Item 1. Business
General
Crown Pacific Partners, L.P. ("Crown Pacific" or 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 facilities located in the Northwest United States. 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"), through its 99.98% owned subsidiary, Crown Pacific Administrative L.P., 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 an 8.74% limited partnership interest in the Partnership. All management decisions related to the Partnership are made by the Managing General Partner, but unitholders have voting rights for certain issues as described in the Partnership Agreement.
For a discussion of the Partnership's timberlands, see "Business-Timberlands" and "Business-Timberland Management." For a discussion of the Partnership's 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, net of asset resales, during the Partnership's history:
Dispositions
In September 2000, Crown Pacific closed the sale of its independently operated subsidiary Yellowstone Trucking, which resulted in a gain of $1.2 million. Under the terms of the sale agreement, Crown Pacific sold all of Yellowstone Trucking's operations and assets, including its real property and terminal in Coeur d'Alene, Idaho.
Timberlands
The Partnership owns or controls in excess of 804,000 acres of timberlands, which contain a total merchantable timber inventory of approximately 4.6 billion board feet, located in Oregon, Washington and Idaho.
The following table summarizes the estimated volume and acreage of the Partnership's timberlands:
The Partnership believes it is one of the largest non-governmental holders of ponderosa pine timberland in the United States. The Partnership also has significant holdings of other softwood species, including Douglas-Fir, hemlock, 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 with a variety of age class stands, and approximately 50% of the Partnership's merchantable timber is older than 50 years.
The Partnership's substantial timber resources help 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 2000, 1999 and 1998, Crown Pacific's timberlands provided the Oregon manufacturing facilities with 26%, 48% and 49%, respectively, and the Inland manufacturing facilities with 46%, 44% and 60%, respectively, of their log requirements.
Timberland Management
Particular silvicultural 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 the number 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 on the Partnership's timberlands.
Although the 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 made necessary by the difficult logging conditions and uniform ages and species of trees harvested. The Partnership maintains a 40-acre seed orchard on Whidbey Island in Washington to support these programs.
Legal title to the Partnership's 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's ability to pledge, assign or transfer its timberlands is subject to certain restrictions.
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, if any, 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 likely 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. 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. No customer accounted for 10% or more of total revenues during 2000, 1999 or 1998.
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 (the "BLM") 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.
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 third party segment sales, including property and stumpage sales, were 20.0% of revenues for the year ended December 31, 2000.
Manufacturing
Crown Pacific produces an array of lumber products at its six mills in Oregon, Idaho and Washington (see Item 2.
Item 2. Properties
Timberlands
The Partnership's timberlands are described above under "Timberlands" in Item 1. Business.
Manufacturing Facilities
The Partnership currently operates six 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 Port Angeles, Washington mill produces lumber studs for general construction purposes in lengths from 8 to 10 feet. The Port Angeles and Bonners Ferry mills are configured to produce both domestic and metric sizes for offshore markets.
The following table summarizes the annual production and capacity of the Partnership's lumber and remanufacturing facilities (amounts in MMBF):
The Partnership currently owns and operates five contractor supply yards, three in the Phoenix, Arizona area, one in Las Vegas, Nevada and one in Reno, Nevada. The Partnership also operates six
forest product wholesale trading operations, one in Eugene, Oregon, one in Ogden, Utah, one in Lakeville, Minnesota, one each in Cameron Park and Tustin, California and one in Albuquerque, New Mexico, which also operates as a wholesale distributor.
Item 3.
Item 3. Legal Proceedings
As of the date of filing of this Form 10-K, 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.
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 2000.
PART II
Item 5.
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, 2000, there were approximately 29,000 beneficial owners of 30,410,906 outstanding common units. All of the Partnership's subordinated units were converted to common units on February 14, 2000.
Trading price data for the common units, as reported by the New York Stock Exchange, and declared distribution information for 2000 and 1999 was as follows:
Cash distributions, if any, are expected to be paid quarterly from "Available Cash" as defined in the Partnership Agreement. The Board of Control, in January 2001, omitted the fourth quarter 2000 distribution, as reflected in the above table. Additionally, the Partnership suspended future distributions until the Board of Control determines that improved market conditions will support a sustained quarterly distribution. The Partnership's debt agreements have certain restrictive covenants limiting cash distribution amounts.
Item 6.
Item 6. Selected Financial Data
(1)Included in 2000 revenues are $29.8 million of sales generated by Cheshire Sales Company Inc., which was acquired in January 2000. Included in 1999 revenues are $68.6 million of sales generated by Desert Lumber, which was acquired in March 1999. Included in 1998 revenues are $114 million of sales generated by Alliance Lumber, which was acquired in January 1998. Also included are revenues from closed or sold operations of $13.9 million in 1997 and $68.7 million in 1996.
(2)For a discussion of the effect of the update of the timber inventory system, see Note 6 of Notes to Consolidated Financial Statements.
(3)Included in 2000 net income are the following items: gain from the sale of Yellowstone Trucking, $1.2 million; gain from the sale of aircraft, $3.5 million; settlement of litigation, $1.4 million expense; and writedown of inventory to market, $3.7 million. In 1996, the liquidation of LIFO inventories decreased cost of sales and, therefore, increased net income by $1.0 million.
(4)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.
(5)In 2000, the Partnership acquired 91,000 acres of timberland in Idaho from Plum Creek Timber Company for $73.4 million. In 1997, the Partnership purchased 65,000 acres of timber from
Trillium Corporation for $152.5 million. In 1996, the Partnership purchased 207,000 acres of timberland from Cavenham Forest Industries for $205 million.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 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 and a third mill that was sold in 1999. 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.
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, which expires on March 31, 2001. This agreement was 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. The Partnership believes that the agreement has generally benefited the Partnership, however the extent of the benefit is not determinable. The Partnership anticipates that a coalition of U.S. lumber producers will file a countervailing duty petition and anti-dumping charges against Canadian lumber producers in April 2001. The Partnership cannot determine the outcome of these petitions and their impact on lumber prices at this time.
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, floods 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.
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. Improved operating efficiencies as a result of recent capital expenditures have partially offset these cost increases.
Effects of Acquisitions
Each of Crown Pacific's acquisitions 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.
Segment Information
The Partnership classifies its operations into three fundamental businesses: (1) Timberlands, consisting of the sale of logs to the Partnership's manufacturing facilities and to third parties, and the sale of timber and timberlands to third parties; (2) Manufacturing, consisting of the manufacture of logs into lumber and the sale of residual chips to pulp and paper mills; and (3) Wholesale Marketing, consisting of the trading of various forest products and distribution of lumber and panel products through the Partnership's professional contractor service yards. Transfers between segments are
generally at prices which management believes reflect current market prices. The following summarizes the Partnership's segment information (in millions):
Results of Operations (2000 compared to 1999)
General
Net sales increased $4.7 million, or 0.6%, to $787.3 million in 2000 from $782.6 million in 1999. The increase reflects higher sales from the Partnership's timberland and wholesale marketing operations. The increase in timberland sales is primarily the result of more property and stumpage sales during 2000 compared to 1999, while the higher wholesale revenues reflect market share growth and the addition of Cheshire Lumber to the segment. The Partnership increased property and stumpage sales in response to poor lumber markets. These higher revenues were partially offset by lower manufacturing sales.
Cost of sales as a percentage of sales increased to 86.3% in 2000, compared to 84.3% in 1999. The increase primarily reflects the impact of a larger portion of the Partnership's revenue being derived from its wholesale operations, which operate at a lower profit margin, and significantly lower lumber
sales prices. In addition, in the fourth quarter of 2000, the Partnership recorded a $3.7 million charge to reflect the decreased market value for existing log and lumber inventories. These factors were only partially offset by lower log and lumber purchase prices, increased stumpage sale activity and lower overall per unit manufacturing costs.
Selling, general and administrative expenses increased $0.6 million to $39.5 million (5.0% of revenues) in 2000, from $38.9 million (5.0% of revenues) in 1999. The increase reflects growth in the wholesale segment and costs incurred in relation to the Partnership's strategic initiative process.
Interest expense increased $10.2 million to $59.6 million in 2000, from $49.4 million in 1999. The increase is a result of higher debt balances in 2000 due primarily to the purchase of the timberlands from Plum Creek in the first quarter of 2000 for $73.4 million, which was financed using the Partnership's acquisition line of credit, and the installation of a new small log line at the Partnership's Gilchrist mill during 2000 for approximately $23.6 million, which was funded with bank financing.
Amortization of debt issuance costs increased to $0.9 million in 2000 from $0.7 million in 1999 due to a full year of amortization in 2000 compared to only a partial year in 1999.
Other income, net was $5.3 million in 2000 compared to $0.3 million in 1999. The 2000 amount includes a gain of $1.2 million related to the sale of the Partnership's subsidiary Yellowstone Trucking in the third quarter of 2000 and a gain of $3.5 million related to the sale of two aircraft in the fourth quarter of 2000, partially offset by a $1.4 million loss related to an unfavorable ruling involving the settlement of a prior bad debt. The $1.4 million was paid in the first quarter of 2001. The 1999 amount includes a $1.4 million charge related to the closing and auctioning off of the Partnership's Colburn mill during the second quarter of 1999.
The Partnership pays no significant income taxes and does not include a provision for income taxes in its financial statements.
Timberlands
Total external log sales, including property and stumpage sales, increased $55.0 million, or 53.8%, to $157.3 million, or 20.0% of revenue in 2000, compared to $102.3 million, or 13.1% of revenue in 1999. The higher revenues reflect increased property and stumpage sales activity. Internal sales of logs to manufacturing decreased 16.2% to $148.8 million in 2000 from $177.6 million in 1999 primarily as a result of significantly lower lumber prices, which resulted in reduced production volumes from the Partnership's mills.
Overall operating income from timberlands, including property sales, increased 26.6% to $71.9 million in 2000 from $56.8 million in 1999. The increase in operating income was primarily a result of increased property and stumpage sales activity and lower overhead expenses in 2000 compared to 1999, offset in part by a 11.0% decrease in the average domestic external log sales realization during 2000 compared to 1999.
Domestic Log Sales
Average external domestic prices received for logs sold from the various tree farms, including stumpage but excluding pulpwood, were as follows:
Increases at the Oregon, Hamilton and Olympic tree farms are primarily a result of higher market prices for delivered logs earlier in 2000.
The decrease at the Inland tree farm, which represented 62.4% of the total external domestic log volume sold in 2000, is a result of increased stumpage sales (which typically have lower realizations but higher margins), which were partially offset by higher market prices for delivered logs.
Domestic external log sales volumes increased 62.3% to 327.1 MMBF, compared to 201.6 MMBF in 1999, primarily as a result of increased stumpage sales at the Inland and Oregon tree farms.
The domestic external volume from each of the Partnership's tree farms was as follows (in thousands of board feet (MBF)):
Export Log Sales
Sales of logs to customers involved in exporting activities were $7.0 million, or 0.9% of total revenues in 2000, compared to $5.1 million, or 0.6% of revenues in 1999. Prices received for export logs increased 1.9% to $632/MBF while sales volumes increased 34.1% to 11.0 MMBF in 2000 compared to 8.2 MMBF in 1999. The increase in volume is primarily a result of a lower supply of logs on the market.
Property Sales
Revenue and operating income from property sales in 2000 were $25.7 million and $14.7 million, respectively, compared to $7.6 million and $4.1 million, respectively in 1999. Property and stumpage sales comprised a significant portion of the Partnership's operating income during 2000, given the low level of lumber prices.
Manufacturing
Sawmill sales, excluding sales of lumber products through the wholesale division, decreased $86.1 million, or 31.7%, to $185.3 million, or 23.5% of revenue in 2000, compared to $271.4 million, or 34.7% of revenue in 1999. The decreased revenue reflects lower shipments, sales realizations and wood chip by-product revenues, partially offset by a decline in unit manufacturing costs, which is attributable to both lower log and lower overhead costs. In addition, due to market conditions, the Partnership closed its Prineville and Coeur d'Alene sawmills in May and August of 2000, respectively. The Prineville sawmill was reopened in late September 2000 in response to improvement in both demand and prices for pine lumber and operated on a one-shift basis during the remainder of 2000 and into the first quarter of 2001. The Coeur d'Alene sawmill remained closed during the fourth quarter of 2000, but was reopened on a one-shift basis during January 2001. The Bonners Ferry sawmill also reduced production to a one-shift basis of operation in January 2001.
Operating loss from manufacturing was $3.8 million in 2000 compared to operating income of $28.5 million in 1999, primarily as a result of an 18.0% decrease in external lumber sales volume, a 17.5% decrease in overall sales realization and a $3.7 million charge during the fourth quarter of 2000
to reflect decreased market values for existing log and lumber inventories, offset in part by lower unit manufacturing costs.
Average prices received for all lumber, excluding sales to the wholesale division and freight, in the various regions were as follows:
The decreases in average realizations are due to weak overall lumber market pricing and product mix changes, especially in the Oregon region as a result of the new log line at the Gilchrist sawmill, which produces more dimension lumber compared to higher priced shop lumber that was produced previously.
Total external lumber sales volumes decreased 18.0% in 2000 to 455.9 MMBF compared to 556.1 MMBF in 1999. Sales volumes from the various regions were as follows (in MBF):
The decrease in lumber sales volume is a result of lower production due to the shut-down or curtailment of production at several of the Partnership's mills, as discussed above, in response to weak lumber pricing.
By-product revenues accounted for 2.1% of revenue in 2000, compared to 2.4% of revenue in 1999. Residual wood chip prices increased to $70 per bone dry unit (BDU) in 2000 compared to $69/BDU in 1999. The slightly higher average realization reflects market reaction to lumber production curtailments industry wide that negatively impacted the available supply of residual wood chips, especially in the third and fourth quarters of 2000. Woodchip volume decreased to 199,159 BDUs in 2000 compared to 216,142 BDUs in 1999. The lower volume reflects decreased chip production primarily in the Oregon and Inland regions as a result of the shutdown of the Prineville and Coeur d'Alene sawmills for significant portions of 2000 as discussed above.
Wholesale Marketing
The Partnership's wholesale operations involve sales of lumber and other wood products, most of which were not manufactured by the Partnership. Sales from the wholesale operations increased $39.3 million, or 10.0%, to $434.1 million, or 55.1% of revenue in 2000, compared to $394.8 million, or 50.4% of revenue in 1999. Operating income from wholesale operations increased 22.1% to $14.9 million in 2000 compared to $12.2 million in 1999. The increases in revenue and operating income are a result of market share growth and improved margins from existing operations as well as the acquisition of Cheshire Sales Company, Inc. in January 2000. The increase in revenue was partially offset by lower building material prices during 2000 compared to 1999. Overall profit margins increased to 3.1% in 2000 compared to 2.8% in 1999 as a result of favorable purchase opportunities of raw materials utilized to supply fixed price sales contracts.
Results of Operations (1999 compared to 1998)
General
Net sales in 1999 increased $115.6 million, or 17.3%, to $782.6 million from $667.0 million in 1998. The increase was principally due to increases in revenues from the Partnership's wholesale and manufacturing operations, which were partially offset by decreases in log and property sales from the timberland operations.
Selling, general and administrative expenses increased $7.4 million to $38.9 million (5.0% of revenues) in 1999, from $31.5 million (4.7% of revenues) in 1998, primarily as a result of the expanding wholesale operations, including the addition of Desert Lumber in March 1999, which were partially offset by operating efficiencies achieved within the administrative functions as operations have increased.
Operating income as a percentage of revenues decreased to 10.8% for 1999 compared to 11.9% for 1998 as a result of a higher percentage of revenue generated by the lower margin wholesale operations. Excluding wholesale operations, operating income as a percentage of revenue increased to 18.6% for 1999 compared to 17.3% for 1998 as a result of favorable increases in log and lumber prices and improved manufacturing efficiencies.
Interest expense decreased $2.1 million to $49.4 million in 1999, from $51.5 million in 1998. The decrease is primarily a result of lower average debt balances during 1999 compared to 1998 as a result of the payoff of approximately $50 million of debt at the end of the fourth quarter of 1998 following the receipt of proceeds from an equity offering.
Other expense, net was $0.4 million in 1999 compared to other income net of $0.3 million in 1998. The 1999 net expense includes a $1.4 million charge related to the closing and auctioning off of the Partnership's Colburn mill during the second quarter of 1999.
The Partnership pays no significant income taxes and does not include a provision for income taxes in its financial statements.
Timberlands
Total external sales decreased to $102.3 million, or 13.1% of revenue in 1999, compared to $189.4 million, or 28.4% of revenue in 1998. Internal sales of logs to manufacturing increased $30.3 million to $177.6 million in 1999 from $147.3 million in 1998 as a result of intersegment sales to the new Bonners Ferry and Port Angeles sawmills.
Overall operating income from timberlands, including property sales, decreased 30.0% to $56.8 million in 1999 from $81.1 million in 1998, primarily as a result of planned decreases in fee harvest, lower external log sales and fewer property sales in 1999 compared to 1998.
Domestic Log Sales
Average external domestic prices received for logs sold from the various tree farms, including stumpage but excluding pulpwood, were as follows:
Log prices for any period of time are influenced by the species of logs sold and the form in which they are sold-as stumpage (i.e. a standing tree) or as a delivered log. Market prices for logs for 1999 are generally higher than for 1998 in response to the higher lumber prices. However, the weighted average price received by the Partnership decreased in 1999 compared to 1998 as a result of differences in the type mix (i.e. changes in the percentage of delivered logs vs. stumpage sales) and changes in the species mix.
Domestic external log sales volumes decreased 36.9% in 1999 to 201.6 MMBF, compared to 319.5 MMBF in 1998, primarily as a result of increased internal sales to the new Bonners Ferry and Port Angeles sawmills, a 19% decrease in the 1999 fee harvest and a significant decrease in stumpage sales from the Oregon tree farm in 1999 compared to 1998. Sales volume from the Inland mill increased primarily as a result of a large, planned stumpage sale during the fourth quarter of 1999.
The external volume from each of the Partnership's tree farms was as follows (in thousands of board feet (MBF)):
Export Log Sales
Sales of logs to customers involved in exporting activities were $5.1 million, or 0.6% of revenues in 1999, compared to $8.3 million, or 1.2% of revenues in 1998. Prices received for export logs increased $22/MBF to $620/MBF while sales volumes decreased 41.2% to 8.2 MMBF in 1999 compared to 13.9 MMBF in 1998.
Property Sales
Revenue and operating income from property sales in 1999 were $7.6 million and $4.1 million, respectively, compared to $32.1 million and $10.7 million, respectively in 1998. As part of its ongoing strategy of reinvesting the value of non-strategic timberlands, the Partnership will continue to sell or trade properties in Oregon, Idaho and northwest Washington.
USFS Exchange of Timberlands
On June 8, 1999 the Partnership exchanged 34,000 acres of timberland in central Oregon with the U.S. Forest Service for 31,000 acres also located in central Oregon. The Partnership gave timberland with an appraised value of approximately $39.2 million and received timberland of like value. There was no impact on the financial position, results of operations or cash flows as a result of the exchange. The exchange allowed the Partnership to block up non-contiguous parcels of timberland, which will allow for more efficient management of the tree farm.
Manufacturing
Sawmill sales, excluding sales of lumber products to the wholesale division, were $271.4 million, or 34.7% of revenue in 1999, compared to $198.3 million, or 29.7% of revenue in 1998.
Operating income from manufacturing increased to $28.5 million in 1999 compared to $1.5 million in 1998. The increase is primarily a result of efficiencies, cost reductions realized at existing mills, production increases, increases in average sales prices and exceeding production goals at the new Bonners Ferry and Port Angeles mills.
Average prices received for all lumber, excluding sales to the wholesale division and freight, in the various regions were as follows:
Lumber prices were generally higher for 1999 in comparison to 1998, although they generally decreased during the fourth quarter of 1999 reflecting seasonally lower lumber pricing. Average prices are often influenced by the species manufactured, particularly at the Inland mills. In 1999, the Inland mills manufactured only an incidental volume of cedar and pine compared to about 20% in 1998. These species have average sales prices that exceed the average sales prices of currently manufactured species by $200 to $300 per MBF.
Total lumber sales volumes increased 39.2% in 1999 to 556.1 MMBF compared to 399.4 MMBF in 1998. Sales volumes from the various regions were as follows (in MBF):
The increases in the Inland and Washington regions are primarily as a result of rpoduction from the newly constructed Bonners Ferry and Port Angeles sawmills that came on line during the fourth quarter of 1998.
By-product revenues accounted for 2.4% of revenue in 1999, compared to 1.8% of revenue in 1998. Residual wood chip prices increased to $69 per bone dry unit (BDU) in 1999 compared to $57/BDU in 1998.
Wholesale Marketing
External revenues from sales by the Partnership's wholesale operations consisted of lumber and other wood products, most of which were not manufactured by the Partnership. Sales totaled $394.8 million, or 50.4% of revenue in 1999, compared to $263.4 million, or 39.5% of revenue in 1998. Operating income from wholesale operations increased 27.5% to $12.2 million in 1999 compared to $9.6 million in 1998. The increases in revenue and operating income are a result of the acquisition of Desert Lumber and Reno Lumber in March 1999, which added two new contractor service yards, as well as internal growth at existing service yards. Increases in operating income were partially offset by a sharp downturn in both lumber and panel markets in the second half of the third quarter, which led to lower profits on new jobs that were being supplied with inventory purchased at higher prices.
Liquidity and Capital Resources
The Partnership's primary sources of liquidity have been cash provided by operating activities, including stumpage and property sales, as well as debt and equity financings.
Cash provided by operating activities was $40.1 million in 2000 and resulted primarily from net income of $13.3 million, the add back of net non-cash expenses of $36.4 million and an increase in accounts payable and accrued expenses of $10.5 million, offset by an increase in accounts and notes receivable of $20.1 million. Working capital decreased to $81.6 million at December 31, 2000 compared to $111.3 million at December 31, 1999.
Net cash used in investing activities of $126.9 million resulted primarily from the acquisition of 91,000 acres of timberland in Idaho from Plum Creek Timber Company for $73.4 million, the acquisition of Cheshire Sales Company, Inc. for $3.5 million and the construction of a new small log line at the Gilchrist saw mill and other additions to timberlands, equipment and timber cutting rights of $85.1 million. These expenditures were offset in part by proceeds from the sale of property and other assets of $35.1 million.
Net cash provided by financing activities of $79.8 million resulted primarily from a $32.0 million net increase in short-term borrowings and a $116.6 million net increase in long-term debt, offset by distributions to partners of $70.1 million.
Cash necessary to enable the Partnership to pay quarterly cash distributions, if any, (in accordance with the Partnership Agreement), to pay for capital expenditures and to satisfy interest and principal payments on indebtedness, is significant. Additions to plant and equipment totaled $39.4 million in 2000 and are expected to total less than $5.0 million during 2001. Additions to timber and timberland purchases are evaluated as opportunities arise and totaled $117.6 million in 2000. The Managing General Partner expects that capital expenditures will be funded by a combination of any or all of the following: property sales, cash generated from operations, current funds or bank borrowings. The Partnership does not expect to make cash distributions from its current funds or from cash generated by operating activities until improved market conditions will support a sustained quarterly distribution.
The Partnership spent approximately $23.6 million (included in the $39.4 million total above) in 2000 on a new small log line at its Gilchrist mill, which was funded with bank financing. Approximately $2.0 million remains to be spent on this project during 2001. In addition, the Partnership closed its acquisition of approximately 91,000 acres of northern Idaho timberlands in January 2000 for $73.4 million (included in the $117.6 million total above), which was funded with bank borrowings under the Partnership's acquisition facility.
The Partnership has a $58 million revolving credit facility with a group of banks for working capital purposes and stand-by letters of credit that expire on December 1, 2002. The revolving credit facility was increased by $2.0 million in January 2000 due to an additional bank joining the credit group. The credit facility bears a floating rate of interest and is unsecured. At December 31, 2000, the Partnership had $31 million outstanding under this facility, with a weighted average interest rate of 9.73%.
The Partnership has a $232 million, three-year, revolving line of credit with a group of banks to provide for the acquisition of additional timber, timberlands and related assets and capital expenditures. The acquisition line was increased by $8.0 million in January 2000 due to an additional bank joining the credit group. The acquisition facility bears a floating rate of interest, is unsecured and expires December 1, 2002. 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. At December 31, 2000, the Partnership had $199.3 million outstanding under this facility, with a weighted average interest rate of 8.78%.
The Partnership's 9.78%, 9.60%, 8.17% and 7.8% senior notes, issued in 1994, 1995, 1996 and 1998, respectively, are unsecured and require semi-annual interest payments through 2018. These senior notes, with an aggregate $486 million principal amount, require the Partnership to make an aggregate principal payment of $37.5 million on December 1, 2002, and annual principal payments in various amounts from December 1, 2003 through 2018. The 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 senior notes, plus 50 basis points.
C.P. Air, a subsidiary of the Partnership, borrowed $2.7 million in January 2000 to finance a new aircraft. The debt bears interest at 8.25%, is secured by the aircraft and requires monthly payments of $26,000 including interest.
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, 2000.
New Accounting Pronouncements
In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities-an amendment of FASB Statement No. 133" ("SFAS 138"). In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is an amendment to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 137 and 138 establish accounting and reporting standards for all derivative instruments. SFAS 137 and 138 are effective for fiscal years beginning after June 15, 2000. The Partnership does not currently have any derivative instruments and, accordingly, does not expect the adoption of SFAS 137 and 138 to have an impact on its financial position, results of operations or cash flows.
On December 3, 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB 101 outlines basic criteria that must be met before registrants may recognize revenue, including persuasive evidence of the existence of an arrangement, the delivery of products or services, a fixed and determinable sales price and reasonable assurance of collection. As amended on June 26, 2000, SAB 101 is effective beginning the fourth fiscal quarter of the first fiscal year beginning after December 15, 1999. The adoption of SAB 101 in the fourth quarter of 2000 did not have a significant impact on the Partnership's financial position or results of operations.
In April 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation-an Interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44 clarifies and modifies APB Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44 was effective for the Partnership in the fourth quarter of fiscal 2000. The implementation of FIN 44 did not have a material impact on the Partnership's financial condition or results of operations.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Partnership's only financial instruments with market risk exposure are its variable rate lines of credit. At December 31, 2000, the Partnership had $230.3 million outstanding under its lines of credit with a weighted average interest rate of 8.93%. A hypothetical 10 percent increase in interest rates to 9.82% would not have a material impact on the Partnership's cash flows.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements and footnotes filed as part of this report follow the signature page of this report and begin on page. Unaudited quarterly financial data for each of the eight quarters in the two-year period ended December 31, 2000 is as follows:
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
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 Investors, Inc. 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.
Directors
Robert Jaunich II, 61, 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 Fremont Group and a member of its Board of Directors and Executive Committee. 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 CNF Transportation, Inc. (NYSE) and on the boards of various other private companies.
Peter W. Stott, 56, 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 trucking and logistics transportation service company, which employs over 500 people. Mr. Stott has been involved in the ownership and operations of timberlands since 1983. Mr. Stott is a member of the Board of Directors for Liberty Northwest Insurance Company and several non-profit boards.
James A. Bondoux, 61, 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. Until his retirement in the spring of 1998, Mr. Bondoux has been a Managing Principal of Fremont Group since December 1984, concentrating on private ventures and special situation equity investments.
Charles E. Carlbom, 66, was elected Director of the Board of Control in December 1997 and is a member of the Audit Committee. Mr. Carlbom is the retired President and Chief Executive Officer of United Grocers, Inc. and has more than 20 years of forest industry experience with Willamette Industries and Western Kraft Corporation. Mr. Carlbom is a director of Bishop Street Funds, Inc. and of Oregon Transfer Company.
John W. Larson, 63, 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 a Director of McKinsey and Company from 1965 to 1984.
Christopher G. Mumford, 55, was elected Director of the Board of Control in January 1995 and is a member of the Audit Committee. He was formerly a General Partner of Scarff, Sears & Associates in San Francisco and a Managing Director of Questor Partners Fund, L.P. 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. Mr. Mumford is on the board of Impco Technologies, Inc., a public company, and has also served as a director of several privately owned companies.
William L. Smith, 59, 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 30 years of experience managing and developing large ranch, timberland, recreational and small community 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.
Executive Officers
For a description of Peter W. Stott's background, the President and Chief Executive Officer of the Managing General Partner, see "Directors" above.
Steven E. Dietrich, 46, joined Crown Pacific in December 1999 as Vice President of Finance. He has over 23 years of experience in the forest products and investment industries. Before joining the Partnership, Mr. Dietrich was Director of Investments for UBS Brinson Timber Group, a global timber investment advisor, since 1998. From 1991 to 1998, Mr. Dietrich was Vice President, Senior Research
Analyst for D.A. Davidson & Co. Prior to 1991, Mr. Dietrich served in senior staff positions at Bohemia and WTD Industries, and as a service forester for the NJ Bureau of Forest Management.
Roger L. Krage, 53, was promoted to Senior Vice President of Corporate Affairs, General Counsel and Corporate Secretary of the Managing General Partner in January 1998. From 1994 until January 1998, Mr. Krage was Secretary and General Counsel of the Managing General Partner 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 22 years. In addition to overseeing the legal affairs of Crown Pacific, he is closely involved with the development and implementation of corporate planning.
Richard D. Snyder, 53, Senior 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 30 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.
W. R. ("Ray") Jones, 48, Executive Vice President of Resources of the Managing General Partner. Mr. 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 25 years of experience in timberland 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, he was a service forester and Forest Practices officer for the Oregon Department of Forestry. Mr. Jones resigned his position with the Partnership effective mid April 2001 to accept employment with Roseburg Forest Products.
Sandy M. Fulton, 57, joined Crown Pacific in 1998 as Executive Vice President of Operations. He has over 35 years of forest product industry experience. Before joining the Partnership, Mr. Fulton was President and Chief Executive Officer of Pacific Forest Products Limited, a Canadian wood products company since 1993.
L. James Weeks, 59, Vice President of Wholesale Operations 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 30 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, 56, Vice President of Administration 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 25 years experience in managing these corporate functions.
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 2000.
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information concerning compensation awarded to, earned by or paid to any person serving as the Chief Executive Officer and the four other most highly compensated executive officers during the last fiscal year (together, the "named executive officers") for services rendered to the Partnership in all capacities during each of the last three fiscal years. The table also indicates the capacity in which each named executive served at the end of 2000.
(A)Amounts represent cash payments related to distribution equivalent rights granted pursuant to the Partnership's 1997 Distribution Equivalent Rights Plan.
(B)1998 salary represents amounts earned by Mr. Fulton from the time he joined the Partnership in July 1998 through December 31, 1998.
(C)Mr. Jones resigned from his position with the Partnership effective mid April 2001 to accept employment with Roseburg Forest Products. Unit Option Grants
The following table sets forth the number of unit options granted at fair market value under the Partnership's 2000 Unit Option Plan to the named executive officers in 2000.
Option Grants in Last Fiscal Year
(A)Options granted in 2000 vest 10%, 20%, 30% and 40% on each of the first through fourth anniversaries of the grant date, respectively, with full vesting occurring on the fourth anniversary date.
(B)These calculations are based on certain assumed annual rates of appreciation as required by rules adopted by the Securities and Exchange Commission requiring additional disclosure regarding executive compensation. Under these rules, an assumption is made that the shares underlying the unit options shown in this table could appreciate at rates of 5% and 10% per annum on a compounded basis over the ten-year term of the unit options. Actual gains, if any, on unit option exercises are dependent on the future performance of the Partnership's common units and overall stock market conditions. There can be no assurance that the potential realizable values reflected in this table will be achieved. Option Exercises and Holdings
The following table provides information concerning the exercise of options during 2000 and unexercised options held as of the end of the fiscal year, with respect to the named executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
(A)None of the named executive officers had options that were in-the-money at December 31, 2000. The market value of the Partnership's common units at December 31, 2000 was $8.93.
Long-Term Incentive Plan Awards
The following table provides information concerning the grant of distribution equivalent rights ("DERs") pursuant to the Partnership's 1997 Distribution Equivalent Rights Plan during 2000 with respect to the named executive officers.
(A)Under the terms of the 1997 DER Plan, participants in the Partnership's option plans 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 subordinated to the payment of quarterly distributions on all units. To the extent that the option related to the DER is vested under the option plans, the DER amount corresponding to the vested portion of such option will be paid to the participant.
(B)DERs granted in 2000 vest 10%, 20%, 30% and 40% on each of the first through fourth anniversaries of the grant date, respectively, with full vesting occurring on the fourth anniversary date.
(C)The DERs pay out only if distributions are paid to holders of our common units. In 2000, unitholders did not receive a fourth quarter distribution, and no amounts were accrued for prior issuances of DERs. It is not possible to predict when distributions will resume to common unitholders, and therefore, no value has been assigned to the DERs granted in 2000. No DERs were granted in the first quarter of 2001. Compensation of Directors
Outside Directors of the Board of Control of the Managing General Partner receive annual retainers of $12,000 and 600 common units of Crown Pacific, plus $1,000 for each Board of Control meeting and committee meeting attended. Mr. Mumford receives $1,500 per quarter for his services as Chairman of the Audit Committee of the Board of Control. Messrs. Jaunich, Stott and Bondoux were not directly compensated by the Managing General Partner or the Partnership for their services as directors of the Managing General Partner.
Employee Contracts and Termination of Employment and Change-in-Control Arrangements
The Managing General Partner entered into annual employment agreements with each officer in 1999. The agreements have a term of one year, however, the term automatically extends for an additional calendar year, unless either party gives written notice to the contrary to the other party at least 90 days prior to the date the agreement would otherwise be so extended. The agreements include confidentiality provisions and an involuntary termination provision pursuant to which the officer would receive severance pay equal to up to twelve months base salary. In the event of a change-in-control and loss of employment, each officer's unit option and distribution equivalent rights vest and the officer can receive up to three years' severance pay.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of February 28, 2001, certain information furnished to the Partnership with respect to ownership of the Partnership's common units of (i) each Director, (ii) the named executive officers, (iii) all persons known by the Partnership to be beneficial owners of more than 5 percent of its common units, and (iv) all executive officers and Directors as a group:
*Less than 1% of the class.
(1)Current address is 199 Fremont Street, Suite 2300, 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 also controls Crown Pacific Administrative L.P.
(2)Common units beneficially owned include (i) 2,711,320 common units owned by Crown Pacific Administrative L.P.; (ii) 851,506 common units owned by Fremont Sequoia Holdings, a subsidiary of Fremont Investors, Inc.; and (iii) 296,443 common units beneficially owned by Fremont Euro-Summit Limited, a subsidiary of Fremont Investors, Inc.
(3)The current address for Crown Pacific Administrative, L.P. is 121 S.W. Morrison Street, Suite 1500, Portland, Oregon 97204.
(4)Includes (i) 2,711,320 common units beneficially owned by Crown Pacific Administrative L.P., (ii) 296,443 common units owned by Fremont Euro-Summit Limited, a subsidiary of Fremont Investors, Inc., of which Mr. Jaunich is a director (iii) 851,506 common units owned by Fremont
Sequoia Holdings, of which Mr. Jaunich serves as a director and (iv) 1,466,758 common units beneficially owned by Sequoia Ventures Holdings, L.P., of which Mr. Jaunich is a director. Mr. Jaunich disclaims beneficial ownership of all such units other than 27,400 common units owned directly by him. Current address is 199 Fremont Street, Suite 2300, San Francisco, California 94105.
(5)Includes: (i) 2,711,320 common units beneficially owned by Crown Pacific Administrative L.P., 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; (iii) 321,050 common units owned by Columbia Investments II, LLC., a wholly owned company of Mr. Stott's; and (iv) 310,335 common units subject to options exercisable within 60 days of February 28, 2001. Current address is 121 S.W. Morrison Street, Suite 1500, Portland, Oregon 97204.
(6)Includes 2,711,320 common units beneficially owned by Crown Pacific Administrative L.P., of which Mr. Bondoux is a director. Mr. Bondoux disclaims beneficial ownership of such units. Current address is PMB #510, 930 Tahoe Blvd., Unit 802, Incline Village, Nevada 89451.
(7)Includes 195,000 common units owned by SK Partners, of which Mr. Krage is a general partner and owns an 8% interest, and 270,035 common units subject to options exercisable within 60 days of February 28, 2001. Current address is 121 S.W. Morrison Street, Suite 1500, Portland, Oregon 97204.
(8)Includes 62,500 units subject to options exercisable within 60 days of February 28, 2001.
(9)Includes: (i) 916,370 common units owned directly by the executive officers and directors as a group; (ii) 195,000 common units beneficially owned by SK Partners, of which Mr. Stott and Mr. Krage are general partners; (iii) 2,711,320 common units beneficially owned by Crown Pacific Administrative, of which Mr. Stott and Mr. Krage are directors and shareholders; (iv) 296,443 common units beneficially owned by Fremont Euro-Summit Limited, a subsidiary of Fremont Investors, Inc., of which Mr. Jaunich is a director; (v) 851,506 common units owned by Fremont Sequoia Holdings, of which Mr. Jaunich serves as a director; (vi) 1,466,758 common units beneficially owned by Sequoia Ventures Inc., of which Mr. Jaunich is a director; (vii) 321,050 common units owned by Columbia Investments II, LLC., a wholly owned company of Mr. Stott's and (viii) 808,470 common units subject to options exercisable within 60 days of February 28, 2001.
Item 13.
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 $5.9 million in 2000.
During 2000, the Partnership paid $100,000 to Fremont Investors, Inc. for management services provided.
During 2000, the Partnership completed a property sale with an unrelated party for total proceeds of $4.4 million. Bridge financing was provided to the buyer by Peter W. Stott, President and Chief Executive Officer and a member of the Board of Control of the Managing General Partner of the Partnership. The Partnership was not responsible or liable for any amount of the resulting note payable. The bridge financing provided by Mr. Stott has been repaid.
All related party transactions were conducted at arm's length and were approved by disinterested members of the Board of Control of the Managing General Partner of the Partnership.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements and Schedules
The Consolidated Financial Statements, together with the report thereon of PricewaterhouseCoopers LLP, are included on the pages indicated below:
The following schedule and report thereon is filed herewith:
Reports on Form 8-K
The Partnership did not file any reports on Form 8-K during the quarter ended December 31, 2000.
Exhibits
The following exhibits are filed herewith and this list is intended to constitute the exhibit index. Exhibits that are not incorporated by reference to a prior filing are designated by an asterisk.
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, hereunto 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
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 indicated on March 30, 2001, on behalf of, as applicable, Crown Pacific Management, L.P., the Registrant's Managing General Partner.
By:
/s/ ROBERT JAUNICH II Robert Jaunich II
Chairman of the Board of Control,
Executive Committee
By:
/s/ PETER W. STOTT Peter W. Stott
President and Chief Executive
Officer & Member, Board of Control, Executive Committee, Crown Pacific Management, L.P.
(Principal Executive Officer)
By:
/s/ RICHARD D. SNYDER Richard D. Snyder
Senior Vice President & Chief Financial Officer Crown Pacific Management, L.P.
(Principal Financial and Accounting Officer)
By:
/s/ CHARLES E. CARLBOM Charles E. Carlbom
Member, Board of Control,
Audit Committee
By:
/s/ JOHN W. LARSON John W. Larson
Member, Board of Control,
Audit Committee
By:
/s/ CHRISTOPHER G. MUMFORD Christopher G. Mumford
Member, Board of Control,
Audit Committee
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 of cash flows present fairly, in all material respects, the financial position of Crown Pacific Partners, L.P. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Portland, Oregon
January 24, 2001
Crown Pacific Partners, L.P.
Consolidated Statement of Income
(In thousands, except unit and per unit data)
See accompanying Notes to Consolidated Financial Statements
Crown Pacific Partners, L.P
Consolidated Balance Sheet
(In thousands, except unit data)
See accompanying Notes to Consolidated Financial Statements
Crown Pacific Partners, L.P.
Consolidated Statement of Cash Flows
(In thousands)
See accompanying Notes to Consolidated Financial Statements.
Crown Pacific Partners, L.P.
Consolidated Statement of Changes in Partners' Capital
(In thousands)
See accompanying Notes to Consolidated Financial Statements.
CROWN PACIFIC PARTNERS, L.P.
Notes to Consolidated Financial Statements
1. Summary of Operations and Significant Accounting Policies
Summary of Operations
Crown Pacific Partners, L.P. (the "Partnership" or "Crown Pacific"), 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. The Partnership's business consists primarily of growing and harvesting timber for sale as logs in domestic and export markets and the manufacturing and marketing 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") through its 99.98% owned subsidiary, Crown Pacific Administrative L.P., 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 8.74% 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.
Principles of Consolidation
All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
Revenue Recognition
The Partnership recognizes revenue from log sales upon delivery to the customer. Revenue from manufactured lumber and sales out of distribution inventories are 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 collectability of any outstanding receivable from the purchaser is assured. Receivables expected to be collected beyond one year are discounted using an appropriate interest rate. As of December 31, 2000 and 1999 discounts associated with receivables were $1.2 million and $0.51 million, respectively. The allowance for doubtful accounts was $1.55 million and $1.09 million at December 31, 2000 and 1999, respectively.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of funds invested in overnight repurchase agreements. The Partnership considers all liquid investments that have original maturities of three months or less to be cash equivalents.
Inventories
Inventories at manufacturing locations, consisting of lumber and logs, are stated at the lower of LIFO cost or market. Supplies and inventories maintained at non-manufacturing 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 landowners, where title to the timber does not pass until the timber is harvested and measured. 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 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, including capitalized interest during construction of $1.03 million, $0.52 million and $0.45 million for the years ended December 31, 2000, 1999, and 1998 respectively. 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 that is based on estimated useful lives as follows:
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. Amortization of the Partnership's logging roads and depletion of 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 6). Changes in these estimates have no impact on the Partnership's cash flow. Timber purchased through cutting contracts is recorded separately as cutting rights and depleted throughout the harvest.
Intangible Assets
Intangible assets primarily represent goodwill resulting from the acquisition of businesses. The cost of goodwill is amortized over 40 years. Periodically, management reviews factors that may impact the recoverability of the goodwill. The factors considered include current operating results, trends, and prospects for the future including the effects of demand, competition and other economic events.
Debt Issuance Costs
Debt issuance costs, including $1.5 million of costs in 1999 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. Unamortized debt issuance costs were $7.2 million and $8.1 million at December 31, 2000 and 1999, respectively.
Income Taxes
The Partnership is not generally subject to income tax as its income or loss is included in the tax returns of the individual unitholders.
Accrued Expenses
Included in accrued expenses are accrued payroll and profit sharing expenses of $3.5 million and $7.0 million as of December 31, 2000 and 1999, 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, after adjusting for the 1% General Partner interest.
Sales to Exporters
The Partnership sells logs to domestic customers engaged in exporting activities. Total sales to those customers were $7.0 million, $5.1 million and $8.3 million for the years ended December 31, 2000, 1999 and 1998, respectively.
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 related depletion and amortization of costs, 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 7).
Concentration of Credit 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. At December 31, 2000, 42% of the Partnership's accounts receivable were derived from two 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.
Supplemental Cash Flow Information
The Partnership made cash payments for interest of $59.4 million, $49.6 million, and $49.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. The Partnership excludes non-cash transactions from the consolidated statement of cash flows. Excluded for the years ended December 31, 2000, 1999 and 1998 were $1.1 million, $2.7 million and $14.5 million, respectively, representing notes received in exchange for timberland sales. Included for the year ended December 1998 are $107.5 million in notes issued in exchange for timberland. Subsequent cash receipts or payments related to these notes are included in the consolidated statement of cash flows.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Derivative Activities" ("SFAS133"). This statement requires companies to record derivatives on the balance sheet as assets and liabilities measured at fair value. SFAS 133 is not expected to have a material impact on the Partnership's consolidated financial statements. The Partnership will adopt this statement as required in 2001.
2. Acquisitions
In January 1998, the Partnership completed its acquisition of Alliance Wholesale Lumber, Inc. ("Alliance Lumber") of Phoenix, Arizona. Alliance Lumber operates three contractor service yards, which provide a variety of wood products to residential and commercial contractors. Consideration given by the Partnership totaled $29.5 million, consisting of $15.0 million in cash, $5.0 million in the Partnership's common units (210,000), and the assumption of $9.5 million of existing debt. Additional consideration of $3.0 million will be paid in 2001 as cash flow targets were met in 2000. The acquisition was accounted for as a purchase and the results of Alliance Lumber operations have been included with those of the Partnership since the acquisition date. Goodwill related to this acquisition was $18.9 million, which is being amortized over 40 years.
In March 1999, the Partnership completed its acquisition of Desert Lumber Inc. and Reno Lumber Services, Inc. (collectively "Desert Lumber") of Las Vegas and Reno, Nevada. Desert Lumber operates two contractor service yards, which provide a variety of wood products to residential and commercial contractors. Consideration given by the Partnership totaled $24.3 million, consisting of $5.1 million in cash, $9.0 million in the Partnership's common units (424,528), and the assumption of $10.2 million of existing debt. Additional consideration up to a total of $3.0 million in units will be paid if certain cash flow targets are met in 1999, 2000 and 2001. Cash flow targets were met in 1999 and 2000 and $1.0 million in units (44,871) was paid in 2000 and $1.0 million units will be paid in 2001. The acquisition was accounted for as a purchase and the results of Desert Lumber operations have been included with those of the Partnership since the acquisition date. Goodwill related to this acquisition was $10.0 million, which is being amortized over 40 years. The unaudited pro forma financial results for the years ended December 31, 1999 and 1998, had the Partnership acquired Desert Lumber on January 1, 1998, are as follows (in thousands, except per unit):
In January 2000, the Partnership completed the acquisition of Cheshire Sales Company, Inc. of Albuquerque, New Mexico for $5.5 million, consisting of $3.7 million in cash, $1.2 million in Partnership units (64,787) and $0.6 million in assumed debt. Additional consideration up to $1.0 million will be paid if certain cash flow targets are met in 2000, 2001 and 2002. Cash flow targets were met in 2000 and $0.3 million was paid. The acquisition was accounted for as a purchase and the results of Cheshire Sales' operations have been included with those of the Partnership since the acquisition date. Goodwill related to this acquisition was $3.6 million, which is being amortized over 40 years. Pro forma results of operations are not significantly different from actual results of operations for 2000 and 1999.
3. Inventories
Inventories consisted of the following (in thousands):
Manufacturing inventories at December 31, 2000, include a $3.7 million write down to net realizable value.
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
In September 2000, the Partnership sold the assets of its independently operated subsidiary Yellowstone Trucking for a gain of $1.2 million. In the fourth quarter of 2000 the Partnership sold two aircraft for a gain of $3.5 million. The gains from the sale of Yellowstone Trucking and the two aircraft are recorded in other income in the accompanying consolidated statement of income.
5. Operating Leases
In 1998, the Partnership entered into leases for two newly constructed sawmills under operating lease arrangements that terminate in 2010. The Partnership is required to pay real estate taxes and other occupancy costs under these leases. The leases have an early buyout provision which may be exercised by the Partnership in 2009 for an amount equal to approximately 39% ($16.9 million) of the facility costs as defined in the lease agreements. The semi-annual lease payments are of varying amounts, however the Partnership expenses the payments evenly over the term of the lease. The leases contain covenants similar to covenants in the Partnership's senior notes (see Note 7). The Partnership also leases rolling stock under operating lease arrangements that run from 36 to 84 months. Lease expense including month-to-month rentals during 2000, 1999, and 1998 was $8.5 million, $7.6 million and $0.4 million, respectively.
At December 31, 2000, the future minimum rental payments under the operating leases are (in thousands):
6. Timber, Timberlands and Roads
Timber, timberlands and roads consisted of the following (in thousands):
On January 14, 2000 the Partnership purchased 91,000 acres of timberlands in Idaho from Plum Creek Timber Company for $73.4 million. The acquisition was financed using the Partnership's Revolving Acquisition Line of Credit.
The Partnership's annual update of its timber inventory system (see Note 1) results in a change in estimated depletion rates. The revised estimate decreased depletion expense for both fee timber harvested and timber sold for the year ended December 31, 1999 by $1.4 million or $0.05 per unit. The rate adjustment for 1998 increased depletion expense by $12.7 million or $0.46 per unit. The adjustment for 2000 was not significant.
7. Long-Term Debt
Long-term debt consisted of the following (in thousands):
The Partnership has a $58 million revolving credit facility with a group of banks for working capital purposes and stand-by letters of credit that expire on December 1, 2002. The credit facility bears a floating rate of interest (8.5% at December 31, 2000) and is unsecured. At December 31, 2000 the Partnership had $31.0 million outstanding under this facility.
On December 1, 1999 the Partnership renegotiated the terms of its Revolving Acquisition Line of Credit with a group of banks to provide for a $232 million three-year revolving line of credit for the acquisition of additional timber, timberlands and related assets and capital expenditures. The line of credit is unsecured and bears a floating rate of interest (8.78% at December 31, 2000). 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. At December 31, 2000 the Partnership had $199.3 million outstanding under this facility.
The Partnership's 9.78%, 9.60%, 8.17% and 7.80% senior notes are unsecured and require semi-annual interest payments through 2018. The senior note agreements require the Partnership to make annual principal payments of $37.5 million on December 1, 2002, $40.0 million in 2003, $44.8 million in 2004, and various amounts from 2005 through 2018.
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, 2000. The 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 senior notes, plus 50 basis points.
On December 31, 2000, the estimated aggregate fair value of the Partnership's senior notes was approximately equal to the recorded value of $486 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.
8. Partners' Capital, Income and Distributions
In December 1998, the Partnership sold 2,562,443 additional common units. Proceeds of the offering were $53.0 million, including $1.1 million from the General Partners, and were used to pay down borrowing on the acquisition facility. The Partnership had 24,103,632 common units and 5,773,088 subordinated units outstanding at December 31, 1998. In February 1999, one-half of the subordinated units converted into common units. The Partnership had 27,414,704 common units and 2,886,544 subordinated units outstanding at December 31, 1999. The remaining subordinated units converted into common units in February 2000. The Partnership had 30,410,906 common units outstanding on December 31, 2000.
Partnership Income
The Partnership's income and losses are allocated 99% to the holders of common and subordinated units and 1% to the Managing General Partner.
Cash Distributions
In accordance with the Partnership Agreement, the Managing General Partner is required to make quarterly cash distributions from available cash.
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 excess cash flow if the annual distribution exceeds $3.62 per unit.
The Managing General Partner declared distributions of $1.69 per unit, $2.26 per unit and $2.20 per unit for the years ended December 31, 2000, 1999 and 1998, respectively.
The Partnership's 2000, 1999 and 1998 consolidated distributions to partners included $0.8 million, $0.7 million, and $0.6 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.
9. Unit Option and Profit Sharing and Employee Savings Benefit Plans
Under the 1994 and 2000 Option Plans the Partnership grants unit options to certain key employees of the Partnership and Managing General Partner. Under the terms of the Option Plans, the Managing General Partner granted annual options on or about January 1, 1995 through January 1, 2000. Total options granted in any one year cannot exceed 1% of the total outstanding units. There were 720,370 (including 362,670 front end options) and 202,400 units exercisable at December 31, 2000 and 1999, 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 10-year period. Upon the exercise of an option the Partnership purchases the requisite number of units in the open market. A summary of option transactions, excluding front end options, during each of the three years in the period ended December 31, 2000 is shown below:
During 1995, the Financial Accounting Standards Board issued SFAS 123, "Accounting for Stock Based Compensation," which defines a fair value method of accounting for an employee stock option or similar equity instrument and encourages, but does not require, all entities to adopt that method of accounting. Entities electing not to adopt the fair value method of accounting must make pro forma disclosures of net income and earnings per unit, as if the fair value based method of accounting defined in this statement had been applied.
The Partnership has elected not to adopt the fair value method; however, as required by SFAS 123, the Partnership has computed for pro forma disclosure purposes, the value of options
granted during years 2000, 1999 and 1998 using the Black-Scholes option pricing model. The assumptions used for unit option grants were:
If the Partnership had accounted for these stock options in accordance with SFAS 123, the Partnership's pro forma net income and net income per unit would have been reported as follows:
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, with an exercise price of $21.50 per unit and exercisable for the period beginning on December 31, 1999 through December 31, 2004. The Partnership expensed the expected difference between the unit price and the exercise price during the vesting period. As of December 31, 1998, $0.5 million had been expensed. In 1999 the expense was reversed when the price of the units at December 31, 1999 closed below the exercise price. The front end options vested effective December 31, 1999 after all of the following conditions were met:
(1)The subordinated units converted to common units;
(2)The officers continued their employment with the Managing General Partner through at least December 31, 1999; and
(3)The Partnership made all required cash distributions to common and subordinated unitholders through December 31, 1999 in excess of those required for subordinated unit conversion. 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 Option Plans, 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 that the targeted distribution is paid, 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 subordinated to the payment of quarterly distributions on all units. To the extent the option related to the DER is vested under the Option Plans, the DER amount corresponding to the vesting portion of such option will be paid to the participant. In 2000, 1999 and 1998, the Board of Control awarded 135,000, 122,500 and 271,000 DERs, respectively. No additional DERs were awarded in January 2001.
The Partnership records as compensation expense the estimated annual cost of the DERs. The amount charged to expense was $1.1 million and $0.9 million in 1999 and 1998 respectively. For the year 2000, the targeted distribution was not earned and therefore no amounts were credited to participants' accounts or charged to expense.
The Partnership has a Profit Sharing and Employee Savings Benefit Plan covering substantially all full-time, nonunion 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 $1.4 million, $2.4 million and $1.8 million for the years ended December 31, 2000, 1999 and 1998, respectively.
10. Segment Information
In 1998 Crown Pacific adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," which requires the reporting of certain financial information by business segment. For purposes of providing segment information, the Partnership classifies its business into three fundamental areas: Timberlands, consisting of the sale of logs to the Partnership's manufacturing facilities and to third parties, and the sale of timber and timberlands to third parties; Manufacturing, consisting of the manufacture of logs into lumber and the sale of residual chips to pulp and paper mills; and Wholesale Marketing, consisting of the trading of various forest products and the distribution of lumber and panel products through the Partnership's professional contractor service yards. Corporate and Other includes general corporate overhead and expenses (such as LIFO) not allocated to the segments and miscellaneous operations not significant enough to be classified as a separate segment. The $3.7 million write down of inventories to market in 2000 is included in the Manufacturing segment. The Partnership does not show assets by segment, as historic costs are not used by management to allocate resources or assess performance.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Partnership evaluates performance based on the operating income of each segment. The Partnership generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties at current market prices.
Business Segment Net Revenues (in thousands)
Business Operating Income (in thousands)
Depreciation, Depletion and Amortization (in thousands)
11. 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 $5.9 million, $5.4 million, and $4.2 million in 2000, 1999, and 1998, respectively.
In 2000 the Partnership sold $4.4 million of timber to an unrelated third party. The financing for the transaction was provided by an officer of the Partnership.
12. Commitments and Contingent Liabilities
As of December 31, 2000 and 1999, 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 $13.3 million at December 31, 2000.
The Partnership becomes involved in litigation and other proceedings arising in the normal course of its business. In December 2000, the Partnership received an unfavorable ruling involving the settlement of a prior bad debt. As a result of the ruling, the Partnership accrued $1.4 million, which was charged against other income in the accompanying consolidated statement of income. In January 2001, the Partnership paid the plaintiff $1.4 million. In the opinion of management, the Partnership's liability, if any, under any other pending litigation would not materially affect its financial condition or results of operations.
Report of Independent Accountants
on Financial Statement Schedule
To the Board of Control of
Crown Pacific Management Limited Partnership
Our audits of the consolidated financial statements of Crown Pacific Partners, L.P. referred to in our report dated January 24, 2001 appearing on page of this 2000 Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 14 of this Form 10-K. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Portland, Oregon
January 24, 2001
Schedule II
Crown Pacific Partners, L.P.
Valuation and Qualifying Accounts
For the Years Ended December 31, 1998, 1999 and 2000
(1)The amount in this column relates to the purchase of reserves with the acquisition of a business and recoveries of accounts previously written off.
(2)Charges to the accounts included in this column are for the purposes for which the reserve was created.
CROWN PACIFIC PARTNERS, L.P. 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Unitholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Managing General Partner
Item 11. Executive Compensation
Option Grants in Last Fiscal Year
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
Report of Independent Accountants
Crown Pacific Partners, L.P. Consolidated Statement of Income (In thousands, except unit and per unit data)
Crown Pacific Partners, L.P Consolidated Balance Sheet (In thousands, except unit data)
Crown Pacific Partners, L.P. Consolidated Statement of Cash Flows (In thousands)
Crown Pacific Partners, L.P. Consolidated Statement of Changes in Partners' Capital (In thousands)
CROWN PACIFIC PARTNERS, L.P. Notes to Consolidated Financial Statements
Report of Independent Accountants on Financial Statement Schedule
Schedule II