to the Former Entities'
partnership agreements, all of the partnerships made tax distributions to
their partners in an amount equal to the estimated tax liability for each
partner based on the profitability of the respective partnership.
CROWN PACIFIC LIMITED PARTNERSHIP. CPLP's equity prior to December 22,
1994 consisted of a general partnership interest, three classes of preferred
limited partnership interests and two classes of limited partnership
interests. Class C Subordinated Preferred Limited Partnership Interests,
Class A Limited Partnership Interests and Class E Limited Partnership
Interests were all subordinate to Class B and Class D Preferred Limited
Partnership Interests (see Note 7). Class C Limited Partnership Interests
were retired in 1993. Class B Preferred Limited Partnership Interests were
redeemed as part of the 1994 Offering at par, plus accrued priority
distributions. Class A and Class E Limited Partnership Interests were
exchanged as part of the 1994 Offering for 3,732,323 Common Units of the
newly formed Partnership, $74.3 million in cash and 5,401 SAUs.
CROWN PACIFIC INLAND LIMITED PARTNERSHIP. CP Inlands partners' capital
consisted of a general partnership interest, Class A Nonredeemable Limited
Partnership Interests and Class B Preferred Limited Partnership Interests
(see Note 7). The Class A Limited Partnership Units and General Partner
interest were exchanged as part of the 1994 Offering for 4,551,204 Common
Units of the newly formed Partnership, plus $33.7 million in cash and 4,599
SAUs.
Both CPLP and CP Inland had issued warrants along with certain
partnership interests. All warrants were redeemed for $21.7 million as part
of the 1994 Offering.
Page 48
<PAGE>
9. UNIT OPTION AND PROFIT SHARING AND EMPLOYEE SAVINGS BENEFIT PLAN
Effective December 22, 1994, the Managing General Partner adopted the
1994 Unit Option Plan (the "1994 Option Plan"). The 1994 Option Plan
empowers the Partnership to award or grant Common Units to certain key
employees of the Partnership and Managing General Partner. Under the terms
of the 1994 Option Plan, the Managing General Partner can grant annual
options on or about January 1, 1995 through January 1, 1999. Total options
granted in any one year cannot exceed 1% of the total outstanding Common and
Subordinated Units. There were 15,200 and 0 Units exercisable at December 31,
1996 and 1995, respectively.
The exercise price for each annual option grant is the market price of the
Common Units at the date of grant. Option grants vest over a four-year
period as follows: 10% in year one; an additional 20% in year two; an
additional 30% in year three; and the final 40% in year four. After the
options are granted, they are generally exercisable for a ten-year period. A
summary of option transactions during each of the three years in the period
ended December 31, 1996 is shown below:
Units Option Price
--------- ----------------
Outstanding, December 31, 1993 -- --
Granted 181,000 $21.50
Exercised -- --
Canceled -- --
-------- ---------------
Outstanding, December 31, 1994 181,000 $21.50
Granted -- --
Exercised -- --
Canceled (8,000) $21.50
-------- ---------------
Outstanding, December 31, 1995 173,000 $21.50
Granted 156,000 $18.13
Exercised -- --
Canceled (21,000) $21.50
-------- ---------------
Outstanding, December 31, 1996 308,000 $18.13 - $21.50
-------- ---------------
-------- ---------------
Effective December 22, 1994, the 1994 Option Plan provided for the
granting of Front End Options to two officers of the Managing General
Partner. Under the terms of the Front End Option grants, each officer
received an option to purchase 181,335 Units on December 31, 1999, with an
exercise price of $21.50 per Unit (not included in the table above). Front
End Options will vest on December 31, 1999 and may be exercised for the
period beginning on December 31, 1999 through December 31, 2004, provided all
of the following conditions are met:
1) The Subordinated Units must convert to Common Units;
2) The officer must continue his employment with the Managing General
Partner through at least December 31, 1999; and
3) The Partnership must make certain minimum levels of cash
distributions to Common and Subordinated Unitholders through
December 31, 1999 in excess of those required for Subordinated
Unit conversion.
The Partnership has a Profit Sharing and Employee Savings Benefit Plan
covering substantially all full-time, non-union employees who have completed
at least one year of service. Contributions are determined annually at the
discretion of the Managing General Partner. The expense related to profit
sharing was $1.7 million, $1.7 million and $1.4 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
Page 49
<PAGE>
10. RELATED PARTIES
In accordance with the Partnership Agreement, the Partnership reimburses
the General Partners for the direct costs incurred to manage the Partnership.
These reimbursements were $3.7 million and $2.9 million in 1996 and 1995,
respectively.
11. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1996 and 1995, the Partnership was committed to
purchase timber or logs from government and private sources. These
commitments mature on various dates through 2001. The remaining commitments
were approximately $41.7 million at December 31, 1996.
The Partnership has two log supply sales agreements that generally have
fixed prices, depending on the species of logs delivered, the delivery point
and size and quality of logs. During 1996 and 1995, there were 10.4 million
board feet (MMBF) and 21 MMBF, respectively, of logs sold under these
contracts. 7.5 MMBF of logs are scheduled to be delivered in 1997 under
these agreements.
The Partnership becomes involved in litigation and other proceedings
arising in the normal course of its business. In the opinion of management,
the Partnership's liability, if any, under any pending litigation would not
materially affect its financial condition or results of operations.
12. SUBSEQUENT EVENTS
In January 1997, the Board of Control of the Managing General Partner
declared the fourth quarter 1996 distribution of $0.524 per Unit. The
distribution will equal $14.3 million, including $0.1 million to the General
Partners, and will be paid on February 14, 1997 to Unitholders of record on
February 3, 1997.
In January 1997, the Board of Control of the Managing General Partner
approved an incentive compensation plan (the "Plan") to attract and retain
certain key employees, who also have unit options outstanding under the 1994
Option Plan, by awarding them Distribution Equivalent Rights ("DERs"). A
participant under the Plan may be granted DERs with respect to one or more of
their options granted on or after January 1, 1997. Each year, an amount
equal to the cash distribution made by the Partnership per Unit will be
allocated to each participant's account for each DER granted. Such amounts
are subordinate to the payment of quarterly distributions on all units. To
the extent the option related to the DER is vested under the 1994 Option
Plan, the DER amount corresponding to the vesting portion of such option will
be paid to the participant. In January 1997, the Board of Control awarded
255,000 DERs which will have an estimated future annual cost of $0.4 million
beginning in 1997.
In January 1997, the Board of Control of the Managing General Partner
approved an amendment (the "Amendment") to the Partnership Agreement. The
Amendment would increase by 20 million the number of Common Units that may be
issued without further Unitholder approval except as otherwise required by
the Partnership Agreement or by law. The Amendment is intended to enhance
management's ability to act upon future acquisitions or financing
opportunities. The Amendment requires the consent of the Common Unitholders,
and the Managing General Partner intends to conduct a consent solicitation
for the Amendment commencing in February 1997.
Page 50
<PAGE>
EXHIBIT 10.5
CROWN PACIFIC MANAGEMENT LIMITED PARTNERSHIP
1997 DISTRIBUTION EQUIVALENT RIGHTS PLAN
SECTION 1. ESTABLISHMENT, PURPOSE, AND EFFECTIVE DATE
1.1 ESTABLISHMENT OF PLAN. Crown Pacific Management Limited
Partnership, a Delaware limited partnership (the "Manager"), hereby
establishes the CROWN PACIFIC MANAGEMENT LIMITED PARTNERSHIP 1997
DISTRIBUTION EQUIVALENT RIGHTS PLAN (the "Plan"), for the benefit of certain
key employees of the Manager. Subject to the terms and conditions provided
herein, the Plan provides for rewarding participating key employees with a
cash payment with respect to vested Distribution Equivalent Rights (as
defined herein) granted hereunder, which are in tandem with the Participant's
options ("Options") on Common Units in Crown Pacific Partners, L.P., a
Delaware limited partnership (the "Partnership"), pursuant to the Crown
Pacific Management Limited Partnership 1994 Unit Option Plan ("Option Plan").
1.2 PURPOSE. The purpose of the Plan is to help attract and retain the
services of participating key employees, and further to align their interests
with the interests of the partners of the Partnership, and to encourage such
employees to increase operating profitability, with the ultimate goal of
surpassing distribution objectives with respect to the Partnership's Common
Units and Subordinated Units.
1.3 EFFECTIVE DATE OF PLAN. The Plan shall be effective as of January
1, 1997.
SECTION 2 DEFINITIONS
2.1 DEFINITIONS. When used in the Plan, the following terms shall have
the meanings specified below:
<PAGE>
2.1.1 "Account" means a ledger account established for a
Participant which shall reflect, with respect to each year, the Distribution
Amounts for such year that have not become vested and paid to the Participant.
Distribution Amounts credited to an Account shall not be credited with interest.
2.1.2 "Beneficiary" means the person or entity determined to be
a Participant's beneficiary pursuant to Section 9.
2.1.3 "Board" means the Board of Control of the Manager, as
constituted in accordance with the agreement of limited partnership of the
Manager.
2.1.4 "Common Unit" has the meaning assigned to such term in
the Partnership Agreement.
2.1.5 "Compensation Committee" means the Compensation Committee
of the Board.
2.1.6 "Disability" has the meaning assigned to such term in the
Manager's long-term disability plan covering the Participant at the
applicable time, or if no such plan exists, means a physical or mental
disability that is reasonably expected to render the Participant incapable of
performing his duties as an employee of the Manager for a period of six
months within any twelve-month period.
2.1.7 "Distribution Amount" means, with respect to any year, an
amount equal to the cash distributions made by the Partnership with respect
to a Common Unit for such year.
2.1.8 "Distribution Equivalent Right" or "DER" means a right,
in tandem with a specified Option, to receive a Distribution Amount.
-2-
<PAGE>
2.1.9 "Distribution Date" means the 45th day following the end
of each calendar year or such other date as may be established by the
Compensation Committee.
2.1.10 "Involuntary Termination" means, with respect to any
Participant, the termination of such Participant's employment by the Manager
or Related Company for any reason whatsoever, other than a Termination for
Cause.
2.1.11 "Participant" means a key employee of the Manager
designated as a Participant pursuant to Section 4.
2.1.12 "Plan" means the Crown Pacific Management Limited
Partnership 1997 Distribution Equivalent Rights Plan, as set forth herein and
as amended from time to time.
2.1.13 "Related Companies" means the Partnership, Crown Pacific
Limited Partnership, a Delaware limited partnership, CP Air, Inc., an Oregon
corporation, Yellowstone Trucking Limited Partnership, a Delaware limited
partnership, and Klamath Northern Railway Co., an Oregon corporation, and any
other entity in which the Partnership owns, directly or indirectly, now or in
the future, 50% or more of the outstanding equity securities. The Manager shall
not be treated as a Related Company.
2.1.14 "Termination for Cause," with respect to any Participant,
has the meaning assigned to such term in such Participant's employment
agreement, if any, with the Manager, or if the Participant has no such
employment agreement, means (i) any conviction of such Participant for a
felony, (ii) any material breach by such Participant of a material agreement
between such Participant and the Manager, and the Partnership or any Related
Company, (iii) such Participant causes, directly and willfully, any material
breach of the Partnership Agreement, the limited partnership agreement of the
Manager or any Related Company, or the charter or bylaws of any
-3-
<PAGE>
Related Company, (iv) any conduct by such Participant materially injurious to
the Partnership, any Related Company, or their respective businesses, (v) any
failure by such Participant to comply with policies, procedures, or
directives of the Board, provided that, except where such failure constitutes
conduct materially injurious to the Partnership, any Related Company, or
their respective businesses, such Participant shall first be given notice
from the Board of such failure and such failure shall not have been cured
within three days after such notice or, if such failure is not capable of
being cured within three days, such Participant shall not have commenced and
be diligently pursuing in good faith efforts to cure such default, or (vi)
any fraud, dishonesty, misappropriation of funds, embezzlement, or other
similar acts of misconduct by such Participant with respect to the
Partnership.
SECTION 3 ADMINISTRATION
3.1 ADMINISTRATION. The Compensation Committee shall be responsible
for the administration of the Plan. The Compensation Committee is authorized
(i) to designate the key employees of the Manager eligible to become
Participants in the Plan, (ii) to designate the Options with respect to which
Distribution Equivalent Rights are granted, so long as the Options were not
issued prior to January 1, 1997, (iii) to interpret and construe any
provision of the Plan, (iv) to determine eligibility and benefits under the
Plan, (v) to prescribe, amend, and rescind rules and regulations relating to
the Plan, (vi) to adopt such forms as it may deem appropriate for the
administration of the Plan, (vii) to provide for conditions and assurances
deemed necessary or advisable to protect the interests of the Manager, and
(viii) to make all other determinations necessary or advisable for the
administration of the Plan, but only to the extent not contrary to the
express provisions of the Plan. Determinations, interpretations, or other
actions made or taken by
-4-
<PAGE>
the Compensation Committee under the Plan shall be final and binding for all
purposes and upon all persons. A majority of the Compensation Committee
shall constitute a quorum, and the acts of a majority of the members present
at any meeting at which a quorum is present, or acts approved in writing by
all members of the Compensation Committee, shall be deemed acts of the
Compensation Committee.
3.2 INDEMNIFICATION OF COMPENSATION COMMITTEE. The Manager and the
Partnership shall indemnify, protect, defend and hold harmless each member of
the Compensation Committee (which, for purposes of this Section 3.2, includes
any employee of the Manager or a Related Company to whom the Compensation
Committee has delegated any responsibility in the administration of the Plan)
against any and all claims, losses, damages, expenses, including, without
limitation, counsel fees incurred by the Compensation Committee, and
liability, including, without limitation, any amounts paid in settlement with
the Manager's approval, arising from the member's or the Compensation
Committee's determination, action or failure to act, except when the same is
judicially determined to be attributable to the gross negligence or willful
misconduct of such member. The right of indemnity described in the preceding
sentence shall be conditioned upon (i) the timely receipt of notice by the
Manager of any claim asserted against the Compensation Committee member,
which notice, in the event of a lawsuit, shall be given within 10 days after
receipt by the Compensation Committee member, and (ii) the timely receipt by
the Manager of an offer from the Compensation Committee member of an
opportunity for the Partnership to participate in the settlement or defense
of such claim.
3.3 RELIANCE BY COMPENSATION COMMITTEE. The Compensation Committee may
employ such legal counsel, consultants and agents as it may deem desirable
for the administration of the Plan
-5-
<PAGE>
and may rely upon any opinion received from any such counsel or consultant.
Expenses incurred by the Compensation Committee in the engagement of such
counsel, consultant, or agent shall be paid by the Partnership. No member or
former member of the Compensation Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any rights
granted herein.
3.4 COST. Although the Plan is maintained by the Manager for
administrative convenience, all expenses and costs associated with the Plan,
including, without limitation, the cost of administration and the cost of
funding the benefits to be provided by the Plan, shall be borne by the
Partnership. All economic benefits and burdens will accrue to and be
incurred by the Partnership, and the Manager shall have no opportunity to
profit from the operation of the Plan.
SECTION 4 ELIGIBILITY AND PARTICIPATION
4.1 ELIGIBILITY. Any employee of the Manager or a Related Company who
(i) is not a member of the Compensation Committee and (ii) has Options
outstanding under the Option Plan shall be eligible to be a Participant.
DERs may be granted to the same employee on more than one occasion.
4.2 GRANTS. Grants of DERs shall be made by the Compensation Committee
to such eligible employees as it may determine from time to time and shall be
evidenced by such form of agreement as the Compensation Committee may
approve. Each grant shall specify the Option with respect to which the
granted DER relates.
SECTION 5 TERMS OF DERS
5.1 VESTING/TERMINATION OF DERS. Each DER will be or become vested, as
the case may be, to the same extent as the Option to which it relates is
vested or becomes vested under the Option
-6-
<PAGE>
Plan. Each DER shall automatically terminate upon the earlier of the
Distribution Date that coincides with or next follows the sixth anniversary
of the grant date of the DER Option, or the date the tandem Option is
exercised or terminates.
5.2 ANNUAL PAYMENT AND/OR CREDITING OF DER AMOUNTS. Subject to Section
5.4, on each Distribution Date each Participant who is an employee of the
Manager or a Related Company on such date:
(a) shall be immediately paid the vested portion of the Participant's
Distribution Amounts for such year in cash;
(b) shall have credited to the Participant's Account the nonvested
portion of the Distribution Amounts for such year; and
(c) shall be immediately paid in cash the portion of any Distribution
Amount credited to the Participant's Account as of a previous
Distribution Date that has become vested as of the current
Distribution Date.
5.3 TERMINATION OF EMPLOYMENT. All DERs and all amounts credited to a
Participant's Account shall be immediately canceled unpaid on the date the
Participant ceases to be an employee of the Manager and its Related
Companies, with the exception that if a Participant ceases to be an employee
as a result of death, Disability or an Involuntary Termination, all amounts
then credited to his Account shall be immediately paid to the Participant in
cash.
5.4 LIMITATIONS ON ANNUAL DISTRIBUTION AMOUNTS. Notwithstanding
anything in this Plan to the contrary, no Distribution Amounts shall be paid
to a Participant or credited to a Participant's Account on a Distribution
Date unless the Available Cash (as defined in the Partnership Agreement) of
the Partnership with respect to the applicable year is sufficient to pay the
sum of (1) all
-7-
<PAGE>
distributions with respect to the Common Units and Subordinated Units for
such year in an amount equal to the distribution goal established by the
Compensation Committee with respect to such year ("Unit Distributions") and
(2) all Distribution Amounts for such year. In the event the Available Cash
is sufficient to pay all Unit Distributions, but not all Distribution
Amounts, the Distribution Amounts shall be reduced prorata for such year.
5.5 ELECTIVE DEFERRALS. A Participant may be given an election to
defer all or part of a Distribution Amount otherwise payable on such terms as
the Manager may from time to time determine.
SECTION 6 DURATION OF PLAN
Subject to Section 8, the Plan shall remain in effect until December 31,
2010.
SECTION 7 WITHHOLDING OF TAXES
The Manager and Related Companies shall withhold from any amounts
payable to a Participant hereunder an amount sufficient to satisfy all
federal, state, local and other withholding tax requirements.
SECTION 8 TERMINATION AND AMENDMENT
Except as specifically set forth herein, the Plan may be terminated at
any time or amended from time to time in any respect by the Board.
Notwithstanding anything to the contrary contained herein, no amendment or
termination shall be made that would materially and adversely affect or
diminish the rights of any Participant with respect to any DERs or amounts
credited to his Account, without such Participant's prior written consent;
provided that the Manager may amend the Plan from time to time in such a
manner as may be necessary to avoid having the Plan being subject to the
Employment Retirement Income Security Act of 1974, as amended. A
Participant's incurring
-8-
<PAGE>
any income tax liability as a result of an amendment or the termination of
the Plan shall not be considered to materially and adversely affect or
diminish the rights of a Participant.
SECTION 9 BENEFICIARIES, PERMITTED TRANSFEREES, AND OTHER PAYEES
9.1 DESIGNATION OF BENEFICIARY. Each Participant shall have the right
to designate in writing from time to time a Beneficiary by filing a written
notice of such designation with the Compensation Committee. A Participant's
designation of a Beneficiary may be revoked by filing with the Compensation
Committee an instrument of revocation or a later designation. Any
designation or revocation shall be effective when received by the
Compensation Committee. In the event of the death of a Participant, any
payment required to be made hereunder to such Participant shall be made to
such Participant's Beneficiary. Unless the Participant's Beneficiary
designation provides otherwise, no person shall be entitled to benefits upon
the death of the Participant unless such person survives the Participant. If
the Beneficiary designated by a Participant does not survive the Participant
or if the Participant has not made a valid Beneficiary designation, the
Participant's Beneficiary shall be the Participant's estate.
9.2 NONTRANSFERABILITY. Except as provided in Section 9.1, no DER or
Account, any interest therein, or any other interest or right of a
Participant under the Plan may be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated (except by will or by the applicable laws
of descent and distribution), or in any matter be liable for or subject to
the debts, contracts, liabilities, engagements or torts of a Participant or
Beneficiary entitled thereto, or be subject to any lien, directly or
indirectly, by operation of law or otherwise, including execution, levy,
garnishment, attachment, and bankruptcy.
-9-
<PAGE>
9.3 INCAPACITY OF PARTICIPANT OR BENEFICIARY. If the Compensation
Committee finds that any Participant or Beneficiary to whom a payment is
payable under the Plan is unable to care for his or her affairs because of
illness or accident or is under a legal disability, any payment due (unless a
prior claim therefor shall have been made by a duly appointed legal
representative) may, in the sole discretion of the Compensation Committee, be
paid to the spouse, child, parent or brother or sister of such Participant or
Beneficiary. Any such payment shall be a complete discharge of the
obligations of the Manager under the provisions of the Plan.
SECTION 10 RIGHTS OF EMPLOYMENT
Nothing in this Plan shall interfere with or limit in any way the right
of the Manager or any Related Company to terminate any Participant's
employment at any time, nor confer upon any Participant any right to continue
in the employ of the Manager or any Related Company.
SECTION 11 REQUIREMENTS OF LAW AND GOVERNING LAW
11.1 REQUIREMENTS OF LAW. The transfer of Common Units issued under the
Plan shall be subject to all applicable laws, rules, and regulations, and to
such approvals by any governmental agencies or national securities exchanges
as may be required.
11.2 GOVERNING LAW. The Plan and all agreements under the Plan shall be
construed in accordance with and governed by the laws of the State of Oregon.
-10-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-94118) of Crown Pacific Partners, L.P. of our
report dated January 24,1997 appearing on page 35 of this Annual Report on
Form 10-K.
/s/ PRICE WATERHOUSE LLP
- -----------------------------
PRICE WATERHOUSE LLP
Portland, Oregon
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,818
<SECURITIES> 0
<RECEIVABLES> 48,165
<ALLOWANCES> 250
<INVENTORY> 35,746
<CURRENT-ASSETS> 108,424
<PP&E> 63,606
<DEPRECIATION> 19,927
<TOTAL-ASSETS> 675,761
<CURRENT-LIABILITIES> 43,202
<BONDS> 0
0
0
<COMMON> 237,290
<OTHER-SE> 2,708
<TOTAL-LIABILITY-AND-EQUITY> 675,761
<SALES> 401,579
<TOTAL-REVENUES> 401,579
<CGS> 321,935
<TOTAL-COSTS> 340,571
<OTHER-EXPENSES> 1,615
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,852
<INCOME-PRETAX> 20,541
<INCOME-TAX> 0
<INCOME-CONTINUING> 20,541
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<NET-INCOME> 20,541
<EPS-PRIMARY> .94
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</TABLE>
