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 a 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 8.70% 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.
Acquisitions From
inception through early 2000, we pursued a plan of growth through strategic
acquisitions of timberlands and other assets. Given the downturn in the economy
in the later part of 2000, which continued through 2001, we decided to pursue a
strategy of preserving our timber assets until log and land prices
improve. Without the strategic land
sales that we had in previous years and the resulting tightening of our cash
position, we curtailed our acquisition program. The following table summarizes
our significant acquisitions, net of asset resales:
Dispositions
In September 2000, we
closed the sale of our independently operated subsidiary Yellowstone Trucking,
which resulted in a gain of $1.2 million.
Under the terms of the sale agreement, we sold all of Yellowstone
Trucking’s operations and assets, including its real property and terminal in
Coeur d’Alene, Idaho.
On
September 28, 2001, we completed a strategic alliance with Louisiana-Pacific
Corporation (“LP”). The strategic
alliance involved the sale of our Bonners Ferry, Idaho sawmill to LP, for net
proceeds to us of approximately $8.0 million (including certain working capital
accounts), the collection of receivables of approximately $9.7 million and the
provision of a long-term log supply commitment from our 252,000 acre Idaho tree
farm to supply LP’s mills in the northern Idaho region. In addition, LP subleased the Bonners Ferry
sawmill, which had been accounted for as an operating lease, the net present
value of which was approximately $18.0 million at September 30, 2001.
In
February 2002, we announced plans for the sale of 252,000 acres of timberland
in Idaho, in two separate transactions, for total proceeds of $189.5
million. The first transaction closed
during the first quarter of 2002 for $133.8 million and the second transaction
is expected to close during the third quarter of 2002 and provide $55.7
million. Following these sales, we will
not own any timberland in Idaho.
Closures We
closed our Coeur d’Alene, Idaho and Prineville, Oregon sawmills in the fourth
quarter of 2001. We are in the process
of liquidating the remaining Coeur d’Alene sawmill related assets, primarily
the property associated with the former sawmill site. The Prineville sawmill assets were written down by $3.9 million
in the fourth quarter of 2001 to their estimated net realizable value and are
being marketed for sale. These closures
and related inventory and asset dispositions are expected to provide net
proceeds in the range of $6.0 to $9.0 million during the first half of 2002 and
favorably impact operating results during 2002.
Timberlands
Excluding
our Idaho timberlands mentioned above, we will own or control in excess of
524,000 acres of timberland, which contain a total merchantable timber
inventory of approximately 2.6 billion board feet, located in Oregon and
Washington.
The
following table summarizes the estimated volume and acreage of our timberlands:
Our
timber holdings are primarily comprised of softwood species, including
Douglas-Fir, hemlock, white fir, ponderosa pine, lodgepole pine, cedar and
sugar pine, but also contain a significant volume of red alder. Due to its long fiber, strength, flexibility
and other characteristics, softwood species are used for construction lumber
and plywood.
The
timberlands are considered healthy and vigorous and are stocked with a variety
of age class stands.
Our
substantial timber resources help reduce our reliance on third-party log
sources to supply our manufacturing facilities, which we believe gives us a
significant competitive advantage over lumber manufacturers without a supply of
fee timber. During 2001, 2000 and 1999,
our timberlands provided the Oregon manufacturing facilities with 30%, 26% and
48%, respectively, the Inland manufacturing facilities with 63%, 44% and 39%,
respectively, and the Washington manufacturing facilities with 68%, 62% and
71%, 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. We actively manage our timber operations
based on these factors and other relevant information in order to maximize the
long-term value of our timber assets.
Our management practices begin with the development of harvest plans for
each of our 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, we attempt 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 our timberlands. Our
commercial thinning activities typically begin when the average stand age
reaches 25 years.
Our
silvicultural systems are either designed to allow the timberlands to
regenerate naturally, or we engage in active reforestation programs that
generally exceed regulatory reforestation requirements applicable to the
timberlands. These systems are designed
to promote better health and growth rates and facilitate greater future harvest
volume. Active reforestation is practiced primarily in the Washington
timberlands due to our even aged forestry management in that region, an
approach made necessary by the difficult logging conditions and uniform ages
and species of trees harvested. We maintain a 40-acre seed orchard on Whidbey
Island in Washington to support these programs. Uneven aged forestry management and natural regeneration is
practiced on the Oregon timberlands.
Legal
title to our 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
our other operations. In addition,
under the terms of our senior notes and bank credit facilities, our ability to
harvest, pledge, assign or transfer our 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 our timberlands. Such
hazards are unpredictable and there can be no assurance that our losses, if
any, will be limited. Consistent with
practices of other forest products companies, we do not maintain insurance
against losses to standing timber on the timberlands. Even if such insurance were available, the cost would likely be
prohibitive to us.
Products and Competition Approximately
49% of the timber harvested by us was utilized by our manufacturing facilities
for the production of lumber during 2001.
The remaining timber, which was harvested primarily from the Washington
timberlands, was sold in third party domestic and export log markets. Our markets are highly competitive with
respect to price, quality of products, distribution and other factors. We
expect
our products to experience steady competition from engineered wood products and
other substitute products. No customer
accounted for 10% or more of total revenues during 2001, 2000 or 1999.
Logs
We
compete 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 us, as well as with the state of
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.
We
compete 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 price, 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.
We expect this phenomenon to decrease for our operations during years
following our planned sale of the Idaho timberlands. Export log sales are affected by economic conditions, variations
in inventory both domestically and in the countries where such logs are sold
and by weather conditions.
Manufacturing We
produce an array of lumber products at our three converting mills, one located
in Oregon and two located in Washington (see Item 2.
Item 2. Properties
Timberlands Our
timberlands are described above under “Timberlands” in Item 1. Business.
Manufacturing
Facilities We
currently operate one lumber mill in Gilchrist, Oregon and one each in
Marysville and Port Angeles, Washington.
The Oregon facility is located in central Oregon and has considerable
capacity to produce a combination of commodity and industrial grade lumber
products. The Washington mills produce
commodity-grade studs for the construction industry. The Port Angeles mill is configured to produce both domestic and
metric sizes for offshore markets.
The
following table summarizes the annual production and capacity of our lumber
manufacturing facilities (amounts in MMBF):
We
sold our Bonners Ferry, Idaho mill in the third quarter of 2001 and closed our Coeur d’Alene, Idaho and
Prineville, Oregon sawmills in the fourth quarter of 2001.
We currently own and operate five contractor supply yards, three in the
Phoenix, Arizona area, one in Las Vegas, Nevada and one in Reno, Nevada. We also operate six forest product wholesale
trading operations, one in Eugene, Oregon, one in Ogden, Utah, one in St.
Louis, Missouri, 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,
results of operations or cash flows 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 2001.
PART
II
Item 5.
Item 5. Market for Registrant’s Common Equity and
Related Unitholder Matters
Our
common units are traded principally on the New York Stock Exchange. As of December 31, 2001, there were
approximately 22,697 beneficial owners of 30,527,030 outstanding common
units. All of our 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 2001 and 2000 was as follows:
In
January 2001, the Board of Control omitted the fourth quarter 2000
distribution, as reflected in the above table.
Additionally, future distributions were suspended until the Board of
Control determines that improved market conditions will support a sustained
quarterly distribution and our current debt agreements mandate the pay-down of
certain long-term debt before distributions are resumed.
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 $64.2 million in 2001 and $13.9
million in 1997.
(2) For a discussion of the effect of the annual update of
the timber inventory, see Note 6 of Notes to Consolidated Financial Statements.
(3) Included in 2001 net loss is a $5.3 million charge
related to the write-down of the Prineville sawmill assets and the write-off of
previously capitalized expenses associated with habitat conservation planning,
a $2.7 million gain related to the sale of the Bonners Ferry owned assets,
corporate aircraft and surplus rolling stock and a $2.6 million write-down of
inventory to market. 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 write-down of inventory to market, $3.7
million.
(4) EBITDDA is defined as net income before interest,
amortization of debt issuance costs, income taxes, depreciation, depletion and
amortization and significant non-recurring items. EBITDDA is provided because management believes EBITDDA provides
useful information for evaluating our ability to service debt and support
possible future cash distributions to unitholders. EBITDDA should not be construed as an alternative to operating
income, as an indicator of our operating performance, as an alternative to cash
flows from operating activities or as a measure of liquidity.
(5) In 2000, we acquired 91,000 acres of
timberland in Idaho from Plum Creek Timber Company for $73.4 million. In 1997, we purchased 65,000 acres of timber
from Trillium Corporation for $152.5 million.
(6) In the fourth quarter of 2001, $174.0 million of our
long-term debt was reclassified as short-term debt as $86.0 million of our
senior note and $88.0 million of our
acquisition facility is due upon application of the Inland tree farm sale
proceeds, see Note 13 of Notes to Consolidated Financial Statements.
Item 7.
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Industry Conditions
Our
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).
Our
ability to implement our business strategy over the long term and our results
of operations depend upon a number of factors, many of which are beyond our
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.
During
2001, we sold one of our Idaho mills, closed the other Idaho mill and closed
one of our Oregon mills. In addition,
in the first quarter of 2002, we announced plans to sell our Idaho timberlands,
which had supplied our Idaho mills, in two separate transactions during the
first and second quarters of 2002.
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 lower 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 us, through
relatively higher stumpage and log prices. Additionally, many manufacturing
facilities without a sufficient supply of fee timber were forced to close.
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 expired 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. We believe that the agreement
generally benefited us, however the extent of the benefit is not
determinable. Since the agreement,
considerable negotiation has occurred between the two countries in an effort to
resolve trade issues over importation of Canadian lumber to the U.S. On March 22, 2002, the U.S. Department of
Commerce implemented final Canadian lumber duties totaling 29%. A ruling by the International Trade
Commission to finalize this move is scheduled for May 16, 2002. We cannot predict the exact outcome of this
matter, but do believe that a final ruling or a negotiated settlement will be
generally favorable to the U.S. lumber industry.
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.
We are 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 and pricing for exported logs
from our Washington Region.
Effects of Inflation
We
have 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 have
partially offset these cost increases.
Effects of Acquisitions
Each
of our 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
We
classify our operations into three fundamental businesses: (1) Timberlands,
consisting of the sale of logs to our 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 our professional contractor service yards. Transfers
between segments are generally at prices which management believes reflect
current market prices. The following summarizes our segment information (in
millions):
Results of Operations (2001 compared to
2000)
General Revenues
decreased $194.0 million, or 24.6%, to $593.3 million in 2001 from $787.3
million in 2000. The decrease reflects the impact of lower log and lumber sales
realizations, lower log and lumber volume, lower property sale activity and the
effect of sawmill sales and/or closures in 2001 compared to 2000.
Cost
of sales as a percentage of revenues increased to 91.7% in 2001, compared to
86.3% in 2000. The increase is
primarily the result of a decreased revenue base over which to spread fixed
costs, increased depreciation, primarily due to additions made to our
Gilchrist, Oregon mill, and less high margin property sales, which were only
partially offset by lower log and lumber costs and lower per unit manufacturing
costs.
Impairment
of assets of $5.3 million in 2001 includes the write-down of our Prineville,
Oregon sawmill assets to liquidation value and the write-off of previously
capitalized costs associated with the habitat conservation project at our
Hamilton tree farm, due to our decision to abandon efforts for a federally
approved plan in favor of working with recent changes in the State of
Washington’s environmental legislation.
Both of these charges occurred in the fourth quarter of 2001 and were
non-cash in nature. We are currently
marketing the Prineville sawmill assets for sale.
Selling,
general and administrative expenses decreased $3.3 million to $36.2 million
(6.1% of revenues) in 2001, from $39.5 million (5.0% of revenues) in 2000. The decrease is primarily a result of lower
salaries and wages, professional fees and public relations expense in 2001
compared to 2000, which included the results of other operations that were
disposed in September 2000. The
increase as a percentage of revenues is due to the significantly decreased
revenues in 2001 compared to 2000.
Interest
expense increased $2.0 million to $61.5 million in 2001, from $59.6 million in
2000. The increase is a result of
higher debt balances during 2001 due primarily to the fact that approximately
$27.0 million of spending related to the installation of a new small log line
and planer mill were outstanding for all of 2001, but not all of 2000.
Amortization
of debt issuance costs increased $1.8 million to $2.7 million in 2001 from $0.9
million in 2000 due to $3.7 million of fees
for amendments made to our bank facilities in April and November 2001. At December 31, 2001, we had a total of $8.2
million of unamortized debt issuance costs, which are currently being amortized
through various dates.
Other income, net includes interest income on notes
receivable, rental income and other miscellaneous income. Other
income, net was $2.8 million in 2001 compared to $5.3 million in 2000. The 2001 amount includes a $2.7 million gain
related to the sale of our Bonners Ferry sawmill
and
one aircraft in the third quarter of 2001 and the sale of surplus rolling stock
during the fourth quarter of 2001. The
2000 amount includes a gain of $1.2 million related to the sale of our
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.
We
pay no significant income taxes and do not include a provision for income taxes
in our financial statements.
Timberlands
Total
external segment sales, including property and stumpage sales, decreased $83.5
million, or 53.1%, to $73.7 million, or 12.4% of revenue in 2001, compared to
$157.3 million, or 20.0% of revenue in 2000.
The decrease in external sales reflects significantly less log sales
volume, which include stumpage sales volume, and lower property sales, and a
decrease in overall realizations. The
lower log sales volumes primarily reflect a 45.5% decline in fee production in
2001. The lower fee production helped
alleviate pricing pressure on external log markets by curtailing available
supplies in local log markets. We
expect internal consumption to decrease in 2002 due to the sale of our Bonners
Ferry sawmill and the closure of our other Idaho sawmill and our Prineville,
Oregon sawmill. In addition, in the
first quarter of 2002, we announced plans to sell our Idaho timberlands, an
event that will further decrease our fee production in 2002.
Overall
operating income from timberlands, including property sales, decreased 73.7% to
$18.9 million in 2001 from $71.9 million in 2000. The decrease in operating income was primarily a result of
significantly lower log sales volume and realizations, a decrease in
high-margin stumpage sales volume, fewer property sales and a $1.2 million
negative adjustment on the Inland tree farm in the fourth quarter of 2001,
which were partially offset by lower non-fee and purchased log costs and lower
segment overhead expense in 2001 compared to 2000. The $1.2 million charge in the fourth quarter of 2001 resulted
from a negotiated stumpage volume adjustment on three previous timber sales,
caused in part by environmental regulatory changes to timber harvest practices
in Eastern Washington.
Domestic Log Sales
Average
external domestic prices received for logs sold from the various tree farms,
including stumpage but excluding pulpwood, were as follows (dollars per
thousand board feet (“MBF”)):
Decreases
at the Oregon, Hamilton and Olympic tree farms reflect the impact of weak
lumber markets on log pricing, increased supply in the marketplace, mix changes
and an unwillingness of sawmills to build log inventories given the continuing
volatility in the lumber markets.
The
increase in average external realization at the Inland tree farm is primarily the
result of favorable mix changes and sales type (i.e. delivered logs versus
stumpage sales).
Domestic
external log sales volumes, excluding pulpwood, decreased 56.9% in 2001 compared to
2000, primarily as a result of a planned decrease in fee harvest levels and a
corresponding increase in internal log consumption. The reduction in fee harvest levels reflects our ongoing strategy
to preserve our timber asset base until market conditions improve.
The
domestic external volume from each of our tree farms, including stumpage, but
excluding pulpwood, was as follows (in thousands of board feet (MBF)):
The increase at the Oregon tree farm is a result of
two stumpage sales executed during the first quarter of 2001 while the increase
on the Hamilton tree farm reflects a stumpage sale during the fourth quarter of
2001.
The large decline at the Inland tree farm reflects
the sale of our timberland and stumpage in Montana during the third quarter of
2000.
Export Log Sales
Sales
of logs to customers involved in exporting activities were $1.5 million, or
0.3% of total revenues in 2001, compared to $7.0 million, or 0.9% of revenues
in 2000. Prices received for export
logs decreased 10.9% to $563/MBF in 2001 from $632/MBF in 2000 and sales
volumes decreased 76.0% to 2.7 MMBF in 2001 compared to 11.0 MMBF in 2000. We significantly curtailed our export
business during 2001 as a result of the continuing weak pricing levels. We anticipate both pricing and demand for
export logs to improve in the first half of 2002.
Property Sales
Revenue
and operating income from property sales in 2001 were $14.3 million and $10.4
million, respectively, compared to $25.7 million and $14.7 million,
respectively in 2000. The lower sales
and gains in 2001 reflect a decreased amount of higher and better use property
available for sale, depressed market demand and lower prices.
Manufacturing
Segment
sales, excluding sales of lumber products through the wholesale marketing
segment, decreased 25.0% to $138.9 million, or 23.4% of revenue, in 2001 from
$185.3 million, or 23.5% of revenue in 2000.
The decreased revenue in 2001 reflects an 11.3% decrease in lumber sales
volume, an 18.8% decrease in average realization and a 12.1% decrease in wood
chip sales volume. The 2000 revenue includes
the effect of lower production from our Prineville and Coeur d’Alene sawmills
in the second half of the year due to temporary market-related closure and/or
curtailed production schedules as well as curtailed production at our
Marysville, Washington sawmill in the fourth quarter of 2000. The 2001 revenue
includes the effects of our Bonners Ferry sawmill curtailing production to a
one-shift basis of operation in January 2001 and its subsequent sale in
September 2001, the permanent closure of our Coeur d’Alene, Idaho and
Prineville, Oregon sawmills in the fourth quarter of 2001 and ongoing
curtailments at our Marysville studmill.
Operating
loss from manufacturing was $6.9 million in 2001 compared to $3.8 million in
2000, primarily as a result of an 11.3% decrease in external lumber sales
volume and an 18.8% decrease in average sales realizations on higher overhead
expense, which were partially offset by a decline in unit manufacturing costs,
which is attributable to increased efficiencies. The increased overhead reflects depreciation expense associated
with the Gilchrist modernization project.
The 2000 loss includes a $3.7 million charge during the fourth quarter
of 2000 to reflect decreased market values for existing log and lumber
inventories.
Average
prices received for all lumber, excluding sales to the wholesale marketing
segment, in the various regions were as follows:
The
lower average lumber realizations for the Oregon region primarily reflect
changes in the product mix. As a result
of prevailing log supplies, both Oregon sawmills produced a much larger
percentage of lower priced pine dimension grade lumber instead of higher priced
pine shop grade lumber during 2001 compared to 2000. With the closure of the Prineville, Oregon sawmill in the fourth
quarter of 2001, we anticipate our average realizations to decrease in this
region with the absence of our Prineville sawmill’s higher value lumber
products in the mix.
Total
external lumber sales volumes decreased 11.3% in 2001 to 404.3 MMBF compared to
455.9 MMBF in 2000. Sales volumes from
the various regions were as follows (in MBF):
The
increased volume from the Oregon region primarily reflects increased production
and efficiencies at the Gilchrist facility, partially offset by the closure of
the Prineville sawmill in the fourth quarter of 2001.
The
decrease at the Inland region reflects a larger percentage of the production
being utilized internally for sale at our wholesale marketing segment,
curtailed production at the Bonners Ferry sawmill in the first three quarters
of 2001, the sale of our Bonners Ferry sawmill in September 2001 and the
permanent closure of our Coeur d’Alene sawmill in the fourth quarter of
2001. We liquidated existing lumber
inventories at our Coeur d’Alene facility in the fourth quarter of 2001 prior
to its closure.
The
decrease at the Washington region reflects production changes effected at the
Marysville studmill during 2001. These
changes better matched lumber production to dry kiln capacity, which reduced
overall output, but increased operating contribution.
By-product
revenues accounted for 2.1% of revenue in 2001, flat when compared to
2000. Residual wood chip prices were
$72 per bone-dry unit (BDU) in 2001, compared to $70/BDU in 2000. Woodchip
volume decreased 12.1% to 174,998 BDUs in 2001 compared to 199,159 BDUs in
2000. The volume decline in 2001
primarily reflects the sale of our Bonners Ferry sawmill, the permanent closure
of our Coeur d’Alene sawmill and operational change at our Marysville
studmill. Woodchip volume in the fourth
quarter of 2001 was negatively affected by one of our Washington region’s
largest chip customers experiencing significant pulp mill boiler downtime
during the latter part of 2001.
Wholesale
Marketing
Our
wholesale marketing segment involve sales of lumber and other wood products,
most of which were not manufactured by us.
Sales from the segment decreased $55.8 million, or 12.9%, to $378.3
million, or 63.8% of revenue in 2001, compared to $434.1 million, or 55.1% of
revenue in 2000. Operating income from
wholesale operations decreased 23.1% to $11.5 million in 2001 compared to $14.9
million in 2000. The lower operating
results are primarily a result of a decline in prices for lumber and panels and
lower demand, particularly after the terrorist events of September 11,
2001. The operating costs are
relatively fixed at our wholesale segment, which resulted in a lower profit
margin from our wholesale operations during 2001 compared to 2000.
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 our 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. We 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 our revenue being derived from our
wholesale operations, which operate at a lower profit margin, and significantly
lower lumber sales prices. In addition, in the fourth quarter of 2000, we
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 our 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 our acquisition line of credit, and the installation of a new
small log line at our 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 our 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 our Colburn mill during the second quarter of 1999.
We
pay no significant income taxes and do not include a provision for income taxes
in our financial statements.
Timberlands
Total
external log sales, including property and stumpage sales, increased $55.0
million, or 53.7%, 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 our mills.
Overall
operating income from timberlands, including property sales, increased 26.4% 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 our 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 our 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, we temporarily closed our 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 marketing
segment, 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 our 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 temporary
shutdown or curtailment of production at several of our 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 temporary
shutdown of our Prineville and Coeur d’Alene sawmills for significant portions
of 2000 as discussed above.
Wholesale
Marketing
Our
wholesale operations involve sales of lumber and other wood products, most of
which were not manufactured by us. Sales
from the wholesale operations increased $39.4 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 22.2% 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 3.4% in 2000 compared to 3.1% in 1999
as a result of favorable purchase opportunities of raw materials utilized to
supply fixed price sales contracts.
Liquidity and Capital Resources
Cash
provided by operating activities was $3.8 million in 2001 and resulted
primarily from a decrease in accounts and notes receivable of $28.8 million and
a decrease in inventories of $22.8 million, offset in part by a net loss of
$19.6 million (net of non-cash expenses of $33.9 million), an increase in
prepaid and other current assets of $0.7 million and a decrease in accounts
payable and accrued expenses of $27.6 million.
Working capital decreased to $78.7 million at December 31, 2001 compared
to $81.6 million at December 31, 2000.
The
$28.8 million decrease in accounts receivable and the $22.8 million decrease in
inventories are primarily the result of our efforts to maximize cash flow, the
planned closure of our Coeur d’Alene and Prineville facilities and the
associated inventory liquidations and the collection of a significant stumpage
receivable as part of the sale of the Bonners Ferry sawmill during the third
quarter of 2001.
Net
cash provided by investing activities of $11.3 million resulted primarily from $26.9 million proceeds from the sale of
timberland and other fixed assets and the collection of $2.9 million of notes
receivable, which were offset by the use of $9.5 million for additions to
timberlands and timber cutting rights and $9.0 million used for additions to
equipment.
Net
cash used by financing activities of $20.4 million resulted primarily from a
$13.0 million net decrease in short-term borrowings, net repayments on
long-term debt of $3.7 million and $3.8 million used for payment of fees and
expenses related to obtaining two bank facility amendments during 2001.
Additions
to plant and equipment totaled $9.0 million in 2001, primarily for a new planer
mill at our Gilchrist, Oregon facility, replacement aircraft and environmental
related improvements. Additions to timber and timberland purchases are
evaluated as opportunities arise and totaled $9.5 million in 2001. We anticipate spending approximately $9.6
million in 2002 for timber and timberland additions and plant and
equipment. The Managing General Partner
expects that capital expenditures will be funded by a combination of any or all
of the following: property and asset sales, cash generated from operations,
current funds or bank borrowings.
As
amended in April 2002, we have a $40 million revolving credit facility with a
group of banks for working capital purposes and stand-by letters of credit that
expires on December 31, 2005. The
credit facility bears a floating rate of interest and is secured by accounts
receivable and inventory. At December
31, 2001, we had $18.0 million outstanding under this facility, with a weighted
average interest rate of 5.9%.
As
amended in April 2002, we have a $199.3 million facility with a group of banks
that previously provided for the acquisition of timber, timberlands and related
assets and capital expenditures. This facility bears a floating rate of
interest, is secured by our timberlands and sawmill assets and expires December
31, 2005. As required in the April 2002
amendment, a portion of the Inland Tree Farm sales proceeds will be applied to
pay down outstanding principal on this facility. The estimated principal reduction from these proceeds is $88.0
million. Principal payments of $5.0
million, $40.0 million and $30.0 million are due on this facility in September
2003, January 2004 and June 2005, respectively. Principal payments on this facility cannot be re-borrowed. At December 31, 2001, we had $199.3 million
outstanding under this facility, with a weighted average interest rate of 5.9%.
We
sought and received these bank facility amendments to obtain relief from
restrictive covenants and upcoming debt maturities during a period of time when
operating cash flows continue to be negatively impacted by weak log and lumber
prices and based our decision to preserve our timber assets until pricing for
logs and lumber improves. See Note 7
and Note 13 to the consolidated financial statements included in this Form 10-K
for more information about the amendments.
The
Partnership’s 9.78%, 9.60%, 8.17% and 7.8% senior notes, issued in 1994, 1995,
1996 and 1998, respectively, and amended in April 2002, are secured by our
timberlands and sawmill assets and require semi-annual interest payments
through 2018. These senior notes, with an aggregate $486 million principal
amount, required us 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. As
amended in April 2002, we are required to apply a portion of the Inland Tree
Farm sale proceeds to pay down principal outstanding on these notes. The estimated principal reduction from these
proceeds is $86.0 million, exclusive of redemption charges. This amendment also allows the Partnership
to defer principal payments due on December 1, 2003, 2004 and 2005,
respectively,
until
December 31, 2005. In addition, the
Partnership is also required to make mandatory principal payments, on a pro
rata basis, with existing bank debt, if asset sale proceeds or operating cash
flow are used to pay outstanding bank principal prior to December 31,
2005. In addition, we may be required
to pay the entire outstanding principal balance, plus accrued interest, of the
senior notes on December 31, 2005 if our credit ratings are below investment
grade. If our credit ratings are
investment grade, on July 1, 2005, the note holders have the right to put to us
some or all of their outstanding note principal balances on December 31, 2005
after giving notice to us on August 1, 2005.
No redemption charges will be associated with any principal payments
made in connection with the notes that are put back to the Partnership.
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 150 basis points. Additionally, the senior notes require the
application of asset sale proceeds to principal reduction, which, under certain
conditions, may be subject to the redemption charge. If asset sales are employed by us as a source of funds for the mandatory
principal payments required on our acquisition facility, as described above,
pro rata funds from these asset sale proceeds must also be applied to
outstanding note principal balances.
Redemption charges incurred on these pro rata payments will be deferred
until December 31, 2005, unless we elect to pay the equivalent amount in common
units on December 31, 2004.
In
exchange for these revisions to the senior note agreements, we agreed to give a
security interest in our timberlands and sawmill assets and to increase the
interest rate on each note by 100 basis points until December 31, 2005. Additionally, we will pay the note holders
an amendment fee of $2.0 million, funded by the Inland tree farm sale proceeds.
We
expect to remain in compliance with all current terms and covenants of our note
agreements and to meet all future amortization requirements.
All
of our senior note agreements and bank lines of credit contain certain
restrictive covenants, including:
• limitations on
harvest levels, capital expenditures, land sales, cash distributions,
acquisitions and investments;
• the amount of
future indebtedness;
• restrictions on the
use of proceeds from property and other assets sales; and
• compliance with
certain financial ratios.
After
giving effect to the April and November 2001 bank facility amendments, we were
in compliance with such covenants at December 31, 2001. Subsequent to December 31, 2001, we violated
an affirmative covenant associated with submitting financial statements and
covenant compliance certificates to our bank lenders, but cured this violation
as of April 22, 2002.
Cash
necessary to enable us to pay for capital expenditures and to satisfy interest
and principal payments on indebtedness, is significant.
In
the first quarter of 2002, we announced plans to sell our Idaho timberlands in
two separate transactions for total proceeds to us of $189.5 million. The proceeds from the Idaho timberland sale
will be received separately, one in the amount of $133.8 million that closed
during the first quarter of 2002 and one in the amount of $55.7 million that is
expected to close in the second quarter of 2002. Additionally, we expect to receive between $6.0 and $9.0 million
in proceeds related to the sale of
our
Coeur d’Alene and Prineville assets later in 2002. The proceeds from all of
these transactions will be used for payment of short-term debt and current
portion of long-term debt. During the
fourth quarter of 2001, we reclassified these fixed assets and timberlands to
assets held for sale totaling $184.4 million.
Based
upon the amendments to the bank facilities discussed above, including the
extension of our bank working capital and acquisition facilities, estimated
proceeds from asset sales and dispositions discussed above and cash provided by
operating activities, we believe we have adequate liquidity to fund our
operating plan and required debt service for at least the next twelve months.
We
do not expect to make cash distributions from our current funds or from cash
generated by operating activities until our overall debt levels are
substantially reduced and significantly improved market conditions will support
a sustained quarterly distribution.
A summary of our
contractual commitments and obligations as of December 31, 2001 is as follows
(in thousands):
In
connection with the sale and sublease of the Bonners Ferry sawmill (see Note 4
to our consolidated financial statements), we guaranteed the termination value
of a sublease. The current termination
value is approximately $2.0 million and the guarantee will remain in place
throughout the term of the lease.
We
reimburse the General Partner for direct costs incurred to manage the
Partnership. These reimbursements were
$4.8 million in 2001, and primarily represent compensation expense and other
costs incurred to manage the business.
Critical Accounting Policies
The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. Our estimates are based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Pursuant
to December 2001 Securities and Exchange Commission guidance, we have included
a list of what we have determined to be our critical accounting policies. See Note 1 to our consolidated financial
statements, Summary of Operations and Significant Accounting Policies, for
additional information.
Our
critical accounting policies relate to the following:
• Accounts
and notes receivable allowances
• Accounting
for timber and timberlands
• Impairment
of assets
• Revenue
recognition of stumpage sales
Accounts Receivable
Allowances
Our
accounts receivable have been concentrated among several customers. We attempt to minimize our credit risk on
both our accounts and notes receivable by utilizing various procedures to
monitor the credit worthiness of our customers. In addition, we may mitigate our credit risk related to notes
receivable by obtaining asset lien rights or other secured interests. The amount of our allowances for
uncollectible accounts and notes receivable are estimated based on historical
experience and current knowledge of past due accounts and particular customer
circumstances. In the case of a
bankruptcy filing by a customer, deterioration in the customer’s operating
results or financial position or other material events impacting their
business, we record a specific allowance for bad debt to reduce the related
receivable to the amount we expect to recover given all information presently
available. If circumstances related to
specific customers change, our estimates of the recoverability of receivables
could materially change.
Accounting for 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 our 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. We estimate our 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. Changes in these estimates
have no impact on our cash flow. Timber purchased through cutting contracts is
recorded separately as cutting rights and depleted throughout the harvest.
Accounting for Impairment
of Assets
Property held for resale is recorded at the lower of cost or
the estimated realizable value, less anticipated selling costs. We base our estimates of realizable value on
the condition of the related assets, market values for comparable assets and,
in the case of timberlands, the estimated amount and type of timber. If we are not able to sell these assets for
their estimated realizable values, we may incur non-cash charges related to
losses upon the sale of the assets.
Revenue Recognition of Stumpage Sales
We
recognize revenue from stumpage sales at the time of sale, as long as revenue
recognition criteria for real property sales, as specified in SFAS No. 66
“Accounting for Sales of Real Estate,” are met. SFAS 66 requires the following:
• Profit
is determinable (i.e. volume and sales price are known and collectibility of
the sales price is reasonably assured or the amount that will not be collected
can be estimated);
• A
significant down payment has been received;
• Parties
are bound by a contract;
• All
conditions precedent to closing, including the transfer of title, have been
performed; and
• Risks
and rewards, other than catastrophic loss, have been transferred and we do not
have substantial continuing involvement.
New
Accounting Pronouncements
In
June 2000, the Financial Accounting Standards Board (“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. We
do not currently have any derivative instruments and, accordingly, the adoption
of SFAS 137 and 138 in the first quarter of 2001 did not have an impact on our
financial position, results of operations or cash flows.
In July 2001, the FASB issued Statement of Financial
Accounting Standards No. 141, “Business Combinations,” (“SFAS 141”) and SFAS
No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”). SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and establishes specific criteria
for the recognition of goodwill separate from other intangible assets. SFAS 142 requires that goodwill and identifiable
intangible assets determined to have an indefinite life no longer be amortized,
but instead be tested for impairment at least annually. SFAS 142 must be adopted in fiscal years
beginning after December 15, 2001 as of the beginning of the fiscal year.
SFAS 142 requires that goodwill be tested annually for
impairment using a two-step process.
The first step is to identify a potential impairment and, in transition,
this step must be measured as of the beginning of the fiscal year. However, a company has six months from the
date of adoption to complete the first step.
We expect to complete that first step of the goodwill impairment test
during the second quarter of 2002. The
second step of the goodwill impairment test measures the amount of the
impairment loss (measured as of the beginning of the year of adoption), if any,
and must be completed by the end of 2002.
We have not yet determined what effect the impairment test will have on
our earnings and financial position. In
connection with the adoption of SFAS 142, we expect that we will no longer
record $0.9 million of amortization expense per year relating to existing
goodwill.
In August 2001, the FASB issued SFAS No. 143, “Accounting
for Obligations Associated with the Retirement of Long-Lived Assets” (“SFAS
143”). SFAS 143 establishes accounting
standards for the recognition and measurement of asset retirement obligations
and the associated asset retirement costs.
We are required to adopt the provisions of SFAS 143 no later than the
first quarter of 2003. SFAS 143 is not
expected to have a material impact on our financial position, results of
operations or cash flows.
In October 2001, the FASB issued SFAS No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144
supercedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of” (“SFAS 121”). SFAS 144 applies to all long-lived assets
and consequently amends Accounting Principles Board opinion No. 30 (APB 30),
Reporting Results of Operations and Reporting the Effects of Disposal of a
Segment of a Business. SFAS 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less cost to sell. Consistent with SFAS 121, long-lived assets
to be held and used should be tested for recoverability using undiscounted cash
flows upon certain triggering events.
An impairment exists if long-lived assets are not recoverable and exceed
fair value. Additionally, SFAS 144
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the
entity and (2) will be eliminated from the ongoing operations of the entity in
a disposal transaction. SFAS 144 is
effective for our fiscal year beginning January 1, 2002. We believe that the adoption of this
standard will not have a material effect on our financial statements.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Our
only financial instruments with market risk exposure are our variable rate
lines of credit. At December 31, 2001,
we had $217.3 million outstanding under our lines of credit with a weighted
average interest rate of 5.87%. A hypothetical
10 percent increase in interest rates to 6.46% would not have a material impact
on our 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, 2001 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, 62, has been the
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, 57, has been a
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 serves on
several non-profit boards.
James A. Bondoux, 62, has been a
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 had been a Managing Principal of Fremont Group
since December 1984, concentrating on private ventures and special situation
equity investments.
Charles E. Carlbom, 67, 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, 64, 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, 56, 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 served
on the board of Impco Technologies, Inc., a public company, from 1998 to 2000
and has also served as a director of several privately owned companies.
William L. Smith, 60, 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.
Gary N. Cremer, 54, was promoted to Vice President of Resources on March 1, 2001. Mr. Cremer joined Crown Pacific in 1993 as
Resource Manager of the Montana Division, and has since been Fee Lands Manager
and Land and Timber Manager for the Oregon Division. Mr. Cremer has over 29 years of experience in timberland
management, procurement and acquisition.
From 1979 until joining Crown Pacific, Mr. Cremer was Forester and
Resource Manager for WI Forest Products and was Procurement Forester for the
Pack River Company from 1977 until 1979.
Steven E. Dietrich, 47, joined
Crown Pacific in December 1999 as Vice President of Finance. He has nearly 25 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.
John S. Ernst, 42, was promoted to Vice President of Manufacturing on June 1,
2001. Mr. Ernst joined Crown Pacific in
1991 following the acquisition of Gilchrist Timber Company in Gilchrist,
Oregon. Since 1998, Mr. Ernst has been
Division Manager for the Oregon manufacturing facilities. From 1995 until 1997, Mr. Ernst was
Corporate Operations Manager for the manufacturing facilities in Oregon, Idaho,
Montana and Washington. Prior to 1995,
Mr. Ernst served as Division Manager for Oregon and Plant Manager and
Maintenance Supervisor for the Gilchrist manufacturing facility.
Roger L. Krage, 54, 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, 54, is 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.
L. James Weeks, 60, is 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, 57, 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 our
review
of the copies of such reports received by us and on written representations
received by us, we believe 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 2001.
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, the
four other most highly compensated executive officers during the last fiscal
year and one additional person who would have been included, except for the
fact that his employment with the Partnership terminated prior to December 31,
2001 (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 2001.
(A) Amounts represent cash payments related to distribution
equivalent rights granted pursuant to the Partnership’s 1997 Distribution
Equivalent Rights Plan.
(B) Mr. Fulton’s employment with the Partnership
terminated December 31, 2001.
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 2001.
Option Grants in Last Fiscal Year
(A) Options granted in 2001 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 2001 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, 2001. The market value of the Partnership’s common units at December
31, 2001 was $5.94.
Long-Term
Incentive Plan Awards
There were no distribution equivalent rights (“DERs”) granted pursuant
to the Partnership’s 1997 Distribution Equivalent Rights Plan during 2001.
Compensation of Directors
Outside
Directors of the Board of Control of the Managing General Partner receive
annual retainers of $20,000 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, 2002,
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 current 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) 321,050 common units owned by Columbia Investments II, LLC, a wholly-owned
company of Mr. Stott’s; and (iii) 365,035 common units subject to options
exercisable within 60 days of February 28, 2002. 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 308,835 common units
subject to options exercisable within 60 days of February 28, 2002. Current
address is 121 S.W. Morrison Street, Suite 1500, Portland, Oregon 97204.
(8) Includes 87,200 units subject to
options exercisable within 60 days of February 28, 2002.
(9) Includes 70,300 units subject to
options exercisable within 60 days of February 28, 2002.
(10) Includes 2,801 units
beneficially owned by Mr. Weeks’ spouse and 52,500 units subject to options
exercisable within 60 days of February 28, 2002.
(11) Includes: (i) 1,112,000 common units owned directly by
the current executive officers and directors as a group; (ii) 2,711,320 common
units beneficially owned by Crown Pacific Administrative, of which Mr. Stott
and Mr. Krage are directors and shareholders; (iii) 296,443 common units
beneficially owned by Fremont Euro-Summit Limited, a subsidiary of Fremont
Investors, Inc., of which Mr. Jaunich is a director; (iv) 851,506 common units
owned by Fremont Sequoia Holdings, of which Mr. Jaunich serves as a director;
(v) 1,466,758 common units beneficially owned by Sequoia Ventures Inc., of
which Mr. Jaunich is a director; (vi) 321,050 common units owned by Columbia
Investments II, LLC, a wholly-owned company of Mr. Stott’s; (vii) 2,801 units
owned by Mr. Weeks’ spouse and (viii) 972,370 common units subject to options
exercisable within 60 days of February 28, 2002.
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 $4.8
million in 2001.
During
2001, the Partnership paid $100,000 to Fremont Investors, Inc. for management
services provided.
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:
Report of Independent
Accountants
Consolidated
Statement of Operations for the years ended December 31, 2001, 2000 and 1999
Consolidated Balance Sheet
- December 31, 2001 and 2000
Consolidated
Statement of Cash Flows for the years ended December 31, 2001, 2000 and 1999
Consolidated
Statement of Changes in Partners’ Capital for the years ended December 31,
2001, 2000 and 1999
Notes to
Consolidated Financial Statements
The
following schedule and report thereon is filed herewith:
Reports
on Form 8-K
We
did not file any reports on Form 8-K during the quarter ended December 31,
2001.
We
filed a report on Form 8-K on February 15, 2002, dated February 5, 2002
pursuant to Item 5. Other Events, regarding our planned sale of our Idaho
timberlands.
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.
Exhibit
No.
Description
3.1
Form of Second Amended and Restated Agreement of Limited Partnership of
Crown Pacific Partners, L.P. (Filed as Exhibit A to Part I of Registrant’s
Registration Statement on Form S-1 No. 83-85066).
3.2
Form of Agreement of Limited Partnership of Crown Pacific Limited Partnership
(Filed as Exhibit 3.2 to the Registrant’s Statement on Form S-1 No.
83-85066).
3.3
First Amendment to
Second Amended and Restated Agreement of Limited Partnership of Crown Pacific
Limited Partnership (filed with the Registrant’s Form 10-Q for the quarter
ended March 31, 1997).
3.4
Second Amendment to
Amended and Restated Agreement of Limited Partnership of Crown Pacific
Limited Partnership (filed as Exhibit 3.4 to the Registrant’s Form 10-K for
the year ended December 31, 1997).
3.5
Third Amendment to
Amended and Restated Agreement of Limited Partnership of Crown Pacific
Limited Partnership (filed as Exhibit 3.5 to the Registrant’s Form 10-K for
the year ended December 31, 1999).
10.1
Note Purchase Agreement relating to 9.78% Senior Notes due 2009 (Filed
as Exhibit 10.3 to Registrant’s Report on Form 10-K for the year ended
December 31, 1995).
10.2
Amendment No. 2 to
$275,000,000, 9.78% Senior Notes due December 1, 2009, dated as of January
15, 1998 (Filed as Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter
ended March 31, 1998).
10.3
Note Purchase Agreement relating to 9.60% Senior Notes due 2009 (Filed
as Exhibit 10.2 to Registrant’s Report on Form 10-K for the year ended
December 31, 1995).
10.4
Amendment No. 2 to
$25,000,000, 9.60% Senior Notes due December 1, 2009, dated as of January 15,
1998 (Filed as Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter
ended March 31, 1998).
10.5
Note Purchase Agreement
dated as of December 15, 1997 - $95 million Senior Notes, Series A, B and C
(Filed as Exhibit 10.18 to the Registrant’s Form 10-K for the year ended
December 31, 1997)
10.6
Amendment No. 1 to
$91,000,000 Senior Notes, Series A, B, C and D, due 2006-2013, dated as of
January 15, 1998 (Filed as Exhibit 10.3 to the Registrant’s Form 10-Q for the
quarter ended March 31, 1998)
10.7
Amended and Restated
Credit Agreement dated December 1, 1999 between Crown Pacific Limited
Partnership and Bank of America, N.A. as agents for Union Bank of California,
N.A. as Syndication Agent and Bank of Montreal and KeyBank National
Association, as co-agents (filed as Exhibit 10.7 to the Registrant’s Form
10-K for the year ended December 31, 1999).
10.8
First Amendment, dated
April 20, 2001, to Amended and Restated Credit Agreement dated December 1,
1999 (filed as exhibit 10.1 to the Registrant’s Form 10-Q for the quarter
ended March 31, 2001).
10.9
Second Amendment, dated
November 7, 2001, to Amended and Restated Credit Agreement dated December 1,
1999 (filed as exhibit 10.1 to the Registrant’s Form 10-Q for the quarter
ended September 30, 2001).
10.10
Amended and Restated
Facility B Credit Agreement dated December 1, 1999 between Crown Pacific
Limited Partnership and Bank of America, N.A., as letter of credit issuing
bank and as agent for Union Bank of California, N.A. as Syndication Agent,
and Bank of Montreal and KeyBank National Association, as co-agents (filed as Exhibit 10.8 to the
Registrant’s Form 10-K for the year ended December 31, 1999).
10.11
First Amendment, dated
April 20, 2001, to Amended and Restated Facility B Credit Agreement dated
December 1, 1999 (filed as exhibit 10.2 to the Registrant’s Form 10-Q for the
quarter ended March 31, 2001).
10.12
Second Amendment, dated
November 7, 2001, to Amended and Restated Facility B Credit Agreement dated
December 1, 1999 (filed as exhibit 10.2 to the Registrant’s Form 10-Q for the
quarter ended September 30, 2001).
10.13
Assumption Agreement
dated February 18, 2000 between Crown Pacific Limited Partnership and Bank
Hapoalim B.M. (filed as exhibit 10 to the Registrant’s Form 10-Q for the
quarter ended March 31, 2000).
10.14
Amended and Restated
Employment Agreement dated September 20, 1999 with Peter W. Stott (Filed as
Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September
30, 1999)
10.15
Amended and Restated
Employment Agreement dated September 20, 1999 with Roger L. Krage (Filed as
Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended September
30, 1999)
10.16
Amended and Restated
Employment Agreement for Richard D. Snyder dated Sept. 20, 1999 (Filed as
Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended September
30, 1999)
10.17
Amended and Restated
Employment Agreement for P.A. Leineweber dated Sept. 20, 1999 (Filed as
Exhibit 10.6 to the Registrant’s Form 10-Q for the quarter ended September
30, 1999)
10.18
Amended and Restated
Employment Agreement for L. James
Weeks dated Sept. 20, 1999 (Filed as Exhibit 10.7 to the Registrant’s Form
10-Q for the quarter ended September 30, 1999)
10.19
Form of Purchase Rights Agreement (Filed as Exhibit 10.2 to the
Registrant’s Registration Statement on Form S-1 No. 83-85066).
10.20
1997 Distribution Equivalent Rights Plan (filed as Exhibit 10.10 to the Registrant’s Form
10-K for the year ended December 31, 1997).
10.21
Amendment No. 1 to
Crown Pacific Management Limited Partnership 1997 Distribution Equivalent
Rights Plan (filed as Exhibit 10.2 to the Registrant’s Form 10-Q for the
quarter ended September 30, 1999)
10.22
Crown Pacific
Management Limited Partnership 2000 Unit Option Plan (filed as Exhibit 10.19
to the Registrant’s Form 10-K for the year ended December 31, 1999).
18*
Letter regarding change
in accounting principle
List of Subsidiaries (Filed as Exhibit 21.1 to the Registrant’s
Registration Statement on Form S-1 No. 33-85066).
23*
Consent of
PricewaterhouseCoopers LLP.
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.
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
April 22, 2002, on behalf of, as applicable, Crown Pacific Management, L.P.,
the Registrant’s Managing General Partner.
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 operations, 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 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 22, 2002, except for footnote 13
which is as of April 22, 2002
Crown Pacific Partners, L.P.
Consolidated Statement of Operations
(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)
Assets
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.
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 a
1% general partner interest in the Operating Partnership. Crown Pacific, Ltd.
(“CPL”), through its 99.98% owned subsidiary, Crown Pacific Administrative
L.P., is the Special General Partner of the Partnership, and, with the Managing
General Partner, comprise the General Partners of the Partnership. The Special
General Partner owns a 0.01% general partner interest and an 8.70% 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
inter-company balances and transactions have been eliminated in the
consolidated financial statements.
Reclassifications
Certain
reclassifications have been made in prior years to conform to the current year
presentation. Such reclassifications
had no effect on the results of operations or unitholders’ equity as previously
reported.
Revenue
Recognition
The Partnership
recognizes revenue from log sales upon delivery to the customer. Revenue from
manufactured lumber and sales from 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, 2001 and 2000 discounts
associated with receivables were $1.1 million and $1.2 million, respectively.
The allowance for doubtful accounts was $1.0 million and $1.55 million at
December 31, 2001 and 2000, 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 Last-in, First-out (LIFO) cost or market. Supplies and inventories
maintained at non-manufacturing locations are valued at the lower of average
cost or market. In the first quarter of fiscal 2002, the Partnership changed
its method of accounting for manufacturing log and lumber inventories from LIFO
to average cost (see Note 13).
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 $0.25 million, $1.03 million and
$0.52 million for the years ended December 31, 2001, 2000, and 1999,
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 purchased timber deeds and
logging roads, are stated at cost less depletion for timber and timber deeds 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.
Impairment
of Long-Lived Assets
When events or
circumstances indicate the carrying value of a long-lived asset may be
impaired, the Partnership uses an estimate of the future undiscounted cash
flows to be derived from the remaining useful life of the asset to assess
whether or not the asset is recoverable.
If the future undiscounted cash flows to be derived over the life of the
asset do not exceed the asset’s net book value, the Partnership then considers
estimated fair market value versus carrying value in determining any potential
impairment (see Note 4).
Goodwill
Goodwill results
primarily from the acquisition of businesses and is amortized using a
straight-line method 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. Net goodwill of $34.3 million and $34.2 million at December 31, 2001
and 2000, includes accumulated amortization of $3.1 million and $2.2 million,
respectively.
Debt Issuance Costs
Debt issuance
costs, including $3.7 million of costs incurred in 2001 (see Note 7), include
all costs and fees incurred that are directly related to obtaining or amending
credit facilities. These costs are amortized over the term of the related
credit agreement or amendment. Unamortized debt issuance costs were $8.2
million and $7.2 million at December 31, 2001 and 2000, respectively, and are
included in other assets in the accompanying consolidated balance sheet.
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 $2.2
million and $3.5 million as of December 31, 2001 and 2000, respectively (see
Note 9).
Per Unit Information
Net (loss) income
per unit is calculated using the weighted average number of common and
subordinated units outstanding, divided into net (loss) 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 $1.5 million, $7.0 million and $5.1 million for the
years ended December 31, 2001, 2000 and 1999, 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).
Derivative
Financial Instruments
Effective January
1, 2001, the Partnership adopted Statement of Financial Accounting Standard
(“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
Activities”, which requires that all derivative instruments be recorded on the
balance sheet at fair value. The
adoption of SFAS 133 did not have a material effect on the Partnership’s
results of operations or its financial position. The Partnership did not have any derivative financial instruments
outstanding at the time of adoption and does not enter into derivative transactions
on a regular basis.
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. The
Partnership may also mitigate credit risk related to accounts and notes
receivable by obtaining asset lien rights or other secured interests or
performing credit worthiness procedures or both. At December 31, 2001, 12% and
25% and at December 31, 2000, 19% and 22% of the Partnership’s accounts
receivable were derived from two customers, respectively.
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 $62.3 million, $59.4
million, and $49.6 million for the years ended December 31, 2001, 2000 and
1999, respectively. The Partnership excludes non-cash transactions from the
consolidated statement of cash flows. Excluded for the years ended December 31,
2001, 2000 and 1999 were $1.5 million, $1.1 million and $2.7 million,
respectively, representing notes received in exchange for timberland sales.
Subsequent cash receipts related to these notes are included in the
consolidated
statement of cash
flows. Additionally, $1.0 million in units issued to satisfy a contingent
purchase price commitment related to the acquisition of Desert Lumber (see Note
2) was excluded in 2001.
Recently
Issued Accounting Standards
In July 2001, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141, “Business Combinations,” (SFAS 141) and
SFAS No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142). SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and establishes specific criteria
for the recognition of goodwill separate from other intangible assets. SFAS 142 requires that goodwill and
identifiable intangible assets determined to have an indefinite life no longer
be amortized, but instead be tested for impairment at least annually. SFAS 142 must be adopted in fiscal years
beginning after December 15, 2001 as of the beginning of the fiscal year.
SFAS 142 requires that goodwill
be tested annually for impairment using a two-step process. The first step is to identify a potential
impairment and, in transition, this step must be measured as of the beginning
of the fiscal year. However, a company
has six months from the date of adoption to complete the first step. The Partnership expects to complete that
first step of the goodwill impairment test during the second quarter of
2002. The second step of the goodwill
impairment test measures the amount of the impairment loss (measured as of the
beginning of the year of adoption), if any, and must be completed by the end of
2002. The Partnership has not yet
determined what effect the impairment test will have on the Partnership’s
earnings and financial position. In
connection with the adoption of SFAS 142, the Partnership expects that it will
no longer record $0.9 million of amortization expense annually, relating to
existing goodwill.
In August 2001, the FASB issued
SFAS No. 143, “Accounting for Obligations Associated with the Retirement of
Long-Lived Assets” (SFAS 143). SFAS 143 establishes accounting standards for
the recognition and measurement of asset retirement obligations and the
associated asset retirement costs. The
Partnership is required to adopt the provisions of SFAS 143 no later than the
first quarter of 2003. SFAS 143 is not
expected to have a material impact on the financial position, results of
operations or cash flows of the Partnership.
In October 2001, the FASB issued
SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”
(SFAS 144). SFAS 144 supercedes SFAS No. 121 “Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (SFAS 121). SFAS 144 applies to all long-lived assets
and consequently amends Accounting Principles Board Opinion No. 30 (APB 30),
Reporting Results of Operations and Reporting the Effects of Disposal of a
Segment of a Business. SFAS 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less cost to sell. Consistent with SFAS 121, long-lived assets
to be held and used should be tested for recoverability using undiscounted cash
flows upon certain triggering events.
An impairment exists if long-lived assets are not recoverable and exceed
fair value. Additionally, SFAS 144
expands the scope
of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from
the ongoing operations of the entity in a disposal transaction. SFAS 144 is effective for the Partnership
for the year beginning January 1, 2002.
The Partnership believes adoption of this standard will not have a
material effect on its financial statements.
2.
Acquisitions
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 units), and the assumption
of $10.2 million of existing debt. Additional consideration up to a total of
$1.0 million in units was to be paid if certain cash flow targets were met in
1999, 2000 and 2001. Cash flow targets were met in 1999 and 2000 and $1.0
million in units (44,871 units) was paid in 2000 and $1.0 million in units
(116,124 units) was paid in 2001. The
cash flow target was not met in 2001 and no units were issued. 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 (see Note
1).
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 units) and $0.6 million in assumed
debt. Additional consideration of $0.3
million will be paid if certain cash flow targets are met in 2000, 2001, and
2002. Consideration of $0.3 million was
paid in 2000 when the cash flow target was met. The cash flow target was not met in 2001. 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 (see Note 1).
3.
Inventories
Inventories consisted of the following (in thousands):
Manufacturing inventories at
December 31, 2001 and 2000, include a $2.6 million and $3.7 million,
respectively, write down to net realizable value. In the first quarter of fiscal 2002, the Partnership changed its
method of accounting for manufacturing log and lumber inventories from LIFO to
average cost (see Note 13).
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
During the third quarter of
2001, the Partnership completed a strategic alliance with Louisiana-Pacific
Corporation (LP). The strategic
alliance involved the sublease of the Bonners Ferry mill and the sale of
related assets (including certain working capital accounts). The strategic alliance resulted in $8.0
million in cash proceeds from the sale of working capital and non-leased
equipment and $9.7 million from the collection of receivables related to
previous stumpage sales, and the provision of a long-term log supply commitment
from the Partnership’s 252,000 acre Idaho tree farm to supply LP’s mills in the
northern Idaho region. The transaction
resulted in a net gain to the Partnership of $1.7 million, of which, $0.9
million relating to inventories is included in cost of goods sold and $0.8
million relating to equipment is included in other income (see also Note 12).
During the third quarter of
2001, the Partnership decided to permanently shut down and dispose of its Coeur
D’Alene sawmill. The equipment was
disposed of during the fourth quarter of 2001, resulting in a $2.9 million
loss. The land is currently being
marketed and, based on current comparables, is expected to result in a gain in
excess of the loss on the related equipment.
As a result, the loss has been deferred until the related land is sold
in accordance with SFAS 121 “Accounting for the Impairment of Long-lived Assets
and for Long-Lived Assets to be Disposed Of” (SFAS 121). Both the land and the deferred loss are
included in property held for sale on the accompanying consolidated balance
sheet.
During the third quarter of
2001, the Partnership exchanged its aircraft, resulting in a $1.6 million gain,
which is included in other income in the accompanying consolidated statement of
operations.
During the fourth quarter of
2001, the Partnership decided to permanently shut down and dispose of its
Prineville sawmill. The shut down and
planned disposal of the mill required an evaluation of asset impairment in
accordance with SFAS 121. Estimates of
fair value less costs to sell were determined by a third-party appraisal and
other estimating techniques. A $3.9
million non-cash asset impairment charge was recorded as a result of this
impairment evaluation, and is included in impairment of assets in the
accompanying consolidated statement of operations.
The
unaudited financial results for the years ended December 31, 2001 and 2000, for
the Bonners Ferry, Coeur d’Alene and Prineville sawmills were as follows (in
thousands, except per unit):
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 are recorded in other income in the accompanying consolidated
statement of operations.
5.
Operating Leases
In 1998, the Partnership entered into leases for two newly
constructed sawmills under operating lease arrangements that terminate in 2010.
One of the leases, the Bonners Ferry mill, was subleased to Louisiana-Pacific
in September 2001 (see Note 4). The Partnership is required to pay real estate
taxes and other occupancy costs under the remaining lease. The lease has an
early buyout provision which may be exercised by the Partnership in 2009 for an
amount equal to approximately 39% ($8.4 million) of the facility costs as
defined in the lease agreement. The semi-annual lease payments are of varying
amounts, however, the Partnership expenses the payments evenly over the term of
the lease. The lease contains 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 2001, 2000, and 1999 was $6.7
million, $8.5 million and $7.6 million, respectively.
At December 31, 2001, the future
minimum rental payments under the operating leases, excluding the sublet
Bonners Ferry mill, are (in thousands):
6.
Timber, Timberlands and Roads
Timber, timberlands and roads
consisted of the following (in thousands):
As a continuation of its
strategy to exit the lumber manufacturing business in the Inland region, in the
fourth quarter of 2001, the Partnership decided to sell its northern Idaho tree
farm. As a result, the net basis of the
property, of $177.2 million, was reclassified as property held for sale at
December 31, 2001 in the accompanying consolidated balance sheet (see also Note
13).
During 2001, the Partnership
formally withdrew its proposal for a Habitat Conservation Plan in its
Washington tree farm. As a result, $1.4
million previously capitalized in timberlands was charged to impairment of
assets in the accompanying statement of operations.
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, was insignificant in 2000 and increased depletion
expense in 2001 by $0.8 million, or $0.03 per unit.
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 Acquisition Line of Credit.
7.
Long-Term Debt and Liquidity
Long-term debt consisted of the following (in thousands):
At December 31, 2001, the
Partnership had a $40 million revolving credit facility (working capital
facility) and a $199.3 million acquisition facility with a syndicate of banks.
The working capital facility is for working capital purposes and stand-by
letters of credit that expire on December 31, 2005. The working capital facility bears a floating rate of interest
(5.9% at December 31, 2001) and is secured by receivables and inventory. At December 31, 2001, there was $18 million
outstanding under this facility. In
April 2002, the acquisition facility and working capital facility were modified
(see Note 13).
On April 20, 2001 and again on
November 7, 2001, the Partnership’s acquisition and working capital bank
facilities were amended to modify the cash flow to interest expense coverage
covenant. Given the Partnership’s
decision to preserve its timber assets until log and land prices improve, and
the fact that weak lumber prices continued to adversely affect its
manufacturing segment results, relief from this covenant was required.
As a result of these amendments,
the Partnership’s revolving credit facility line was reduced to its then
current outstanding level of $40 million (including letters of credit) and was
secured by the Partnership’s accounts receivable and inventories. The acquisition facility line was reduced to
its then outstanding balance of $199.3 million. The November amendment eliminated the cash flow to interest
expense coverage covenant and replaced it with required levels of cash flow at
quarterly compliance dates beginning December 31, 2001. The Partnership was in compliance with the
modified covenants at December 31, 2001. Subsequent to December 31, 2001, the
Partnership violated an affirmative covenant associated with submitting
financial statements and covenant compliance certificates to its bank lenders,
but cured this violation as of April 22, 2002. The amendments also allowed the use of
certain funds from dispositions to be used for operations and required the
payoff of both bank facilities by December 1, 2002. Pursuant to the November amendments to the agreements, the
interest rate (5.9% at December 31, 2001) paid by the Partnership under these
facilities is either LIBOR plus 3.50 percentage points or prime plus 2.50
percentage points.
The Partnership incurred an
amendment fee of $1.1 million for the April amendments, which was recognized
ratably over the second and third quarters of 2001 as amortization of debt
issuance costs in the accompanying consolidated statement of operations. Fees for the November amendment, including
advisor fees and expenses, were $2.6 million and are being recognized ratably
through December 1, 2002, the expiration date of the bank facilities.
The Partnership’s 9.78%, 9.60%, 8.17% and 7.80% senior notes
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, $41.8 million in 2004, $44.8 million
in 2005, $44.8 million in 2006 and various amounts from 2007 through 2018. Pursuant to amendments to the senior note
agreements implemented in April 2002, significant changes occurred that are
described in Note 13.
All of the Partnership’s
senior note agreements and mill operating leases (see Notes 4 and 5) contain
cross-default provisions to the bank lines of credit. The bank facilities
contain certain restrictive covenants, including limitations on harvest levels,
capital expenditures, acquisitions, investments, land sales, cash distributions
and the amount of future indebtedness. The Partnership was in compliance with
such covenants at December 31, 2001. 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
150 basis points, as per the April 2002 amendments. The senior note agreements also require principal repayments,
which may be subject to the redemption premium, as outlined in the senior note
agreements. The bank credit facilities
and senior note agreements also contain certain acceleration clauses with
respect to certain asset sales as further described in Note 13.
On December 31, 2001, the
estimated aggregate fair value of the Partnership’s senior notes was $410.4
million and the recorded value was $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.
In April 2002, the
Partnership entered into agreements with its bank and senior note lenders to
extend current maturities of its debt (see Note 13). Accordingly, debt classified as currently due reflects the
provisions of these agreements.
8. Partners’ Capital, Income (Loss) and
Distributions
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
30,527,030 and 30,410,906 common units outstanding on December 31, 2001 and
2000, respectively.
Partnership Income and Losses
The Partnership’s income and losses are allocated 99% to the holders of common
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 Managing
General Partner declared distributions of $1.69 per unit and $2.26 per unit for
the years ended December 31, 2000 and 1999, respectively. There were no distributions declared in
2001.
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 Partnership’s 2000 and 1999
consolidated distributions to partners included $0.8 million and $0.7 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, 2001. Total options
granted in any one year cannot exceed 1% of the total outstanding units. There
were 877,370 and 720,370 units exercisable, including front-end options of
362,670, at December 31, 2001 and 2000, 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, 2001 is shown
below:
Units
Option Price
December 31, 1998
729,400
$18.13 - $23.75
$21.25
Granted
275,000
Exercised
(26,700
)
$18.13 - $22.00
Canceled
(85,700
)
$18.13 - $23.75
December 31, 1999
892,000
$18.13 - $23.75
Granted
300,000
$17.88
Exercised
(2,000
)
$18.13
Canceled
(63,300
)
$18.13 - $23.75
December 31, 2000
1,126,700
$18.13 - $23.75
Granted
320,000
$7.30
Exercised
-
$-
Canceled
(160,700
)
$7.30- $23.75
December 31, 2001
1,286,000
$7.30- $23.75
At December 31, 2001, 877,370 options were exercisable at a
weighted average price of $21.52. The
weighted average exercise price per unit of options outstanding at December 31,
2001 was $18.39.
The following table summarizes information about unit options,
including front-end options of 362,670 outstanding December 31, 2001:
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 2001, 2000 and 1999 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 (loss) income and net
(loss) 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. In 1999, expense previously recognized of $0.5 million 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 vested portion of such option will be paid to the participant. In 2000
and 1999, the Board of Control awarded 135,000 and 122,500 DERs, respectively.
No additional DERs were awarded in January 2002 or January 2001.
The Partnership records as
compensation expense the estimated annual cost of the DERs. The amount charged
to expense in 1999 was $1.1 million.
For the years 2000 and 2001, the targeted distribution was not earned
and therefore no amounts were credited to participant’s 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. Profit sharing paid was $0.8 million, $1.4 million
and $2.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
10. Segment Information
The Partnership
classifies its business into three fundamental areas for purposes of providing
segment information: 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 $2.6 million and $3.7 million write down
of inventories to market in 2001 and 2000, respectively, is included in the
Manufacturing segment. The $3.9 million and $1.4 million write down of
property, plant and equipment (see Note 4) and timberlands, respectively, (see
Note 6) in 2001 is included in the Corporate and Other 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 results 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.
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 $4.8 million, $5.9 million, and $5.4 million in 2001, 2000, and 1999,
respectively, and primarily represent compensation expense and other costs
incurred to manage the business.
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, 2001 and 2000, the Partnership was committed to purchase timber or logs
from government and private sources. These commitments mature on various dates
through 2002. The remaining commitments were approximately $18.1 million at December 31, 2001.
In connection
with the sale and sublease of the Bonners Ferry mill, the Partnership
guaranteed the termination value of the sublease, which LP would be required to
pay should the Partnership default on the lease. The lease has similar covenant requirements as the Partnership’s
senior notes (see Note 7). The
termination value is based on a formula outlined in the lease agreement. The current termination value of
approximately $2 million remains in escrow at December 31, 2001 and is included
in prepaids and other current assets in the accompanying consolidated balance
sheet.
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
operations. 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, results
of operations or cash flows.
13. Subsequent Events
In the first quarter of 2002,the Partnership changed its method of
accounting for manufacturing log and lumber inventories from LIFO to average
cost. Given the volatility of both
prices and quantities and a fundamental change in the composition of
inventories, management believes that accounting for inventories at average
cost better matches revenues and expenses, and therefore is preferable. In accordance with Accounting Principles
Board Opinion No. 20, “Accounting Changes,” upon adoption, the Partnership will
retroactively restate prior periods by accounting for inventories at average
cost. Had the Partnership adopted this
change in 2001, the retroactive impact would have been as follows (amounts in
thousands):
In February 2002, the
Partnership announced the sale of its Inland tree farm in two separate sales
for a total of $189.5 million. The
first transaction was completed on March 29, 2002 for $133.8 million, subject
to adjustments after closing. The
second transaction is expected to close in the second quarter of 2002 and
produce proceeds of $55.7 million. The
proceeds, net of fees and expenses, will be used to reduce bank and senior note
debt.
In April 2002, the
Partnership entered into agreements with its bank lenders to extend the
expiration date of the working capital and acquisition line facilities to
December 2005. The amendments require
the Partnership to use approximately $88.0 million of the proceeds from the
Inland tree farm sale to pay down the acquisition facility, leaving a balance
due of $111.3 million. Principal
payments of $5.0 million, $40.0 million and $30.0 million are due on this
facility in September 2003, January 2004, and June 2005, respectively. Additionally, $10.0 million of the Inland
tree farm proceeds will be applied to the working capital facility to provide
future liquidity. The amended facilities
contain covenants that require the Partnership to achieve certain financial
ratios and limit the amount the Partnership can spend on capital expenditures.
The Partnership also
amended its senior note agreements in April 2002. With the exception of $5.0 million due in 2003, these revisions
allow the Partnership to defer principal payments due on December 1, 2003, 2004
and 2005, respectively, until December 31, 2005. The April 2002 amendment also requires the Partnership to apply a
portion of the Inland Tree Farm sale proceeds to pay down principal outstanding
on these notes. The estimated principal
reduction from these proceeds is $86.0 million, exclusive of redemption
charges. The amendment also requires
the payment of all outstanding principal balances on December 31, 2005 if the
Partnership does not have a certain investment grade status, as measured by
nationally recognized rating agencies, on July 1, 2005. Additionally, note holders now have the
option to put their principal balances to the Partnership on December 31, 2005
after giving notice on August 1, 2005.
No redemption charges will be due by the Partnership on any principal
payments made in connection with notes that are put back to the Partnership.
The amendment to the
senior note agreements also requires mandatory principal payments, on a pro
rata basis, with existing bank debt, if asset sale
proceeds or operating cash flow are
used to pay outstanding bank principal prior to December 31, 2005. Under certain circumstances, redemption
charges are due on such principal payments.
However, the Partnership has the option to defer these payments until
December 31, 2005 or pay an equivalent amount in common units for any payments
made before December 31, 2004.
In exchange for these bank facility and
note agreement amendments, the Partnership gave a security interest in its
timberlands and sawmill assets and will pay certain fees and enhanced interest
on the senior notes of 100 basis points.
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 22, 2002, except for footnote 13 which is as of April 22, 2002
appearing on page of this 2001 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 22, 2002
Schedule II
Crown
Pacific Partners, L.P.
Valuation
and Qualifying Accounts
For the
Years Ended December 31, 1999, 2000 and 2001
(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.