<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1997
REGISTRATION NO. 333-32811
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
U.S. TIMBERLANDS COMPANY, L.P.
(Exact name of registrant as specified in its charter)
-----------
DELAWARE 0800 91-1842156
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
-----------
P.O. BOX 10
6400 HIGHWAY 66
KLAMATH FALLS, OREGON 97601
(541) 884-2240
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------
JOHN J. STEPHENS
P.O. BOX 10
6400 HIGHWAY 66
KLAMATH FALLS, OREGON 97601
(541) 884-2240
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------
Copies to:
ANDREWS & KURTH L.L.P. BAKER & BOTTS, L.L.P.
425 LEXINGTON AVENUE ONE SHELL PLAZA
10TH FLOOR 910 LOUISIANA
NEW YORK, NEW YORK 10017 HOUSTON, TEXAS 77002
(212) 850-2800 (713) 229-1234
ATTN: JONATHAN P. CRAMER ATTN: JOSHUA DAVIDSON
------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuing basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-----------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C>
PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE(1)
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Common Units representing limited partner
interests......................................... $9,763,200 $2,959
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o). On August 4, 1997, the Registrant registered
Common Units with a proposed maximum aggregate offering price of
$174,652,800 and paid a registration fee of $52,930. This Registration
Statement is registering an additional $9,763,200 of Common Units for a
total proposed maximum offering price of $184,416,000.
-----------
THIS REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 16, 1997
PROSPECTUS
7,458,684 COMMON UNITS
U.S. TIMBERLANDS COMPANY, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
----------
[LOGO]
The Common Units offered hereby represent limited partner interests in U.S.
Timberlands Company, L.P., a recently formed Delaware limited partnership (the
"Company"). The Company's business consists of the growing of trees and the
sale of logs and standing timber from its approximately 630,000 acres of
timberland located east of the Cascade Range in Oregon.
The Company will distribute to its partners, on a quarterly basis, all of its
Available Cash, which is generally all cash on hand at the end of a quarter, as
adjusted for reserves. The General Partner has broad discretion in making cash
disbursements and establishing reserves. The Company intends, to the extent
there is sufficient Available Cash from operating surplus or capital surplus,
to distribute to each holder of Common Units at least $0.50 per Common Unit per
quarter (the "Minimum Quarterly Distribution") or $2.00 per Common Unit on an
annualized basis.
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION. PURCHASERS OF COMMON UNITS SHOULD CONSIDER EACH OF THE FACTORS
DESCRIBED UNDER "RISK FACTORS," STARTING ON PAGE 28 OF THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE COMPANY, INCLUDING, BUT NOT LIMITED TO, THE
FOLLOWING:
. THE MINIMUM QUARTERLY DISTRIBUTION IS NOT GUARANTEED. THE ACTUAL AMOUNT OF
CASH DISTRIBUTIONS WILL DEPEND ON THE COMPANY'S FUTURE OPERATING
PERFORMANCE AND WILL BE AFFECTED BY THE FUNDING OF RESERVES, OPERATING AND
CAPITAL EXPENDITURES AND OTHER MATTERS WITHIN THE DISCRETION OF THE
GENERAL PARTNER, AS WELL AS REQUIRED INTEREST AND PRINCIPAL PAYMENTS ON,
AND THE OTHER TERMS OF, THE COMPANY'S INDEBTEDNESS. CERTAIN PROVISIONS OF
THE COMPANY'S INDEBTEDNESS SPECIFICALLY PROHIBIT PAYMENTS TO HOLDERS OF
COMMON UNITS UPON THE OCCURRENCE OF EVENTS OF DEFAULT OR IF CERTAIN
FINANCIAL RATIOS ARE NOT MET. ON A PRO FORMA BASIS, THE COMPANY WOULD HAVE
HAD A SUBSTANTIAL CASH FLOW DEFICIT DURING 1996. CONSEQUENTLY, ON A PRO
FORMA BASIS, THE COMPANY WOULD HAVE BEEN UNABLE TO MAKE ANY DISTRIBUTIONS
FOR SUCH YEAR FROM OPERATING CASH FLOW ON ANY OF THE COMMON UNITS OFFERED
HEREBY OR ANY OF THE SUBORDINATED UNITS.
(continued on page iii)
Prior to this offering, there has not been a public market for the Common
Units. It is currently estimated that the initial public offering price will be
between $20.50 and $21.50 per Common Unit. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price. The Common Units have been approved for listing on the Nasdaq
National Market under the symbol "TIMBZ".
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Common Unit............................ $ $ $
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Total(3)................................... $ $ $
</TABLE>
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(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $ payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,118,803 additional Common Units on the same terms and conditions as set
forth above, solely to cover over-allotments, if any. See "Underwriting."
If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
$ , $ and $ , respectively.
--------
The Common Units are being offered by the several Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that certificates for the Common Units offered
hereby will be available for delivery on or about , 1997, at the
office of Smith Barney Inc., 333 West 34th Street, New York, New York 10001.
--------
SMITH BARNEY INC.
DEUTSCHE MORGAN GRENFELL
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
, 1997
<PAGE>
[MAP OF COMPANY TIMBERLANDS AND TWO PHOTOGRAPHS OF THE COMPANY'S PROPERTIES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE COMMON UNITS,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
ii
<PAGE>
(continued from page i)
. ON A PRO FORMA BASIS AT JUNE 30, 1997, THE COMPANY'S TOTAL LONG-TERM
INDEBTEDNESS WOULD HAVE BEEN APPROXIMATELY $266.7 MILLION, REPRESENTING
APPROXIMATELY 68% OF THE COMPANY'S TOTAL CAPITALIZATION. AS A RESULT,
THE COMPANY WILL BE SIGNIFICANTLY LEVERAGED AND WILL HAVE INDEBTEDNESS
THAT IS SUBSTANTIAL IN RELATION TO ITS EQUITY CAPITAL.
. HOLDERS OF COMMON UNITS WILL HAVE ONLY LIMITED VOTING RIGHTS, AND THE
GENERAL PARTNER WILL MANAGE AND OPERATE THE COMPANY. THE GENERAL PARTNER
MAY NOT BE REMOVED EXCEPT PURSUANT TO THE VOTE OF THE HOLDERS OF AT
LEAST 66 2/3% OF THE OUTSTANDING UNITS (INCLUDING UNITS OWNED BY THE
GENERAL PARTNER AND ITS AFFILIATES). THE OWNERSHIP OF SUBORDINATED UNITS
BY CERTAIN AFFILIATES OF THE GENERAL PARTNER EFFECTIVELY GIVES THE
GENERAL PARTNER THE ABILITY TO PREVENT ITS REMOVAL.
. PURCHASERS OF THE COMMON UNITS OFFERED HEREBY WILL EXPERIENCE IMMEDIATE
AND SUBSTANTIAL DILUTION IN NET TANGIBLE BOOK VALUE OF $11.52 PER COMMON
UNIT FROM THE INITIAL PUBLIC OFFERING PRICE (ASSUMING AN INITIAL PUBLIC
OFFERING PRICE OF $21.00 PER COMMON UNIT).
. PRIOR TO MAKING ANY DISTRIBUTION ON THE COMMON UNITS, THE COMPANY WILL
REIMBURSE THE GENERAL PARTNER AND ITS AFFILIATES (INCLUDING OFFICERS AND
DIRECTORS OF THE GENERAL PARTNER) FOR ALL EXPENSES INCURRED ON BEHALF OF
THE COMPANY, WHICH ARE DETERMINED BY THE GENERAL PARTNER IN ITS SOLE
DISCRETION.
. THE NET PROCEEDS FROM THIS OFFERING WILL BE USED TO REPAY INDEBTEDNESS
OF THE COMPANY'S SUBSIDIARY OPERATING COMPANY. CERTAIN OF SUCH
INDEBTEDNESS WAS INCURRED BY AFFILIATES OF THE GENERAL PARTNER.
. THE COMPANY'S OPERATIONS ARE SUBJECT TO CYCLICAL FLUCTUATIONS IN PRICE
AND DEMAND FOR FOREST PRODUCTS AND SUPPLIES OF TIMBER.
. THE COMPANY'S BUSINESS, INCLUDING THE ABILITY TO HARVEST ITS TIMBER, MAY
BE AFFECTED BY VARIOUS FACTORS, INCLUDING ENVIRONMENTAL AND ENDANGERED
SPECIES CONCERNS, FEDERAL AND STATE REGULATIONS, LIMITATIONS ON ACCESS
ACROSS PUBLIC LANDS AND DAMAGE BY FIRE, INSECT INFESTATION AND OTHER
NATURAL CAUSES.
. CONFLICTS OF INTEREST MAY ARISE BETWEEN THE GENERAL PARTNER AND ITS
AFFILIATES, ON THE ONE HAND, AND THE COMPANY AND THE UNITHOLDERS, ON THE
OTHER. THE PARTNERSHIP AGREEMENT CONTAINS CERTAIN PROVISIONS THAT LIMIT
THE LIABILITY AND REDUCE THE FIDUCIARY DUTIES OF THE GENERAL PARTNER TO
THE UNITHOLDERS. HOLDERS OF COMMON UNITS ARE DEEMED TO HAVE CONSENTED TO
CERTAIN ACTIONS AND CONFLICTS OF INTEREST THAT MIGHT OTHERWISE BE DEEMED
A BREACH OF FIDUCIARY OR OTHER DUTIES UNDER APPLICABLE STATE LAW.
. THE AVAILABILITY TO A COMMON UNITHOLDER OF THE FEDERAL INCOME TAX
BENEFITS OF AN INVESTMENT IN THE COMPANY DEPENDS ON THE CLASSIFICATION
OF THE COMPANY AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES. THE
COMPANY WILL RELY UPON AN OPINION OF COUNSEL, AND NOT A RULING FROM THE
INTERNAL REVENUE SERVICE, ON THAT ISSUE AND OTHERS RELEVANT TO A COMMON
UNITHOLDER.
. THE GENERAL PARTNER WILL REGISTER THE COMPANY AS A TAX SHELTER WITH THE
SECRETARY OF THE TREASURY.
To enhance the Company's ability to make the Minimum Quarterly Distribution
on the Common Units during the Subordination Period, which will generally
extend at least through December 31, 2002, each holder of Common Units will be
entitled to receive the Minimum Quarterly Distribution, plus any arrearages
thereon, before any distributions are made on the outstanding subordinated
limited partner interests of the Company (the "Subordinated Units"). Upon
expiration of the Subordination Period, all Subordinated Units will convert
into Common Units on a one-for-one basis and will thereafter participate pro
rata with the other Common Units in distributions of Available Cash. Under
certain circumstances, up to 50% of the Subordinated Units may convert into
Common Units prior to the expiration of the Subordination Period. See "Cash
Distribution Policy."
iii
<PAGE>
The Common Units offered hereby will represent an aggregate 61.6% interest
in the Company and U.S. Timberlands Klamath Falls, L.L.C. ("USTK"), a Delaware
limited liability company which, upon consummation of the transactions
described herein, will become the Company's subsidiary operating company (in
such capacity, the "Operating Company"). The general partner of the Company
will be U.S. Timberlands Services Company, L.L.C., a newly formed Delaware
limited liability company (the "General Partner" or "New Services"). The
General Partner will own an aggregate 2% interest in the Company and the
Operating Company. In addition, certain affiliates of the General Partner will
own an aggregate of 4,407,404 Subordinated Units representing an aggregate
36.4% interest in the Company and the Operating Company. The Common Units and
the Subordinated Units are collectively referred to herein as the "Units."
Holders of the Common Units and the Subordinated Units are collectively
referred to herein as "Unitholders."
The sale of the Common Units offered hereby is subject to, among other
things, the concurrent consummation of a public offering (the "Public Note
Offering") by the Operating Company of $225.0 million aggregate principal
amount of unsecured senior notes (the "Notes") and the closing of a $25.0
million revolving credit facility to be used for working capital purposes (the
"Working Capital Facility") and a $75.0 million revolving credit facility to
be used for acquisitions and capital improvements (the "Acquisition Facility"
and, together with the Working Capital Facility, the "Bank Credit Facility").
See "The Transactions."
The Company will furnish or make available to record holders of Common Units
(i) within 120 days after the close of each fiscal year of the Company, an
annual report containing audited financial statements and a report thereon by
its independent public accountants and (ii) within 90 days after the close of
each quarter (other than the fourth quarter), a quarterly report containing
unaudited summary financial information. The Company will also furnish each
Unitholder with tax information within 90 days after the close of each
calendar year.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY........................................................ 1
U.S. Timberlands Company, L.P. ......................................... 1
Summary Historical and Pro Forma Financial and Operating Data........... 7
Summary of Risk Factors................................................. 10
Cash Available for Distribution......................................... 15
Company Structure and Management........................................ 17
The Offering............................................................ 20
Summary of Tax Considerations........................................... 25
FORWARD LOOKING STATEMENTS................................................ 28
RISK FACTORS.............................................................. 28
Risks Inherent in an Investment in the
Company................................................................ 28
Risks Inherent in the Company's Business................................ 32
Conflicts of Interest and Fiduciary Responsibilities.................... 34
Tax Risks............................................................... 36
THE TRANSACTIONS.......................................................... 40
USE OF PROCEEDS........................................................... 41
CAPITALIZATION............................................................ 42
DILUTION.................................................................. 43
CASH DISTRIBUTION POLICY.................................................. 44
General................................................................. 44
Quarterly Distributions of Available Cash............................... 45
Distributions from Operating Surplus during Subordination Period........ 45
Distributions from Operating Surplus after Subordination Period......... 47
Incentive Distributions-Hypothetical Annualized Yield................... 47
Distributions from Capital Surplus...................................... 48
Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels................................................................. 49
Distributions of Cash Upon Liquidation.................................. 49
CASH AVAILABLE FOR DISTRIBUTION........................................... 52
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA............ 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 57
General................................................................. 57
Supply and Demands Factors.............................................. 57
Results of Operations................................................... 58
Liquidity and Capital Resources......................................... 61
Description of Indebtedness............................................. 63
Contingencies........................................................... 64
Effects of Inflation.................................................... 65
Other................................................................... 65
BUSINESS AND PROPERTIES................................................... 66
General................................................................. 66
Business Strategy....................................................... 67
Transaction Background.................................................. 68
The Timberlands......................................................... 69
Resource Management..................................................... 73
Federal and State Regulation............................................ 75
Litigation.............................................................. 77
Employees............................................................... 77
</TABLE>
<TABLE>
<S> <C>
MANAGEMENT................................................................. 78
Company Management....................................................... 78
Directors, Executive Officers and Key Employees of the General Partner... 78
Reimbursement of Expenses of the General Partner and its Affiliates...... 81
Executive Compensation................................................... 81
Compensation of Directors................................................ 84
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 85
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 86
Rights of the General Partner............................................ 86
Contribution, Conveyance and Assumption Agreement........................ 86
Consulting Agreements.................................................... 86
Related Party Transactions............................................... 86
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES....................... 87
Conflicts of Interest.................................................... 87
Fiduciary and Other Duties............................................... 89
DESCRIPTION OF THE COMMON UNITS............................................ 91
The Units................................................................ 91
Transfer Agent and Registrar............................................. 91
Transfer of Common Units................................................. 91
THE PARTNERSHIP AGREEMENT.................................................. 93
Organization and Duration................................................ 93
Purpose.................................................................. 93
Power of Attorney........................................................ 93
Capital Contributions.................................................... 94
Limited Liability........................................................ 94
Issuance of Additional Securities........................................ 95
Amendment of Partnership Agreement....................................... 95
Merger, Sale or Other Disposition of Assets.............................. 97
Termination and Dissolution.............................................. 97
Liquidation and Distribution of Proceeds................................. 97
Withdrawal or Removal of the General
Partner................................................................. 97
Transfer of General Partner's Interests and Incentive Distribution
Rights.................................................................. 99
Change of Management Provisions.......................................... 99
Limited Call Right....................................................... 99
Meetings; Voting......................................................... 100
Status as Limited Partner or Assignee.................................... 100
Non-citizen Assignees; Redemption........................................ 101
Indemnification.......................................................... 101
Books and Reports........................................................ 101
Right to Inspect Company Books and
Records................................................................. 102
Registration Rights...................................................... 102
UNITS ELIGIBLE FOR FUTURE SALE............................................. 103
TAX CONSIDERATIONS......................................................... 105
Legal Opinions and Advice................................................ 105
Tax Rates and Changes in Federal Income Tax Laws......................... 106
Partnership Status....................................................... 106
</TABLE>
v
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Limited Partner Status.................................................... 107
Tax Consequences of Unit Ownership........................................ 108
Allocation of Company Income, Gain, Loss and Deduction.................... 110
Disposition of Common Units............................................... 115
Uniformity of Units....................................................... 117
Administrative Matters.................................................... 119
State, Local and Other Tax Considerations................................. 121
INVESTMENT IN THE COMPANY BY
EMPLOYEE BENEFIT PLANS..................................................... 122
UNDERWRITING................................................................ 123
VALIDITY OF THE COMMON UNITS................................................ 125
</TABLE>
<TABLE>
<S> <C>
EXPERTS................................................................... 125
AVAILABLE INFORMATION..................................................... 125
INDEX TO FINANCIAL STATEMENTS............................................. F-1
APPENDIX A--Form of Amended and Restated Agreement of Limited Partnership
of U.S. Timberlands Company, L.P.............................. A-1
APPENDIX B--Form of Application for Transfer of Common Units.............. B-1
APPENDIX C--Glossary of Certain Terms..................................... C-1
</TABLE>
vi
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and historical and pro forma
financial data appearing elsewhere in this Prospectus. Unless otherwise
specified, the information in this Prospectus assumes that the Underwriters'
over-allotment option is not exercised. The transactions related to the
formation of the Company, the issuance of the Notes, the entering into of the
Bank Credit Facility and the other transactions to occur in connection with
this offering are referred to in this Prospectus as the "Transactions." See
"The Transactions." Except as the context otherwise requires, references to, or
descriptions of, assets and operations of the Company in this Prospectus
include the assets and operations of the Operating Company and any other
subsidiary and the predecessors of the Company. References to percentage
ownership of the Company reflect the approximate effective ownership interest
of the Unitholders and the General Partner in the Company and the Operating
Company on a combined basis. For ease of reference, a glossary of certain terms
used in this Prospectus is included as Appendix C to this Prospectus.
U.S. TIMBERLANDS COMPANY, L.P.
THE COMPANY
The Company's business consists of the growing of trees and the sale of logs
and standing timber. The Company owns approximately 630,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 1997 to
be approximately 2.2 billion board feet ("BBF") in Oregon east of the Cascade
Range (the "Timberlands"). Logs harvested from the Timberlands are sold to
unaffiliated domestic conversion facilities. These logs are processed for sale
as lumber, plywood and other wood products, primarily for use in new
residential home construction, home remodeling and repair and general
industrial applications. The Company also owns and operates its own seed
orchard and produces approximately five million conifer seedlings annually from
its nursery, approximately half of which are used for its own internal
reforestation programs, with the balance sold to other forest products
companies.
The Timberlands include substantial holdings of merchantable, good quality
timber. The Timberlands' merchantable timber consists of Ponderosa Pine
(approximately 42%) and Douglas Fir (approximately 14%), species which have
historically commanded premium prices over other softwood species, with the
balance consisting of Lodgepole Pine, White Fir and other softwood species. The
Timberlands have stands of varying ages and are unique in the forests east of
the Cascade Range in Oregon in that approximately 184,000 acres are actively
managed tree farms (the "Plantations"). The Plantations were first established
by Weyerhaeuser Company ("Weyerhaeuser") in the early 1960s and acreage has
been planted each year since then. Currently, the Plantations contain age
classes ranging generally from two to 35 years old. Initial thinning of the
Plantation stands, including the thinning of commercial quantities of
merchantable timber, is expected to begin within the next five years. Because
the timber on the Plantations is generally not yet considered merchantable,
volumes of timber on the Plantations are not included in the Company's
estimated merchantable timber volume. The balance of the Timberlands are
composed of natural stands.
The Company was recently formed to acquire and own substantially all of the
equity interests in USTK and to acquire and own the business and assets of U.S.
Timberlands Management Company, L.L.C., formerly known as U.S. Timberlands
Services Company, L.L.C. ("Old Services"). USTK and Old Services acquired
approximately 600,000 fee acres of timberland (the "Klamath Falls
Timberlands"), containing an estimated merchantable timber volume of
approximately 1.9 BBF and related assets from Weyerhaeuser in August 1996 (the
"Weyerhaeuser Acquisition"). Most of the Klamath Falls Timberlands had been
owned by Weyerhaeuser for more than 50 years. The Company recently sold
approximately 12,000 acres from the Klamath Falls Timberlands. On July 15,
1997, USTK acquired approximately 42,000 fee acres of timberland and cutting
1
<PAGE>
rights on approximately 3,000 acres of timberland (the "Ochoco Timberlands"),
containing an estimated merchantable timber volume of approximately 280 million
board feet ("MMBF") from Ochoco Lumber Company ("Ochoco") (the "Ochoco
Acquisition"). Over 45% of the merchantable timber on the Ochoco Timberlands is
at least 80 years old. The Company believes that the age classes and species
mix of the Ochoco Timberlands fit well with the Klamath Falls Timberlands and
provide the Company flexibility in developing its harvest plans. Most of the
land comprising the Ochoco Timberlands had been owned by Ochoco since the
1920s. The Company expects that during 1997, including the five and one-half
months of its operations on the Ochoco Timberlands, it will harvest
approximately 153 MMBF of timber (including the sale of harvest rights) from
the Timberlands.
During the period from January 1, 1994 through the acquisition of the Klamath
Falls Timberlands by USTK, approximately 58% of the logs harvested from the
Klamath Falls Timberlands had been delivered to a plywood mill owned by
Weyerhaeuser at Klamath Falls, Oregon. In recent years, substantially all of
the timber harvested from the Ochoco Timberlands had been delivered to Ochoco's
mills. The Company does not currently own any conversion facilities nor does it
intend in the future to own any such facilities on a long-term basis;
consequently all of the Company's sales are made to unaffiliated third parties.
Concurrent with USTK's acquisition of the Klamath Falls Timberlands, USTK
arranged for Collins Products LLC ("Collins"), a privately owned forest
products company located within the Klamath Falls Timberlands area, to purchase
Weyerhaeuser's Klamath Falls mill facilities. The Company has entered into a
10-year log supply agreement with Collins (the "Collins Supply Agreement")
providing for the purchase by the plywood mill and delivery by the Company of a
minimum of 34 MMBF of logs each year at market prices (approximately 25% of the
Company's estimated annual harvest in the next three years). In addition to its
sales under the Collins Supply Agreement, the Company sells logs to conversion
facilities located in the area surrounding the Timberlands and operated by
third parties. There are currently more than 50 primary conversion facilities
located within a 150 mile radius of the Company's base of operations in Klamath
Falls.
The Company believes that it is well positioned to compete successfully in
the timber business for the following reasons: (i) the Company has substantial
holdings of timber properties which include over 2.2 BBF of merchantable, good
quality timber, approximately 184,000 acres of plantation timberland and a
full-scale seed orchard and nursery operation located in a region where
conversion facilities have been experiencing shortages in the supply of wood
fiber; (ii) the Company focuses on owning timberlands rather than operating
conversion facilities, which minimizes the Company's cost structure and capital
expenditures, allows the Company to seek the most favorable markets for its
timber rather than being committed to supply its own facilities, and ensures
that the Company will not compete with its customers; (iii) the Company's
senior operating management team has an average of more than 20 years of
experience in the forest products industry, including experience in
identifying, evaluating, completing and integrating acquisitions of timber
properties; (iv) the Company's lean operating structure allows it to
efficiently manage its Timberlands, and should enable it to acquire additional
timberlands without commensurate increases in overhead; and (v) the Company's
computerized geographic information system ("GIS") enables the Company to
evaluate the optimal timing and patterns of the harvest of its Timberlands and
evaluate and integrate acquisitions of additional timberlands.
BUSINESS STRATEGY
The Company's business strategy is to manage its Timberlands in a manner that
will enable it to pay the Minimum Quarterly Distribution on all the Units and
to increase the per Unit value of the Company's assets and cash flow.
Management intends to pursue this strategy in a number of ways:
Continue to Increase Productivity of the Timberlands
The Company intends to continue to utilize and increase the use of various
modern forestry practices on its Timberlands in order to increase their
productivity. Examples of these practices include the use of the Company's GIS,
which enables it to develop optimal harvest plans; the application of selective
harvesting and thinning practices, which improve the productivity of the
remaining stand while providing merchantable timber for sale;
2
<PAGE>
and the development of genetically improved seedlings to grow trees with
desirable traits such as superior size and disease resistance. Certain members
of senior management were involved in the development of these practices while
at Weyerhaeuser, and the Company expects to benefit from their experience.
Maximize Investment in Ochoco Timberlands
In order to maximize its investment in the Ochoco Timberlands, the Company
intends to harvest the mature timber thereon over the next five to six years.
As a result, the Company will convert Ochoco's older, slower growing forests to
younger, more productive forests. In addition, by increasing the harvest on the
Ochoco Timberlands, the Company will be able to reduce the amount of timber
harvested on the Klamath Falls Timberlands, allowing these faster growing
Timberlands to continue to mature, thereby increasing their commercial value.
Pursue Accretive Acquisition Opportunities
The Company intends to identify, evaluate and acquire undervalued timberlands
in North America with the objective of increasing both the value of the
Company's Units and its cash flow. The Company believes that management's
relationships within the timber industry, as well as its focus on operating
timberlands, rather than conversion facilities, give it a competitive advantage
in developing acquisition opportunities. The Company believes that its use of
independent contractors to conduct its silviculture and harvesting activities
should enable it to operate significantly increased acreage without a
commensurate increase in fixed overhead costs. The Company intends to evaluate
and pursue those opportunities that are located within markets distinguished by
strong demand, that include ages and species that complement the Company's
existing inventory, and that fit the Company's current and long-term value
objectives. In addition, the Company may in the future acquire timberlands
located in areas, and containing timber, suitable for export. By early January
1998, it is expected that Edward J. Kobacker, the current Executive Vice
President and Chief Operating Officer of the General Partner, will become the
President and Chief Executive Officer of the General Partner and that John J.
Stephens, the current President and Chief Executive Officer, will become Vice
Chairman of the Board of Directors of the General Partner in order to devote
more time to the Company's acquisition program.
Implement Flexible Marketing Strategies
The Company's marketing strategy emphasizes flexibility in structuring the
sales of its timber assets. Depending upon the needs of its customers and
current market conditions, the Company can either sell harvested logs or sell
harvest rights to standing timber ("stumpage") and can sell forest by-products,
such as wood chips. The Company believes that its strategy of owning
timberlands rather than conversion facilities that compete with its customers
is an important factor in developing and maintaining strong customer
relationships. Since the Weyerhaeuser Acquisition, the Company has sold logs to
17 different customers and expects to sell to a greater number in the future.
In addition to log and stumpage sales, the Company may also sell or exchange
parcels of land with other timberland owners. For example, the Company may seek
to realize the value of portions of the Plantations by exchanging them for more
mature timber owned by other timberland owners or by selling them for immediate
cash proceeds.
Sell Land for Higher and Better Uses
The Company seeks to realize the value of land that may have a higher and
better use than for timberland management or that is otherwise a candidate for
sale or exchange. For example, some of the Timberlands may have greater value
if used for ranching, farming or recreational purposes. The Company intends to
sell approximately 30,000 acres of small tracts for higher and better uses over
the next ten years. The Company recently sold approximately 12,000 acres from
the Klamath Falls Timberlands. In addition, the Company has identified a tract
of approximately 23,000 acres that it intends to sell within the next five
years. The Company will also seek to exchange lands with significant
environmental sensitivity or recreational values for lands that are more
suitable for commercial timberland management.
3
<PAGE>
INDUSTRY CONDITIONS
The Company's ability to implement its business strategy over the long term
and its results of operations will depend upon a number of factors, many of
which are beyond its control. These factors include general industry
conditions, domestic and international prices and supply and demand for logs,
lumber and other wood products, seasonality and competition from other domestic
and international supplying regions and substitute products.
Supply
The supply of logs available for purchase has been most affected in recent
years by significant reductions in timber harvested from public timberlands,
principally as a result of efforts to preserve the habitat of certain
endangered species, as well as a change in the emphasis of government policy
toward habitat preservation, conservation and recreation and away from timber
management. Since the early 1970s, environmental and other similar concerns and
governmental policies have substantially reduced the volume of timber under
contract to be harvested from public lands. The pace of regulatory activity
accelerated in the late 1980s. Federal timber under contract in Washington and
Oregon decreased approximately 88% from approximately 8.4 BBF in January 1988
to approximately 1.0 BBF in January 1997. The resulting supply decrease caused
prices for logs to increase significantly, reaching peak levels during late
1993 and early 1994. Although prices have declined from these record levels,
current prices still exceed pre-1993 levels. The low supply of timber from
public lands, which is expected to continue for the foreseeable future, has
benefited private timber holders, such as the Company, through higher stumpage
and log prices.
Industry participants do not expect environmental restrictions to ease
materially within any reasonable planning horizon. Consequently, many producers
of lumber and wood products are attempting to adapt to the new supply
environment by increasing their emphasis on raw material yields, entering into
long term timber supply arrangements and value-added manufacturing, and
accessing previously untapped supplies (such as private wood lot owners, timber
with difficult access, alternative species and imports). These factors have
tended to restrict prices from even greater increases. While raw material
supply is expected to be an ongoing challenge for the lumber and wood products
industry, such conditions are likely to cause the favorable operating
environment for timber owners, such as the Company, to continue for the
foreseeable future.
In response to an increase in timber prices in the early 1990s, imports of
logs and lumber from abroad (from countries such as Canada and New Zealand)
increased. These imports, however, only partially offset the lost volume of
timber from public timberlands and did not replace the mature, high-quality
timber found in greater quantities on public timberlands. Since 1993, imports
have decreased and their impact on timber prices currently is minimal.
Demand
Changes in general economic and demographic factors, including the strength
of the economy and interest rates for home mortgages and construction loans,
have historically caused fluctuations in housing starts and, in turn, in the
demand and prices for lumber and commodity wood products. With the growth of
the home center distribution business, the repair and remodeling markets have
become a significant factor in terms of the demand for lumber and commodity
wood products and have dampened the wide fluctuations that occurred when new
housing starts were the primary factor. A large portion of the Company's
property consists of Pine species, which are used in the finishing market, for
molding trim, doors and windows. This market is more affected by repair and
remodeling than new housing construction. Prices for these species, primarily
Ponderosa Pine, reached a peak in the spring of 1993 and as a result attracted
imports of Radiata Pine from New Zealand and Chile. The market absorbed these
relatively small quantities with little impact on prices. The demand for logs
in the United
4
<PAGE>
States is also affected by the level of lumber imports. In response to
increasing lumber imports from Canada, the United States and Canada signed an
agreement in 1996 which restricts the availability of Canadian softwood lumber
in the United States. The Company believes that to date this agreement has not
had a material impact on the price or demand for logs in the United States,
although its long-term effect is uncertain.
Due to transportation costs, domestic conversion facilities in the Pacific
Northwest tend to purchase raw materials within relatively confined geographic
areas, generally within a 200-mile radius. The conversion facilities in the
vicinity of the Timberlands need more wood supply to run at capacity than can
be produced by nearby timberlands. As a result, the demand from this region is
relatively steady, although prices fluctuate with market conditions.
TRANSACTIONS AT CLOSING
Concurrent with the closing of this offering, Old Services will contribute
all of its assets, including its timber operations, to the General Partner in
exchange for interests therein. Immediately thereafter, USTK will assume
certain indebtedness of U.S. Timberlands Holdings, L.L.C., an affiliate of USTK
("Holdings"), and the General Partner will contribute its timber operations to
USTK in exchange for a member interest in USTK. Then the General Partner will
contribute all but a 1% member interest in USTK to the Company in exchange for
a general partner interest in the Company, the right to receive Incentive
Distributions (as defined herein) and 1,428,571 Subordinated Units and Holdings
will contribute all of its interest in USTK to the Company in exchange for
2,978,833 Subordinated Units. The General Partner will then distribute the
Subordinated Units to Old Services. Approximately 145,278 Subordinated Units
will be used by Old Services to redeem interests in Old Services held by John
J. Stephens and George R. Hornig, founding directors of the General Partner. As
a result of such transactions, USTK will become the Operating Company and the
General Partner will own an aggregate 2% interest in the Company and the
Operating Company, and the right to receive Incentive Distributions; Old
Services will own 1,283,293 Subordinated Units; Holdings will own 2,978,833
Subordinated Units; and Messrs. Stephens and Hornig will own an aggregate of
145,278 Subordinated Units. The 4,407,404 Subordinated Units owned by Old
Services, Holdings and Messrs. Stephens and Hornig will represent an aggregate
36.4% interest in the Company.
Use of Proceeds
The Company will contribute the net proceeds from the sale of Common Units
offered hereby (estimated to be approximately $143.4 million after deducting
underwriting discounts and commissions and expenses associated with this
offering) to the Operating Company. Concurrent with the closing of this
offering, the Operating Company will issue $225.0 million aggregate principal
amount of Notes in the Public Note Offering. Net proceeds from the sale of the
Notes (estimated to be approximately $217.8 million after deducting
underwriting discounts and commissions and expenses associated with the Public
Note Offering), together with the net proceeds from the sale of Common Units
offered hereby, approximately $25.1 million to be borrowed by the Operating
Company under the Acquisition Facility and cash on hand (estimated to be
approximately $43.0 million), will be used by the Operating Company to repay
approximately $429.3 million of indebtedness of the Operating Company
(including accrued interest).
Concurrent with the closing of this offering, the Operating Company will
enter into the Bank Credit Facility, which will include the $25.0 million
Working Capital Facility, a revolving credit facility to be used for working
capital purposes, and the $75.0 million Acquisition Facility, a revolving
credit facility to be used for acquisitions and capital improvements. For
additional information regarding the terms of the Notes and the Bank Credit
Facility, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Description of Indebtedness."
5
<PAGE>
The following table sets forth an estimated breakdown of the sources and uses
of funds contemplated by the Transactions.
<TABLE>
<CAPTION>
AMOUNTS
(IN MILLIONS)
-------------
<S> <C>
SOURCES OF FUNDS
Net proceeds from Common Units offering (a).................... $143.4
Net proceeds from Public Note Offering (b)..................... 217.8
Drawdown on Acquisition Facility............................... 25.1
Cash on hand................................................... 43.0
------
Total........................................................ $429.3
======
USES OF FUNDS
Repayment of outstanding bank indebtedness (c)................. $429.3
======
</TABLE>
- --------
(a) After approximately $13.2 million in underwriting discounts and commissions
and expenses relating to this offering.
(b) After approximately $7.2 million in underwriting discounts and commissions
and expenses relating to the Public Note Offering.
(c) Represents (i) $130.0 million of bank debt incurred by Holdings in
connection with USTK's acquisition of the Klamath Falls Timberlands, $3.6
million in loan guarantee fees payable to Weyerhaeuser (the "Guarantee
Fees") and approximately $9.3 million of accrued interest and (ii) $283.0
million of bank debt incurred by USTK to refinance indebtedness incurred in
connection with its acquisition of the Klamath Falls Timberlands and to
finance the acquisition of the Ochoco Timberlands and approximately $3.4
million of accrued interest.
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables set forth for the periods and at the dates indicated,
summary historical financial and operating data for the Company, and pro forma
financial and operating data after giving effect to the Weyerhaeuser
Acquisition and the Transactions. The summary historical operating statement
data for the two years ended December 31, 1995, the eight months ended August
29, 1996 and the balance sheet data as of December 31, 1995 are derived from
the historical audited financial statements of the southern Oregon timberlands
operations of Weyerhaeuser (the "Predecessor") which were prepared by the
Company, and the summary historical operating statement data for the six months
ended June 30, 1996 are derived from the historical unaudited financial
statements of the Predecessor which were prepared by the Company, and should be
read in conjunction with such financial statements included elsewhere in this
Prospectus. The summary historical combined financial data for the four months
ended December 31, 1996 are derived from the historical combined audited
financial statements of the Company, and the summary historical financial data
for the six months ended June 30, 1997 are derived from the historical audited
combined financial statements of the Company included elsewhere in this
Prospectus. In the opinion of management each of the unaudited financial
statements include all adjustments, consisting of normal recurring adjustments,
necessary for a fair statement of the results for the unaudited periods. The
summary pro forma financial and operating data of the Company are derived from
the unaudited pro forma consolidated financial statements and notes thereto
included elsewhere in this Prospectus and should be read in conjunction
therewith. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The dollar amounts in the table below,
except per Unit data, are in thousands.
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(a) FORMA(b)
--------------------------------------------------- ------------ ------------
JANUARY 1, AUGUST 30,
1996 1996
YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED
--------------------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1996 1996 1996
----------- ----------- ------- ------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT
DATA:
Revenues:
Logs................... $27,225 $28,609 $29,102 $29,110 $14,077 $ 13,590 $ 27,667
Timberland and property
sales................. -- 4,180 -- -- -- -- --
By-products and other.. 4,354 3,537 3,240 2,623 1,501 429 1,930
------- ------- ------- ------- ------- -------- --------
Total revenues......... 31,579 36,326 32,342 31,733 15,578 14,019 29,597
Operating costs:
Cost of products sold.. 12,830 15,697 16,351 14,951 9,225 6,179 15,404
Cost of timber and
property sales........ -- 58 -- -- -- -- --
Depreciation, depletion
and road
amortization.......... 1,531 1,443 1,455 1,486 927 3,323 8,376
Selling, general and
administrative
expenses.............. 4,069 4,034 4,454 4,235 2,730 9,284 7,079 (c)
------- ------- ------- ------- ------- -------- --------
Operating income
(loss)................ 13,149 15,094 10,082 11,061 2,696 (4,767) (1,262)
Interest expense....... -- -- -- -- -- 7,316 24,299
Amortization of
deferred financing
fees and debt
guarantee fees........ -- -- -- -- -- 1,326 725
Interest income........ -- -- -- -- -- (409) (409)
Other (income) expense,
net................... (322) 297 140 (555) 1 36 37
------- ------- ------- ------- ------- -------- --------
Net income (loss)
before minority
interest.............. 13,471 14,797 9,942 11,616 2,695 (13,036) (25,914)
Minority interest(d)... -- -- -- -- -- -- 259
------- ------- ------- ------- ------- -------- --------
Net income (loss)...... $13,471 $14,797 $ 9,942 $11,616 $ 2,695 $(13,036) $(25,655)
======= ======= ======= ======= ======= ======== ========
Limited partners'
interests in net
loss.................. $(25,396)
========
Pro forma loss per
Unit(e)............... $ (2.14)
========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(a) FORMA(b)
----------------------------------------------------- ------------ ------------
JANUARY 1,
1996 AUGUST 30,
YEAR ENDED DECEMBER 31, THROUGH 1996 THROUGH YEAR ENDED
----------------------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1996 1996 1996
----------- ----------- -------- ------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS AND OTHER
DATA:
EBITDDA(f)............. $ 14,680 $ 16,595 $ 11,537 $12,547 $ 3,623 $ (1,444) $ 7,114
Capital expenditures--
Maintenance(g)........ 1,553 1,157 2,098 2,082 459 360
Cash flow from (used
in) operations........ 16,784 15,124 13,173 11,810 5,512 (2,984)
Cash flow used in
investing............. (1,553) (1,157) (2,013) (1,859) (459) (291,450)
Cash flow from (used
in) financing......... (15,231) (13,967) (11,160) (9,951) (5,054) 311,047
BALANCE SHEET DATA (AT
PERIOD END):
Working capital........ $ 793 $ 2,068 $ 211 $ 1,304 $ 524 $ 21,459
Timber, timberlands and
logging roads, net.... 22,050 21,495 20,885 20,822 21,275 273,457
Total assets........... 30,787 32,292 29,844 30,947 27,839 310,191
Long-term debt......... -- -- -- -- -- 305,000
Excess of assets over
liabilities........... 29,220 29,643 27,745 29,155 27,839
Members' deficit....... (2,936)
OPERATING DATA
(UNAUDITED):
Harvest volumes (MBF):
Used in log and
stumpage sales(h)..... 70,982 69,291 68,208 63,614 32,760 27,389 60,149
Used in chip sales..... 33,012 18,996 10,224 18,315 5,196 -- 5,196
Total................. 103,994 88,287 78,432 81,929 37,956 27,389 65,345
Sales volumes:
Log and stumpage sales
(MBF)(h).............. 70,903 66,250 68,302 63,822 32,760 30,210 62,970
Timber and property
sales (MBF)........... -- 9,449 -- -- -- -- --
Chip sales (BDT)....... 98,802 52,278 38,380 25,702 20,568 7,174 27,742
</TABLE>
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(a) FORMA(b)
----------- ---------- -----------
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------------- 1997
-----------
1996 1997
----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenues:
Logs....................................... $9,816 $19,813 $19,813
Timberland and property sales.............. -- 3,494 3,494
By-products and other...................... 1,174 489 489
------ ------- -------
Total revenues............................. 10,990 23,796 23,796
Operating costs:
Cost of products sold...................... 6,750 7,811 7,811
Cost of timber and property sales.......... -- 1,191 1,191
Depreciation, depletion and road
amortization.............................. 707 5,395 5,395
Selling, general and administrative
expenses.................................. 2,028 2,892 2,892
------ ------- -------
Operating income........................... 1,505 6,507 6,507
Interest expense........................... -- 10,877 12,150
Amortization of deferred financing fees and
debt guarantee fees....................... -- 2,198 362
Interest income............................ -- (774) (774)
Other (income) expense, net................ 31 (20) (20)
------ ------- -------
Net income (loss) before minority
interest.................................. 1,474 (5,774) (5,211)
Minority interest(d)....................... -- -- 52
------ ------- -------
Net income (loss).......................... $1,474 $(5,774) $(5,159)
====== ======= =======
Limited partners' interests in net loss.... $(5,107)
=======
Pro forma loss per Unit(e)................. $ (.43)
=======
CASH FLOWS AND OTHER DATA:
EBITDDA(f)................................. $2,212 $13,093 $13,093
Capital expenditures--Maintenance(g)....... 298 690
Cash flow from operations.................. 2,265 6,123
Cash flow from (used in) investing......... (298) 9,710
Cash flow used in financing................ (1,967) (2,059)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(a) FORMA(b)
----------- ---------- -----------
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------------- 1997
-----------
1996 1997
----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit).................. $ 1,220 $ 6,567 $ (2,757)
Timber, timberlands and logging roads,
net....................................... 21,271 270,630 381,060
Total assets............................... 29,803 313,637 398,951
Long-term debt............................. -- 295,000 266,714
Excess of assets over liabilities.......... 28,282
Members' deficit........................... (9,901)
Partners' capital.......................... 122,029
OPERATING DATA (UNAUDITED):
Harvest volumes (MBF):
Used in log and stumpage sales(h).......... 22,989 46,770 46,770
Used in chip sales......................... 3,168 1,589 1,589
Total..................................... 26,157 48,359 48,359
Sales volumes:
Log and stumpage sales (MBF)(h)............ 22,846 46,770 46,770
Timber and property sales (MBF)............ -- 11,045 11,045
Chip sales (BDT)........................... 14,879 4,739 4,739
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial and
operating data after August 30, 1996 are not comparable to financial and
operating data of the Predecessor. See the financial statements of the
Company and accompanying notes included elsewhere in this Prospectus for
additional information.
(b) The Company's pro forma consolidated financial and operating data are
derived from the unaudited pro forma consolidated financial statements of
the Company included elsewhere in this Prospectus.
(c) Includes $2,800 paid to an affiliate for management services. The Company
does not intend to pay such management fees subsequent to completion of the
Transactions.
(d) Reflects the General Partner's 1% minority interest in USTK's pro forma net
income (loss).
(e) Pro forma loss per Unit is computed by dividing the limited partners' 99%
interest in net loss by the number of Units expected to be outstanding at
the closing of this offering.
(f) EBITDDA is defined as operating income plus depreciation, depletion and
amortization and cost of timber and property sales. EBITDDA should not be
considered as an alternative to net income, operating income, cash flows
from operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles.
EBITDDA is not intended to represent cash flow and does not represent the
measure of cash available for distribution, but provides additional
information for evaluating the Company's ability to make the Minimum
Quarterly Distribution. In addition, EBITDDA does not necessarily represent
funds available for management's discretionary use as it is calculated
prior to debt service obligations and capital expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Description of Indebtedness."
(g) Maintenance capital expenditures include the replacement of property, plant
and equipment, capitalized seed orchard and nursery costs and additions to
timber, timberlands and logging roads.
(h) The Company had no stumpage sales prior to April 1997.
9
<PAGE>
SUMMARY OF RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which the Company will be
subject are similar to those that would be faced by a corporation engaged in a
similar business. Prospective purchasers of the Common Units should consider
the following risk factors in evaluating an investment in the Common Units.
RISKS INHERENT IN AN INVESTMENT IN THE COMPANY
. The Minimum Quarterly Distribution is not guaranteed. The actual amount
of cash distributions may fluctuate and will depend on the Company's
future operating performance. Cash distributions are dependent primarily
on cash flow, including cash flow from reserves and working capital
borrowings, and not solely on profitability, which is affected by non-
cash items. Therefore, cash distributions might be made during periods
when the Company records losses and might not be made during periods when
the Company records profits. Decisions of the General Partner with
respect to the amount and timing of cash expenditures, borrowings,
issuances of additional Units and reserves will affect the amount of
Available Cash. Because the business of the Company is seasonal, it is
likely that the General Partner will make additions to reserves during
certain quarters in order to fund operating expenses, interest and
principal payments and cash distributions to Unitholders with respect to
other quarters.
. On a pro forma basis, the Company would have had a substantial cash flow
deficit during 1996. Consequently, on a pro forma basis, the Company
would have been unable to make any distributions for such year from
operating cash flow on any of the Common Units offered hereby or on any
of the Subordinated Units.
. The Notes and the Bank Credit Facility effectively will prohibit the
Company from making distributions to Unitholders during an event of
default and from distributing to Unitholders the proceeds of harvests in
excess of specified levels. The Notes will also effectively prohibit the
Company, with respect to any quarter that the Consolidated Fixed Charge
Coverage Ratio (as defined in the indenture governing the Notes) is equal
to or less than 1.75 to 1.00, from distributing to Unitholders more than
$7.5 million less the aggregate amount of distributions made with respect
to any of the immediately preceding 16 quarters during which the
Consolidated Fixed Charge Coverage Ratio was equal to or less than 1.75
to 1.00.
. The Klamath Falls and Ochoco Timberlands, prior to their acquisition by
the Company, had been part of Weyerhaeuser and Ochoco, respectively, and
had not been operated as separate businesses or divisions. In addition,
prior to the Company's acquisition of the Timberlands, sales from the
Timberlands were generally made to affiliated conversion facilities and
not to unaffiliated customers. Although the Company has operated the
Klamath Falls Timberlands since September 1996, and sales during such
period have been made exclusively to unaffiliated customers, there can be
no assurance that the Company will be able to manage successfully the
Timberlands as a separate business on a profitable basis. For the years
ended December 31, 1994 and 1995 and the eight-month period ended August
29, 1996, the Company had net income of $9.9 million, $11.6 million and
$2.7 million, respectively. Since the Weyerhaeuser Acquisition, the
Company has had net losses of $13.0 million and $5.8 million for the
four-month period ended December 31, 1996 and the six months ended June
30, 1997, respectively. On a pro forma basis, the Company would have had
net losses of $25.7 million and $5.2 million for the year ended December
31, 1996 and the six months ended June 30, 1997, respectively.
. In establishing the terms of this offering, including the number and
initial offering price of the Common Units, the number of Subordinated
Units to be received by certain affiliates of the General Partner and the
Minimum Quarterly Distribution, the Company has relied on certain
assumptions concerning its operations. Whether the assumptions are
realized is not, in many cases, within the control of the Company
10
<PAGE>
and cannot be predicted with any degree of certainty. In the event that
the Company's assumptions are not realized, the actual Available Cash from
Operating Surplus generated by the Company could be substantially less
than that currently expected.
. On a pro forma basis as of June 30, 1997, the Company's total long-term
indebtedness would have been approximately $266.7 million, representing
approximately 68% of the Company's total capitalization. As a result, the
Company will be significantly leveraged and will have indebtedness that
is substantial in relation to its equity capital. The Company's leverage
may adversely affect the ability of the Company to finance its future
operations and capital needs, limit its ability to pursue acquisitions
and other business opportunities and make its results of operations more
susceptible to adverse economic or operating conditions. In addition, the
Company will have approximately $74.9 million of unused borrowing
capacity under the Bank Credit Facility at the closing of this offering.
Future borrowings could result in a significant increase in the Company's
leverage.
. The General Partner will manage and operate the Company. Holders of
Common Units will have no right to elect the General Partner on an annual
or other continuing basis, and will have only limited voting rights on
matters affecting the Company's business. The General Partner may not be
removed except pursuant to the vote of the holders of at least 66 2/3% of
the outstanding Units (including Units owned by the General Partner and
its affiliates) and upon the election of a successor general partner by
the holders of at least a Unit Majority. The ownership of Subordinated
Units by certain affiliates of the General Partner effectively gives the
General Partner the ability to prevent its removal. As a result, holders
of Common Units will have limited influence on matters affecting the
operations of the Company.
. Subject to certain limitations, the Company may issue additional Common
Units and other interests in the Company, the effect of which may be to
dilute the value of the interests of the then-existing holders of Common
Units in the net assets of the Company, dilute the interests of holders
of Common Units in distributions by the Company, reduce the support
provided by the subordination feature of the Subordinated Units or to
make it more difficult for a person or group to remove the General
Partner or otherwise change the management of the Company.
. The Partnership Agreement contains certain provisions that may have the
effect of discouraging a person or group from attempting to remove the
General Partner or otherwise change the management of the Company. The
effect of these provisions may be to diminish the price at which the
Common Units will trade under certain circumstances.
. Purchasers of Common Units in this offering will experience substantial
and immediate dilution in net tangible book value of $11.52 per Common
Unit from the initial public offering price (assuming an initial offering
price of $21.00 per Common Unit).
. Prior to making any distribution on the Common Units, the Company will
reimburse the General Partner and its affiliates (including officers and
directors of the General Partner) for all expenses incurred by the
General Partner and its affiliates on behalf of the Company rather than
by the Company directly, which expenses are determined by the General
Partner in its sole discretion. In addition, the General Partner and its
affiliates may provide services to the Company for which the Company will
be charged reasonable fees as determined by the General Partner. The
reimbursement of such expenses and the payment of any such fees could
adversely affect the ability of the Company to make distributions.
. The net proceeds from this offering will be used to repay indebtedness of
the Company's subsidiary operating company. Certain of such indebtedness
was incurred by affiliates of the General Partner.
. Prior to this offering, there has been no public market for the Common
Units. The initial public offering price for the Common Units will be
determined through negotiations between the General Partner and the
representatives of the Underwriters. No assurance can be given as to the
market prices at which the Common Units will trade.
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. If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by
persons other than the General Partner and its affiliates, the General
Partner will have the right, which it may assign to any of its affiliates
or the Company, to acquire all, but not less than all, of the remaining
limited partner interests of such class held by such unaffiliated persons
at a price generally equal to the then-current market price of limited
partner interests of such class. As a consequence, a holder of Common
Units may be required to sell his Common Units at a time when he may not
desire to sell them or at a price that is less than the price he would
desire to receive upon such sale. A holder may also incur a tax liability
upon such sale.
. Under certain circumstances, holders of the Common Units could lose their
limited liability and could become liable for amounts improperly
distributed to them by the Company.
. The holders of the Common Units have not been represented by counsel in
connection with this offering, including the preparation of the
Partnership Agreement or the other agreements referred to herein or in
establishing the terms of this offering.
RISKS INHERENT IN THE COMPANY'S BUSINESS
. The Company's results of operations are, and will continue to be,
affected by the cyclical nature of the forest products industry. Prices
and demand for logs have been, and in the future can be expected to be,
subject to cyclical fluctuations.
. Various factors, including environmental and endangered species concerns,
have limited, and are likely to continue to limit, the amount of timber
offered for sale by certain United States government agencies, which
historically have been major suppliers of timber to the United States
forest products industry. Although the Company believes that sales of
timber by United States government agencies are likely to remain at
relatively low levels for the foreseeable future, any reversal of policy
that substantially increases such sales could significantly reduce prices
for logs, which could have a material adverse effect on the Company.
. Revenues, net income and cash flow from the Company's operations will be
dependent to a significant extent on its ability to harvest timber at
adequate levels. The Company's business, including the ability to harvest
its timber, may be affected by various factors, including environmental
and endangered species concerns, federal and state regulations,
limitations on access across public lands and damage by fire, insect
infestation and other natural causes. There can be no assurance that one
or more of these factors will not prevent the Company from achieving
future harvest levels necessary to maintain or increase revenues, net
income or cash flows.
. The forest products industry is highly competitive in terms of price and
quality. Many of the Company's competitors have substantially greater
financial and operating resources than the Company. Wood products are
subject to increasing competition from a variety of non-wood products,
which affects the demand for logs. In addition, competition from imported
logs and end-use wood products from foreign sources into the United
States may adversely affect the demand and prices for the Company's logs.
To the extent there is a significant increase in competitive pressures,
the Company's results of operations could be materially and adversely
affected.
. The Company intends to pursue acquisitions as one means of increasing the
value of the Company's Units and its cash flow. The Company cannot
predict whether it will be successful in consummating any such
acquisitions or what the consequences of any such acquisitions would be.
Moreover, there can be no assurance that general economic or industry
conditions will be conducive to the Company's acquisition strategy, that
the Company will be able to identify and acquire any such assets or
businesses on economically acceptable terms, that any acquisitions will
not be dilutive to earnings and distributions to the Unitholders or that
any additional debt incurred to finance an acquisition will not affect
the ability of the Company to make distributions to the Unitholders.
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. The Company believes that its success will depend to a significant extent
upon the efforts and abilities of its senior operating management team.
The failure by the General Partner to retain the key members of its
senior operating management team could adversely affect the financial
condition or results of operations of the Company.
. The Company currently derives a significant portion of its revenues from
sales of timber to certain key customers. Between August 29, 1996 (the
date of the Weyerhaeuser Acquisition), and June 30, 1997, four of these
customers, Collins, Boise Cascade Corporation, WTD Lumber Company and
Crown Pacific Partners, L.P., purchased timber representing approximately
37%, 17%, 13% and 10%, respectively, of the Company's revenues. Collins
made its purchases pursuant to the 10-year Collins Supply Agreement,
while the other purchases were made pursuant to short-term arrangements.
The loss of these or other significant customers could materially
adversely affect the Company's results of operations.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
. The General Partner and its affiliates may have conflicts of interest
with the Company and its limited partners. The Partnership Agreement
contains certain provisions that limit the liability and reduce the
fiduciary duties of the General Partner to the Unitholders, as well as
provisions that may restrict the remedies available to Unitholders for
actions that might, without such limitations, constitute breaches of
fiduciary duty. Holders of Common Units are deemed to have consented to
certain actions and conflicts of interest that might otherwise be deemed
a breach of fiduciary or other duties under applicable state law.
. Decisions of the General Partner with respect to the amount and timing of
timber harvests, stumpage sales, property sales, cash expenditures,
borrowings, issuances of additional Units and creation of reserves in any
quarter will affect whether, or the extent to which, there is sufficient
Available Cash from Operating Surplus to meet the Minimum Quarterly
Distribution and Target Distribution Levels on all Units in a given
quarter. In addition, actions by the General Partner may have the effect
of enabling the General Partner to receive distributions on the
Subordinated Units or Incentive Distributions or hastening the expiration
of the Subordination Period or the conversion of Subordinated Units into
Common Units.
. The Partnership Agreement provides that the General Partner will
generally be restricted from engaging in any business activities other
than those incidental to its ownership of interests in the Company.
Following the closing of this offering, the General Partner's affiliates
will be restricted from engaging in certain business activities in North
America that are in competition with the Company. There can be no
assurance that there will not be competition between the Company and
affiliates of the General Partner in the future.
TAX RISKS
. The availability to a Common Unitholder of the federal income tax
benefits of an investment in the Company depends on the classification of
the Company as a partnership for federal income tax purposes. Assuming
the accuracy of certain factual matters as to which the General Partner
and the Company have made representations, Andrews & Kurth L.L.P.,
special counsel to the General Partner and the Company, is of the opinion
that, under current law, the Company will be classified as a partnership
for federal income tax purposes.
. No ruling has been requested from the Internal Revenue Service (the
"IRS") with respect to classification of the Company as a partnership for
federal income tax purposes or any other matter affecting the Company.
. A Unitholder will be required to pay income taxes on his allocable share
of the Company's income, whether or not he receives cash distributions
from the Company.
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. Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such
persons. For example, much of the taxable income derived by most
organizations exempt from federal income tax (including individual
retirement accounts ("IRAs") and other retirement plans) from the
ownership of a Common Unit will be unrelated business taxable income and
thus will be taxable to such a Unitholder.
. In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the
Company will generally only be available to offset future income
generated by the Company and cannot be used to offset income from other
activities, including other passive activities or investments. Passive
losses which are not deductible because they exceed the Unitholder's
income generated by the Company may be deducted in full when the
Unitholder disposes of his entire investment in the Company in a fully
taxable transaction to an unrelated party.
. The Company will be registered with the Secretary of the Treasury as a
"tax shelter." No assurance can be given that the Company will not be
audited by the IRS or that tax adjustments will not be made. Any
adjustments in the Company's tax returns will lead to adjustments in the
Unitholders' tax returns and may lead to audits of the Unitholders' tax
returns and adjustments of items unrelated to the Company.
. A Unitholder will likely be required to file state and local income tax
returns and pay state and local income taxes in some or all of the
various jurisdictions in which the Company does business or owns
property. The Company will initially own property and conduct business in
Oregon, which imposes a personal income tax.
See "Risk Factors," "Cash Distribution Policy," "Cash Available for
Distribution," "Conflicts of Interest and Fiduciary Responsibilities," "The
Partnership Agreement" and "Tax Considerations" for a more detailed description
of these and other risk factors and conflicts of interest that should be
considered in evaluating an investment in the Common Units.
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CASH AVAILABLE FOR DISTRIBUTION
Based on the amount of working capital that the Company is expected to have
at the time it commences operations and the availability of the Working Capital
Facility, the Company believes that, if its assumptions about operating
conditions are realized, the Company should have sufficient Available Cash from
Operating Surplus to enable the Company to distribute the Minimum Quarterly
Distribution on the Common Units and Subordinated Units to be outstanding
immediately after the consummation of this offering, and the related
distribution on the combined 2% interest of the General Partner, with respect
to each of its quarters at least through the quarter ending December 31, 1998.
However, no assurance can be given respecting such distributions or any future
distributions. The Company's belief is based on a number of assumptions,
including the assumptions (i) that there will be an increase of 4% in average
realized log or stumpage prices in 1998 from those realized during 1997, (ii)
that the Company will be able to harvest the timber volumes (including stumpage
sales) reflected in its harvest plan, (iii) that the Company will be able to
complete the sale of certain properties that it has identified for aggregate
gross proceeds of at least $9.6 million, (iv) that there will be no regulatory
changes that materially adversely affect the Company's operations, (v) that
there will be no significant change in the rate of inflation and (vi) that the
market and overall economic conditions will not change substantially. Although
the Company believes such assumptions are within a range of reasonableness,
whether the assumptions are realized is not, in a number of cases, within the
control of the Company and cannot be predicted with any degree of certainty. If
the Company's assumptions, particularly with respect to prices, harvest volumes
or property sales, are not realized, Available Cash from Operating Surplus
generated by the Company could be substantially less than that currently
expected and could therefore be insufficient to permit the Company to make
distributions at the levels described above. See "Risk Factors--The Company's
Assumptions Concerning Future Operations May Not Be Realized." In addition, the
terms of the Company's indebtedness under certain circumstances will restrict
the ability of the Company to distribute cash to Unitholders. Accordingly, no
assurance can be given that distributions of the Minimum Quarterly Distribution
or any other amounts will be made. See "Cash Distribution Policy," "Cash
Available for Distribution" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The amount of Available Cash from Operating Surplus needed to distribute the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units to be outstanding immediately after this offering and on the
combined 2% interest of the General Partner is approximately $24.2 million
($14.9 million for the Common Units, $8.8 million for the Subordinated Units
and $0.5 million for the combined 2% interest of the General Partner). If the
Underwriters' over-allotment option is exercised in full, such amounts will be
$17.2 million for the Common Units, $8.8 million for the Subordinated Units and
$0.5 million for the combined 2% interest of the General Partner, or an
aggregate of approximately $26.5 million. Available Cash from Operating Surplus
as defined in the Partnership Agreement is a cash accounting concept, while the
Company's historical and pro forma financial statements have been prepared on
an accrual basis. As a consequence, the Company's pro forma cash flow
information derived from the Company's pro forma financial statements should
only be viewed as a general indication of the amount of Available Cash from
Operating Surplus that might in fact have been generated by the Company had it
been formed in earlier periods. On a pro forma basis, the Company would have
had a deficit in its cash flow (pro forma EBITDDA less pro forma interest
expense and pro forma maintenance capital expenditures) during 1996 of
approximately $18 million. Consequently, on a pro forma basis, the Company
would have been unable to make any distributions for such year from operating
cash flow on any of the Common Units offered hereby, any of the Subordinated
Units or the related distribution on the combined 2% interest of the General
Partner. The pro forma adjustments are based upon currently available
information and certain estimates and assumptions. The pro forma financial
statements do not purport to present the results of operations of the Company
had the Transactions actually been completed as of the dates indicated.
The Company does not believe, however, that the pro forma operating results
for 1996 are indicative of its ability to generate cash from the Timberlands in
1997 and beyond for several reasons. Most significantly, the
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pro forma results of operations for 1996 do not reflect any revenues from the
Ochoco Timberlands, which contain large quantities of higher valued, mature
timber that the Company intends to harvest over the next several years. The
Company believes it will be able to operate the Ochoco Timberlands without a
commensurate increase in overhead costs. In addition, the pro forma results of
operations for 1996 reflect eight months of operations by Weyerhaeuser, which
managed the Klamath Falls Timberlands significantly differently from the
Company, and a four-month transitional period of operations by the Company
during which the Company did not have sufficient time to realize the benefits
of implementing its strategy. The principal difference between Weyerhaeuser's
operations and the Company's operations is that while Weyerhaeuser delivered a
majority of its harvested logs to its own plywood facility, the Company does
not own any conversion facilities and sells its entire harvest to unaffiliated
conversion facilities. The Company has therefore developed a flexible marketing
strategy intended to enable it to structure sales of timber assets in various
ways (as sales of logs, stumpage sales, timber deed sales or land sales or
exchanges) depending upon the needs of its customers and current market
conditions in order to manage its Available Cash. Furthermore, under
Weyerhaeuser's management, approximately half of the harvesting and delivery of
logs on the Klamath Falls Timberlands were conducted by Weyerhaeuser employees.
In contrast, the Company uses independent contractors to conduct such
activities, which the Company believes will result in a significant reduction
in logging and hauling costs per MBF. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--General." As discussed above,
however, the Company has a limited operating history and no assurances can be
given that the Company will generate sufficient Available Cash from Operating
Surplus to pay the Minimum Quarterly Distribution on all the Units. See "Risk
Factors--Risks Inherent in an Investment in the Company--Cash Distributions Are
Not Guaranteed, May Fluctuate with Company Performance and Are Limited by Debt
Instruments", and "--The Company's Assumptions Concerning Future Operations May
Not Be Realized."
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COMPANY STRUCTURE AND MANAGEMENT
The operations of the Company will be conducted through, and the operating
assets will be owned by, USTK, as the Operating Company. Upon consummation of
the Transactions, the Company will own a 98.9899% member interest in the
Operating Company and the General Partner will own a 1% general partner
interest in the Company and a 1.0101% managing member interest in the Operating
Company. The General Partner therefore will own an aggregate 2% interest in the
Company and the Operating Company on a combined basis.
Following this offering, the senior executives who currently manage USTK and
Old Services will manage and operate the Company's business as the senior
executives of the General Partner. The General Partner will not receive any
management fee or other compensation in connection with its management of the
Company, but will be reimbursed for all direct and indirect expenses incurred
on behalf of the Company and all other necessary or appropriate expenses
allocable to the Company or otherwise reasonably incurred by the General
Partner in connection with the operation of the Company's business.
Conflicts of interest may arise between the General Partner and its
affiliates, on the one hand, and the Company, the Operating Company and the
Unitholders, on the other, including conflicts relating to the compensation of
the directors, officers and employees of the General Partner and the
determination of fees and expenses that are allocable to the Company. The
General Partner will have a conflicts committee (the "Conflicts Committee"),
consisting of two independent members of its Board of Directors, that will be
available at the General Partner's discretion to review matters involving
conflicts of interest. See "Management" and "Conflicts of Interest and
Fiduciary Responsibilities."
The principal executive offices of the Company and the Operating Company are
located at 6400 Highway 66, Klamath Falls, Oregon 97601. The telephone number
at such offices is (541) 884-2240. The principal executive offices of the
General Partner are located at 625 Madison Avenue, Suite 10-B, New York, New
York 10022. The telephone number at such offices is (212) 755-1100.
The following charts depict the organization and ownership of (i) USTK and
Old Services prior to the consummation of the Transactions and (ii) the Company
and the Operating Company immediately after giving effect to the consummation
of the Transactions, including the sale of the Common Units offered hereby, and
assuming that the Underwriters' over-allotment option is not exercised. The
percentages reflected in the second chart represent the approximate ownership
interest in each of the Company and the Operating Company individually and not
on an aggregate basis. Except in the second chart, the ownership percentages
referred to in this Prospectus reflect the approximate effective ownership
interest of the Unitholders in the Company and the Operating Company on a
combined basis. The 2% ownership percentage of the General Partner referred to
in this Prospectus reflects the approximate effective ownership interest of the
General Partner in the Company and the Operating Company on a combined basis.
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CURRENT OWNERSHIP STRUCTURE
[FLOW CHART]
- ---------------
/1./ 100% of the equity interests in Rudey Timber L.L.C. are owned, directly or
indirectly, by John M. Rudey, the Chairman of the Board of the General
Partner.
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[FLOW CHART]
- ---------------
/1/ 100% of the equity interests in Old Services will be owned, directly or
indirectly, by John M. Rudey, the Chairman of the Board of the General
Partner.
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THE OFFERING
Securities Offered..........
7,458,684 Common Units (8,577,487 Common Units if
the Underwriters' over-allotment option is
exercised in full).
Units to be Outstanding
After This Offering........
7,458,684 Common Units and 4,407,404 Subordinated
Units, representing an aggregate 61.6% and 36.4%
limited partner interest in the Company,
respectively. If the Underwriters' over-allotment
option is exercised in full, 1,118,803 additional
Common Units will be issued by the Company,
resulting in there being 8,577,487 Common Units
and 4,407,404 Subordinated Units outstanding,
representing a 64.7% and 33.3% limited partner
interest in the Company, respectively.
Distributions of Available
Cash....................... Available Cash will generally be distributed 98%
to Unitholders and 2% to the General Partner
within 45 days after the end of each quarter. If
distributions of Available Cash from Operating
Surplus exceed specified target levels ("Target
Distribution Levels") in excess of the Minimum
Quarterly Distribution, the General Partner will
receive a percentage of such excess distributions
that will increase to up to 50% of the excess
distributions above the highest Target
Distribution Level. See "Cash Distribution
Policy--Incentive Distributions--Hypothetical
Annualized Yield."
Distributions to Common and
Subordinated Unitholders... The Company intends, to the extent there is
sufficient Available Cash from Operating Surplus,
to distribute to each holder of Common Units at
least the Minimum Quarterly Distribution of $0.50
per Common Unit per quarter. The Minimum
Quarterly Distribution is not guaranteed and is
subject to adjustment as described under "Cash
Distribution Policy--Adjustment of Minimum
Quarterly Distribution and Target Distribution
Levels."
The first distribution to the Unitholders will be
made within 45 days after the quarter ending
March 31, 1998. The Minimum Quarterly
Distribution for the period from the closing of
this offering through March 31, 1998 will be
adjusted upward based on the actual length of
such period.
With respect to each quarter during the
Subordination Period, which will generally not
end prior to December 31, 2002, the Common
Unitholders will generally have the right to
receive the Minimum Quarterly Distribution, plus
any arrearages thereon ("Common Unit
Arrearages"), and the General Partner will have
the right to receive the related distribution on
its interest, before any distribution of
Available Cash from Operating Surplus is made to
the Subordinated Unitholders. This subordination
feature will enhance the Company's ability to
distribute the Minimum Quarterly Distribution on
the Common Units during the Subordination Period.
In addition, no distributions of Available Cash
from Operating Surplus may be
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made on the Subordinated Units with respect to
any quarter if the Consolidated Fixed Charge
Coverage Ratio (as defined in the Partnership
Agreement) for the four-quarter period ended with
such quarter is equal to or less than 1.75 to
1.00. Subordinated Units will not accrue
distribution arrearages. Upon expiration of the
Subordination Period, Common Units will no longer
accrue distribution arrearages. See "Cash
Distribution Policy."
Subordination Period........
The Subordination Period will generally extend
from the closing of this offering until the first
day of any quarter beginning after December 31,
2002 in respect of which (i) distributions of
Available Cash from Operating Surplus on the
Common Units and the Subordinated Units with
respect to each of the three consecutive four-
quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the outstanding
Common Units and Subordinated Units during such
periods, (ii) the Adjusted Operating Surplus
generated during each of the three consecutive
four-quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the Common Units
and Subordinated Units that were outstanding
during such period on a fully diluted basis and
the related distribution on the general partner
interest in the Company, and (iii) there are no
outstanding Common Unit Arrearages. Upon
expiration of the Subordination Period, all
remaining Subordinated Units will convert into
Common Units on a one-for-one basis and will
thereafter participate pro rata with the other
Common Units in distributions of Available Cash.
See "Cash Distribution Policy--Distribution from
Operating Surplus during Subordination Period."
Early Conversion of
Subordinated Units.........
Up to one-half of the Subordinated Units may
convert into Common Units prior to the end of the
Subordination Period. A portion of the
Subordinated Units will convert into Common Units
on the first day after the record date
established for the distribution in respect of
any quarter ending on or after (a) December 31,
2000 (with respect to one-quarter of the
Subordinated Units) and (b) December 31, 2001
(with respect to one-quarter of the Subordinated
Units), in respect of which (i) distributions of
Available Cash from Operating Surplus on the
Common Units and the Subordinated Units with
respect to each of the three consecutive four-
quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the outstanding
Common Units and Subordinated Units during such
periods, (ii) the Adjusted Operating Surplus
generated during each of the two consecutive
four-quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the Common Units
and Subordinated Units that were outstanding
during such period on a fully diluted basis and
the related distribution on the General Partner's
interest in the Company, and (iii) there are no
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outstanding Common Unit Arrearages; provided,
however, that the early conversion of the second
one-quarter of Subordinated Units may not occur
until at least one year following the early
conversion of the first one-quarter of
Subordinated Units. See "Cash Distribution
Policy--Distributions from Operating Surplus
during Subordination Period."
Incentive Distributions..... If quarterly distributions of Available Cash
exceed the Target Distribution Levels, the
General Partner will receive distributions which
are generally equal to 15%, then 25% and then 50%
of the distributions of Available Cash that
exceed such Target Distribution Levels. The
Target Distribution Levels are based on the
amounts of Available Cash from Operating Surplus
distributed with respect to a given quarter that
exceed distributions made with respect to the
Minimum Quarterly Distribution and Common Unit
Arrearages, if any. See "Cash Distribution
Policy--Incentive Distributions--Hypothetical
Annualized Yield." The distributions to the
General Partner described above that are in
excess of its combined 2% interest are referred
to herein as the "Incentive Distributions."
Adjustment of Minimum
Quarterly Distribution and
Target Distribution
Levels.....................
The Minimum Quarterly Distribution and the Target
Distribution Levels are subject to downward
adjustments in the event that the Unitholders
receive distributions of Available Cash from
Capital Surplus or legislation is enacted or
existing law is modified or interpreted by the
relevant governmental authority in a manner that
causes the Company to be treated as an
association taxable as a corporation or otherwise
taxable as an entity for federal, state or local
income tax purposes. If, as a result of
distributions of Available Cash from Capital
Surplus, the Unitholders receive a full return of
the initial public offering price of the Common
Units and any unpaid Common Unit Arrearages, the
distributions of Available Cash payable to the
General Partner and its affiliates will increase
to 50% of all amounts distributed thereafter. See
"Cash Distribution Policy--General,"
"--Distributions from Capital Surplus" and
"--Adjustment of Minimum Quarterly Distribution
and Target Distribution Levels."
Company's Ability to Issue
Additional Units...........
The Partnership Agreement generally authorizes
the Company to issue an unlimited number of
additional limited partner interests and other
equity securities of the Company for such
consideration and on such terms and conditions as
shall be established by the General Partner in
its sole discretion without the approval of the
Unitholders. During the Subordination Period,
however, the Company may not issue equity
securities ranking prior or senior to the Common
Units or an aggregate of more than 7,458,684
Common Units (excluding Common Units issued upon
the exercise of the Underwriters' over-allotment
option, upon conversion of Subordinated Units, in
connection with the repayment of certain
indebtedness or pursuant
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<PAGE>
to employee benefit plans) or an equivalent
number of securities ranking on a parity with the
Common Units, without the approval of the holders
of a Unit Majority. See "The Partnership
Agreement--Issuance of Additional Securities."
Limited Call Right.......... If at any time less than 20% of the issued and
outstanding Common Units are held by persons
other than the General Partner and its
affiliates, the General Partner may purchase all
of the remaining Common Units at a price
generally equal to the then current market price
of the Common Units. See "The Partnership
Agreement--Limited Call Right."
Limited Voting Rights....... Unitholders will not have voting rights except
with respect to the following matters, for which
the Partnership Agreement requires the approval
of at least a majority (and in certain cases a
greater percentage) of all of the holders of the
Subordinated Units and of all of the holders of
the Common Units: a sale or exchange of all or
substantially all of the Company's assets, the
removal or the withdrawal of the General Partner,
the election of a successor General Partner, a
dissolution or reconstitution of the Company, a
merger of the Company, issuance of limited
partner interests in certain circumstances,
approval of certain actions of the General
Partner (including the transfer by the General
Partner of its general partner interest or
Incentive Distribution Rights under certain
circumstances) and certain amendments to the
Partnership Agreement, including any amendment
that would cause the Company to be treated as an
association taxable as a corporation. Holders of
Subordinated Units will generally vote as a class
separate from the holders of Common Units. After
Subordinated Units convert into Common Units
(either upon termination of the Subordination
Period or upon early conversion), holders of such
Common Units will vote as a single class together
with the holders of the other Common Units. Under
the Partnership Agreement, the General Partner
generally will be permitted to effect amendments
to the Partnership Agreement that do not
adversely affect Unitholders. See "The
Partnership Agreement."
Loss of Voting Rights in
Certain Circumstances...... Any person or group (other than the General
Partner and its affiliates) that acquires
beneficial ownership of 20% or more of the Common
Units will lose its voting rights with respect to
all of its Common Units. See "The Partnership
Agreement--Change of Management Provisions."
Removal and Withdrawal of
the General Partner........ Subject to certain conditions, the General
Partner may be removed upon the approval of the
holders of at least 66 2/3% of the outstanding
Units (including Units held by the General
Partner and its affiliates) and the election of a
successor general partner by the vote of the
holders of at least a Unit Majority. A meeting of
holders of the Common Units may be called only by
the General Partner or by the holders of 20% or
more of the outstanding Common Units. The
ownership of the Subordinated Units by certain
affiliates of the
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General Partner effectively gives the General
Partner the ability to prevent its removal. The
General Partner has agreed not to voluntarily
withdraw as general partner of the Company and
the Operating Company prior to December 31, 2007,
subject to limited exceptions, without obtaining
the approval of at least a Unit Majority and
furnishing an Opinion of Counsel (as defined in
the Glossary). See "The Partnership Agreement--
Withdrawal or Removal of the General Partner" and
"--Meetings; Voting."
Consequences of Removal of
General Partner in Certain
Circumstances..............
If the General Partner is removed other than for
Cause, (i) the Subordination Period will end and
all outstanding Subordinated Units will
immediately convert into Common Units on a one-
for-one basis, (ii) any existing Common Unit
Arrearages will be extinguished and (iii) the
General Partner will have the right to convert
its general partner interest (and its right to
receive Incentive Distributions) into Common
Units or to receive cash in exchange for such
interests. See "The Partnership Agreement--Change
of Management Provisions."
Distributions Upon If the Company liquidates during the
Liquidation................ Subordination Period, under certain circumstances
holders of outstanding Common Units will be
entitled to receive more per Unit in liquidating
distributions than holders of outstanding
Subordinated Units. The per Unit difference will
be dependent upon the amount of gain or loss
recognized by the Company in liquidating its
assets and will be limited to the Unrecovered
Capital of a Common Unit and any Common Unit
Arrearages thereon. Under certain circumstances
there may be insufficient gain for the holders of
Common Units to fully recover all such amounts,
even though there may be cash available for
distribution to holders of Subordinated Units.
Following conversion of the Subordinated Units
into Common Units, all Units will be treated the
same upon liquidation of the Company. See "Cash
Distribution Policy--Distributions of Cash Upon
Liquidation."
Use of Proceeds.............
The net proceeds to the Company from the sale of
Common Units offered hereby will be approximately
$143.4 million, after deducting underwriting
discounts and commissions and other expenses of
this offering. The net proceeds of this offering
and the net proceeds from the Public Note
Offering will be applied to repay indebtedness of
the Operating Company (including accrued interest
and the Guarantee Fees) upon consummation of the
Transactions. The Company will use the net
proceeds from any exercise of the Underwriters'
over-allotment option to repay the indebtedness
incurred by the Operating Company under the
Acquisition Facility. See "Use of Proceeds."
Listing.....................
The Common Units have been approved for listing
on the Nasdaq National Market (the "Nasdaq").
Proposed Nasdaq Symbol...... "TIMBZ".
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SUMMARY OF TAX CONSIDERATIONS
The tax consequences of an investment in the Company to a particular investor
will depend in part on the investor's own tax circumstances. Each prospective
investor should consult his own tax advisor about the United States federal,
state and local tax consequences of an investment in Common Units.
The following is a brief summary of certain expected tax consequences of
owning and disposing of Common Units. The following discussion, insofar as it
relates to United States federal income tax laws, is based upon the opinion of
Andrews & Kurth L.L.P., special counsel to the General Partner and the Company
("Counsel"), described in "Tax Considerations." This summary is qualified by
the discussion in "Tax Considerations," particularly the qualifications on the
opinions of Counsel described therein.
PARTNERSHIP STATUS; CASH DISTRIBUTIONS
In the opinion of Counsel, the Company will be classified for federal income
tax purposes as a partnership, and the beneficial owners of Common Units will
generally be considered partners in the Company. Accordingly, the Company will
pay no federal income taxes, and a Common Unitholder will be required to report
in his federal income tax return his share of the Company's income, gains,
losses and deductions. In general, cash distributions to a Common Unitholder
will be taxable only if, and to the extent that, they exceed the tax basis in
his Common Units.
COMPANY ALLOCATIONS
In general, income and loss of the Company will be allocated to the General
Partner and the Unitholders for each taxable year in accordance with their
respective percentage interests in the Company, as determined annually and
prorated on a monthly basis and subsequently apportioned among the General
Partner and the Unitholders of record as of the opening of the first business
day of the month to which they relate, even though Unitholders may dispose of
their Units during the month in question. At any time that distributions are
made on the Common Units and not on the Subordinated Units, or that Incentive
Distributions are made to the General Partner, gross income will be allocated
to the recipients to the extent of such distribution. A Unitholder will be
required to take into account, in determining his federal income tax liability,
his share of income generated by the Company for each taxable year of the
Company ending within or with the Unitholder's taxable year even if cash
distributions are not made to him. As a consequence, a Unitholder's share of
taxable income of the Company (and possibly the income tax payable by him with
respect to such income) may exceed the cash actually distributed to him.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
The Company estimates that a purchaser of Common Units in this offering who
owns them through December 31, 2000, will be allocated, on a cumulative basis,
an amount of federal taxable income for such period that will be less than 30%
of the cash distributed with respect to that period. A majority of such taxable
income may be treated as capital gains (depending upon a Common Unitholder's
particular tax circumstances) as a result of an election to be made by the
Company pursuant to Section 631(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and as a result of timber transactions qualifying for
treatment under Section 631(b) of the Code. The Company further estimates that
for taxable years after the taxable year ending December 31, 2000, the taxable
income allocable to them will represent a significantly higher percentage (and
could in certain circumstances exceed the amount) of cash distributed to the
Unitholders. These estimates are based upon the assumption that the gross
income from operations will approximate the amount required to make the Minimum
Quarterly Distribution with respect to all Units and other assumptions with
respect to capital expenditures, cash flow and anticipated cash distributions.
These estimates and assumptions are subject to, among other things, numerous
business, economic, regulatory, competitive and political uncertainties which
are beyond the control of the Company, especially the assumed prices for logs
and lumber. Further, the estimates are based
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on current tax law and certain tax reporting positions that the Company intends
to adopt and with which the IRS could disagree. Accordingly, no assurance can
be given that the estimates will prove to be correct. The actual percentages
could be higher or lower than as described above and any differences could be
material. See "Tax Considerations--Tax Consequences of Unit Ownership--Ratio of
Taxable Income to Distributions," and "--Tax Treatment of Operations--Timber
Income."
BASIS OF COMMON UNITS
A Unitholder's initial tax basis for a Common Unit purchased in this offering
will generally be the amount paid for the Common Unit. A Unitholder's basis
will generally be increased by his share of Company income and decreased by his
share of Company losses and distributions.
LIMITATIONS ON DEDUCTIBILITY OF COMPANY LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any Company losses will only be
available to offset future income generated by the Company and cannot be used
to offset income from other activities, including passive activities or
investments. Any losses unused by virtue of the passive loss rules may be fully
deducted when the Unitholder disposes of all of his Common Units in a taxable
transaction with an unrelated party.
SECTION 754 ELECTION
The Company intends to make the election provided for by Section 754 of the
Code, which will generally result in a Unitholder being allocated income and
deductions calculated by reference to the portion of his purchase price
attributable to each asset of the Company.
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss equal to the
difference between the amount realized and the adjusted tax basis of those
Common Units. Thus, distributions of cash from the Company to a Unitholder in
excess of the income allocated to him will, in effect, become taxable income if
he sells the Common Units at a price greater than his adjusted tax basis even
if the price is less than his original cost. A portion of the amount realized
(whether or not representing gain) may be ordinary income.
CHANGES IN FEDERAL INCOME TAX LAWS
Legislation recently enacted as part of the Taxpayer Relief Act of 1997 (the
"TRA of 1997") alters the tax reporting system and the deficiency collection
system applicable to large partnerships that elect to have the provisions apply
and makes certain additional changes to the treatment of large partnerships.
The legislation contained in the TRA of 1997 is generally intended to simplify
the administration of the tax rules governing large partnerships. It is not
expected that the Company will elect to have these provisions apply because of
the cost of their application.
The TRA of 1997 also affects the taxation of certain financial products,
including partnership interests by treating a taxpayer as having sold an
"appreciated" partnership interest (one in which gain would be recognized if it
were sold, assigned or otherwise terminated at its fair market value) if the
taxpayer or related persons enter into a short sale of, enter into an
offsetting notional principal contract with respect to, enter into a futures or
forward contract to deliver, or in the case of an appreciated financial
position that is a short sale or offsetting notional principal or futures or
forward contract, acquire, the same or substantially identical property. The
Secretary of Treasury is also authorized to issue regulations that treat a
taxpayer that enters in transactions or positions that have substantially the
same effect as the preceding transactions as having constructively sold the
financial position.
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STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that are imposed by the
various jurisdictions in which a Unitholder resides or in which the Company
does business or owns property. Although an analysis of those various taxes is
not presented here, each prospective Unitholder should consider their potential
impact on his investment in the Company. The Company will initially own
property and conduct business in Oregon, which imposes a personal income tax.
In certain states, tax losses may not produce a tax benefit in the year
incurred (if, for example, the Company has no income from sources within that
state) and also may not be available to offset income in subsequent taxable
years. Some states may require the Company, or the Company may elect, to
withhold a percentage of income from amounts to be distributed to a Unitholder.
Withholding, the amount of which may be more or less than a particular
Unitholder's income tax liability owed to the state, may not relieve the
nonresident Unitholder from the obligation to file an income tax return.
Amounts withheld may be treated as if distributed to Unitholders for purposes
of determining the amounts distributed by the Company. Based on current law and
its estimate of future Company operations, the Company anticipates that any
amounts required to be withheld will not be material.
It is the responsibility of each prospective Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states and localities,
of his investment in the Company. Accordingly, each prospective Unitholder
should consult, and must depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each Unitholder
to file all U.S. federal, state and local tax returns that may be required of
such Unitholder. Counsel has not rendered an opinion on the state or local tax
consequences of an investment in the Company.
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
An investment in Common Units by tax-exempt organizations (including IRAs and
other retirement plans), regulated investment companies (mutual funds) and
foreign persons raises issues unique to such persons. Much of the income
allocated to a Unitholder which is a tax-exempt organization will be unrelated
business taxable income and, thus, will be taxable to such Unitholder; no
significant amount of the Company's gross income will be qualifying income for
purposes of determining whether a Unitholder will qualify as a regulated
investment company; and a Unitholder who is a nonresident alien, foreign
corporation or other foreign person will be regarded as being engaged in a
trade or business in the United States as a result of ownership of a Common
Unit and, thus, will be required to file federal income tax returns and to pay
tax on such Unitholder's share of Company taxable income. Furthermore,
distributions to foreign Unitholders will be subject to federal income tax
withholding. See "Tax Considerations--Tax-Exempt Organizations and Certain
Other Investors."
TAX SHELTER REGISTRATION
The Code generally requires that "tax shelters" be registered with the
Secretary of the Treasury. It is arguable that the Company is not subject to
this registration requirement. Nevertheless, the Company will be registered as
a tax shelter with the Secretary of the Treasury. ISSUANCE OF THE REGISTRATION
NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE COMPANY OR THE CLAIMED TAX
BENEFITS HAS BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. See "Tax
Considerations--Administrative Matters--Registration as a Tax Shelter."
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FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements and information that are
based on the beliefs of the Company and the General Partner, as well as
assumptions made by, and information currently available to, the Company and
the General Partner. All statements, other than statements of historical fact,
included in this Prospectus are forward-looking statements, including, but not
limited to, statements identified by the words "anticipate", "believe",
"estimate" and "expect" and similar expressions and statements regarding the
Company's business strategy, plans and objectives of management of the Company
for future operations. Such statements reflect the current views of the
Company and the General Partner with respect to future events, based on what
they believe are reasonable assumptions; however, such statements are subject
to certain risks, uncertainties and assumptions, including, but not limited
to, the risk factors described in this Prospectus. If one or more these risks
or uncertainties materialize, or if underlying assumptions prove incorrect,
actual results may vary materially from those in the forward-looking
statements. The Company does not intend to update these forward-looking
statements and information.
RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which the Company will be
subject are similar to those that would be faced by a corporation engaged in a
similar business. Prospective purchasers of the Common Units should consider
the following risk factors in evaluating an investment in the Common Units.
RISKS INHERENT IN AN INVESTMENT IN THE COMPANY
Cash Distributions Are Not Guaranteed, May Fluctuate with Company Performance
and Are Limited by Debt Instruments
Although the Company will distribute all of its Available Cash, there can be
no assurance regarding the amounts of Available Cash to be generated by the
Company and the Company cannot guarantee that the Minimum Quarterly
Distribution will be paid. The actual amounts of cash distributions may
fluctuate and will depend upon numerous factors, including cash flow generated
by operations, required principal and interest payments on the Company's debt,
the costs of acquisitions (including related debt service payments),
restrictions contained in the Company's debt instruments, issuances of debt
and equity securities by the Company, fluctuations in working capital, capital
expenditures, adjustments in reserves, prevailing economic conditions and
financial, business and other factors, a number of which will be beyond the
control of the Company and the General Partner. Cash distributions are
dependent primarily on cash flow, including from reserves and working capital
borrowings, and not solely on profitability, which is affected by non-cash
items. Therefore, cash distributions might be made during periods when the
Company records losses and might not be made during periods when the Company
records profits.
On a pro forma basis, the Company would have had a substantial cash flow
deficit during 1996. Consequently, on a pro forma basis, the Company would
have been unable to make any distributions for such year from operating cash
flow on any of the Common Units offered hereby or on any of the Subordinated
Units. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Cash Available for Distribution."
The Partnership Agreement gives the General Partner broad discretion in
establishing reserves for the proper conduct of the Company's business that
will affect the amount of Available Cash. Because the business of the Company
is seasonal, the General Partner will make additions to reserves during
certain quarters in order to fund operating expenses, interest and principal
payments and cash distributions to partners with respect to other quarters.
The effect of the establishment of such operating reserves is to increase the
likelihood that the Minimum Quarterly Distribution will be paid in any given
quarter but to decrease the likelihood that any amount in excess of the
Minimum Quarterly Distribution will be paid in such quarter. The Notes and the
Bank Credit Facility will
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prohibit the Company from making distributions to Unitholders during an event
of default and from distributing to Unitholders the proceeds of harvests in
excess of specified levels. The Notes will also effectively prohibit the
Company, with respect to any quarter that the Consolidated Fixed Charge
Coverage Ratio (as defined in the indenture governing the Notes) is equal to
or less than 1.75 to 1.00, from distributing to Unitholders more than $7.5
million less the aggregate amount of distributions made with respect to any of
the immediately preceding 16 quarters during which the Consolidated Fixed
Charge Coverage Ratio was equal to or less than 1.75 to 1.00. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Description of Indebtedness." Any subsequent refinancing of the
Notes, the Bank Credit Facility or any other indebtedness incurred by the
Company may have similar restrictions. As a result of these and other factors,
there can be no assurance regarding the actual levels of cash distributions to
Unitholders by the Company.
The Company Has a Limited Operating History; Recent Losses
The Klamath Falls Timberlands and the Ochoco Timberlands, prior to their
acquisition by the Company, had been part of Weyerhaeuser and Ochoco,
respectively, and had not been operated as separate businesses or divisions.
In addition, prior to the Company's acquisition of the Timberlands, sales from
the Timberlands were generally made to affiliated conversion facilities and
not to unaffiliated customers. Although the Company has operated the Klamath
Falls Timberlands since September 1996, and sales during such period have been
made exclusively to unaffiliated customers, there can be no assurance that the
Company will be able to manage successfully the Timberlands as a separate
business on a profitable basis. For the years ended December 31, 1994 and 1995
and the eight-month period ended August 29, 1996, the Company had net income
of $9.9 million, $11.6 million and $2.7 million, respectively. Since the
Weyerhaeuser Acquisition, the Company has had net losses of $13.0 million and
$5.8 million for the four-month period ended December 31, 1996 and the six
months ended June 30, 1997, respectively. On a pro forma basis, the Company
would have had net losses of $25.7 million and $5.2 million for the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively.
The Company's Assumptions Concerning Future Operations May Not Be Realized
In establishing the terms of this offering, including the number and initial
offering price of the Common Units, the number of Subordinated Units to be
received by certain affiliates of the General Partner and the Minimum
Quarterly Distribution, the Company has relied on certain assumptions
concerning its operations. These assumptions include, among others, that there
will be an increase of 4% in average realized log or stumpage prices in 1998
from those realized in 1997, that the Company will be able to harvest the
timber volumes (including stumpage sales) reflected in its harvest plan, that
the Company will be able to complete the sale of certain properties that it
has identified for aggregate gross proceeds of at least $9.6 million, that
there will be no material regulatory changes, that there will be no
significant change in the rate of inflation and that market and overall
economic conditions will not change substantially. Whether the assumptions are
realized is not, in many cases, within the control of the Company and cannot
be predicted with any degree of certainty. In the event that the Company's
assumptions are not realized, the actual Available Cash from Operating Surplus
generated by the Company could be substantially less than that currently
expected. See "Cash Available for Distribution."
The Company's Indebtedness May Affect its Operations
On a pro forma basis at June 30, 1997, the Company's total long-term
indebtedness would have been approximately $266.7 million, representing
approximately 68% of the Company's total capitalization. As a result, the
Company will be significantly leveraged and will have indebtedness that is
substantial in relation to its equity capital. Upon consummation of the
Transactions, the Company will have outstanding $225.0 million in Notes and
approximately $25.1 million in borrowings under the Acquisition Facility and
approximately $74.9 million of unused borrowing capacity under the Bank Credit
Facility. Future borrowings could result in a significant increase in the
Company's leverage. The ability of the Company to make principal and interest
payments depends on future performance, which performance is subject to many
factors, a number of which will be outside the
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Company's control. The Company's leverage may adversely affect the ability of
the Company to finance its future operations and capital needs, limit its
ability to pursue acquisitions and other business opportunities and make its
results of operations more susceptible to adverse economic or operating
conditions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Description of Indebtedness."
Unitholders Will Have Limited Voting Rights
The General Partner will manage and operate the Company. Unlike the holders
of common stock in a corporation, holders of Common Units will have only
limited voting rights on matters affecting the Company's business. Holders of
Common Units will have no right to elect the General Partner on an annual or
other continuing basis, and the General Partner may not be removed except
pursuant to the vote of the holders of at least 66 2/3% of the outstanding
Units (including Units owned by the General Partner and its affiliates) and
upon the election of a successor general partner by the vote of the holders of
at least a Unit Majority. The ownership of the Subordinated Units by certain
affiliates of the General Partner effectively gives the General Partner the
ability to prevent its removal. In addition, all of the other matters
requiring the approval of the Unitholders first require the support of the
General Partner and then require the approval of holders of at least a Unit
Majority. As a result, holders of Common Units will have limited influence on
matters affecting the operation of the Company. See "The Partnership
Agreement."
The Company May Issue Additional Common Units thereby Diluting Existing
Unitholders' Interests
During the Subordination Period, the General Partner has broad discretion,
without the approval of Unitholders, to cause the Company to issue up to an
additional 7,458,684 Common Units (in addition to Common Units issued upon
exercise of the Underwriters' over-allotment option, upon conversion of
Subordinated Units, in connection with the repayment of certain indebtedness
or pursuant to employee benefit plans) or an equivalent number of securities
ranking on a parity with the Common Units. The issuance during the
Subordination Period of Common Units or parity units in excess of the
foregoing would require the approval of a Unit Majority. After the end of the
Subordination Period, the Company may issue an unlimited number of limited
partner interests of any type (including interests ranking prior or senior to
the Common Units) without the approval of Unitholders. The Partnership
Agreement does not give the holders of Common Units the right to approve the
issuance by the Company of equity securities ranking junior to the Common
Units at any time. Based on the circumstances of each case, the issuance of
additional Common Units or securities ranking senior to or on a parity with
the Common Units may dilute the value of the interests of the then-existing
holders of Common Units in the net assets of the Company, dilute the interests
of holders of Common Units in distributions by the Company or make it more
difficult for a person or group to remove the General Partner or otherwise
change the management of the Company.
Issuance of Additional Common Units, Including Upon Conversion of
Subordinated Units, Will Increase Risk that the Company Will Be Unable to
Pay Full Minimum Quarterly Distribution on All Common Units
The distribution support provided by the Subordinated Units will be reduced
both by any increase in the number of outstanding Common Units, whether as a
result of conversion of Subordinated Units, exercise of the Underwriters'
over-allotment option or future issuances of Common Units, and by any decrease
in the number of outstanding Subordinated Units. Any of these actions will
increase the percentage of the aggregate Minimum Quarterly Distribution
payable to the Common Unitholders, thereby increasing the risk that the
Company will be unable to pay the Minimum Quarterly Distribution in full on
all the Common Units.
No Removal of the General Partner Without Its Consent
Following this offering, the ownership of Subordinated Units by certain
affiliates of the General Partner will effectively preclude the removal of the
General Partner without its consent. In addition, the Partnership Agreement
contains certain provisions that may have the effect of discouraging a person
or group from attempting to remove the General Partner or otherwise change the
management of the Company. If the General
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Partner is removed as general partner of the Company under circumstances where
Cause does not exist and Units held by the General Partner and its affiliates
are not voted in favor of such removal, (i) the Subordination Period will end
and all outstanding Subordinated Units will immediately convert into Common
Units on a one-for-one basis, (ii) any existing Common Unit Arrearages will be
extinguished and (iii) the General Partner will have the right to convert its
general partner interest (and its right to receive Incentive Distributions)
into Common Units or to receive cash in exchange for such interests. Further,
if any person or group (other than the General Partner or its affiliates)
acquires beneficial ownership of 20% or more of any class of Units then
outstanding, such person or group will lose voting rights with respect to all
of its Units. In addition, the Company has substantial latitude in issuing
equity securities without Unitholder approval. The Partnership Agreement also
contains provisions limiting the ability of Unitholders to call meetings of
Unitholders or to acquire information about the Company's operations as well
as other provisions limiting the Unitholders' ability to influence the manner
or direction of management. The effect of these provisions may be to diminish
the price at which the Common Units will trade under certain circumstances.
See "The Partnership Agreement--Withdrawal or Removal of the General Partner."
Purchasers of Common Units Will Experience Dilution
Purchasers of Common Units in this offering will experience substantial and
immediate dilution in net tangible book value of $11.52 per Common Unit from
the initial public offering price (assuming an initial public offering price
of $21.00 per Common Unit). See "Dilution."
Cost Reimbursements and Fees Due to the General Partner May Be Substantial
Prior to making any distribution on the Common Units, the Company will
reimburse the General Partner and its affiliates (including officers and
directors of the General Partner) for all expenses incurred by the General
Partner and its affiliates on behalf of the Company rather than by the Company
directly, which expenses are determined by the General Partner in its sole
discretion. In addition, the General Partner and its affiliates may provide
services to the Company for which the Company will be charged reasonable fees
as determined by the General Partner, and its affiliates may provide services
to the Company for which the Company will be charged reasonable fees as
determined by the General Partner. The reimbursement of such expenses and the
payment of any such fees could adversely affect the ability of the Company to
make distributions.
Proceeds from this Offering Will Be Used to Repay Indebtedness of the
Company's Subsidiary
The net proceeds from this offering will be used to repay indebtedness of
the Company's subsidiary operating company. Certain of such indebtedness was
incurred by affiliates of the General Partner.
No Prior Public Market for Common Units
Prior to this offering, there has been no public market for the Common
Units. The initial public offering price for the Common Units will be
determined through negotiations between the General Partner and the
representatives of the Underwriters. For a description of the factors to be
considered in determining the initial public offering price, see
"Underwriting." No assurance can be given as to the market prices at which the
Common Units will trade. The Common Units have been approved for listing on
the Nasdaq, under the symbol "TIMBZ."
The General Partner Will Have a Limited Call Right with Respect to the
Limited Partner Interests
If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by persons
other than the General Partner and its affiliates, the General Partner will
have the right, which it may assign to any of its affiliates or the Company,
to acquire all, but not less than all, of the remaining limited partner
interests of such class held by such unaffiliated persons at a price generally
equal to the then-current market price of limited partner interests of such
class. As a consequence, a
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holder of Common Units may be required to sell his Common Units at a time when
he may not desire to sell them or at a price that is less than the price he
would desire to receive upon such sale. A holder may also incur a tax
liability upon such sale. See "The Partnership Agreement--Limited Call Right."
Unitholders May Not Have Limited Liability in Certain Circumstances;
Liability for Return of Certain Distributions
The limitations on the liability of holders of limited partner interests for
the obligations of a limited partnership have not been clearly established in
some states. If it were determined that the Company had been conducting
business in any state without compliance with the applicable limited
partnership statute, or that the right or the exercise of the right by the
Unitholders as a group to remove or replace the General Partner, to make
certain amendments to the Partnership Agreement or to take other action
pursuant to the Partnership Agreement constituted participation in the
"control" of the Company's business, then the Unitholders could be held liable
in certain circumstances for the Company's obligations to the same extent as a
general partner. In addition, under certain circumstances a Unitholder may be
liable to the Company for the amount of a distribution for a period of three
years from the date of the distribution. See "The Partnership Agreement--
Limited Liability" for a discussion of the limitations on liability and the
implications thereof to a Unitholder.
Holders of Common Units Have Not Been Represented by Counsel
The holders of Common Units have not been represented by counsel in
connection with this offering, including the preparation of the Partnership
Agreement or the other agreements referred to herein or in establishing the
terms of this offering.
RISKS INHERENT IN THE COMPANY'S BUSINESS
Cyclicality of Forest Products Industry Will Affect the Company's Results of
Operations
The Company's results of operations are, and will continue to be, affected
by the cyclical nature of the forest products industry. Prices and demand for
logs have been, and in the future can be expected to be, subject to cyclical
fluctuations. The demand for logs is primarily affected by the level of new
residential construction activity, and, to a lesser extent, repair and
remodeling activity and other industrial uses, which are subject to
fluctuations due to changes in economic conditions, interest rates, population
growth, weather conditions and other factors. Decreases in the level of
residential construction activity will be reflected in reduced demand for
logs, which may result in lower revenues, profits and cash flows.
Timber Supply May Increase in the Future
Various factors, including environmental and endangered species concerns,
have limited, and are likely to continue to limit, the amount of timber
offered for sale by certain United States government agencies, which
historically have been major suppliers of timber to the United States forest
products industry. Federal timber under contract in Washington and Oregon
decreased approximately 88% from approximately 8.4 BBF in January 1988 to
approximately 1.0 BBF in January 1997.
Although the Company believes that sales of timber by United States
government agencies are likely to remain at relatively low levels for the
foreseeable future, any reversal of policy that substantially increases such
sales could significantly reduce prices for logs, which could have a material
adverse effect on the Company. Furthermore, increased imports from Canada (due
to the expiration in 2001 of the United States-Canada lumber trade agreement
or otherwise) and other foreign countries could reduce the prices the Company
receives for its timber.
The Company's Ability to Harvest Timber Will be Subject to Limitations
Revenues, net income and cash flow from the Company's operations will be
dependent to a significant extent on its ability to harvest timber at adequate
levels. There can be no assurance that the Company will in the
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<PAGE>
future achieve harvest levels necessary to maintain or increase revenues, net
income or cash flows. Weather conditions, timber growth cycles, access
limitations and regulatory requirements associated with the protection of
wildlife and water resources or any shortage of contract loggers may restrict
harvesting of the Timberlands, as may other factors, including damage by fire,
insect infestation, disease, prolonged drought and natural disasters. For
example in 1993, approximately 30,000 acres of the Timberlands had to be
partially salvaged due to an infestation of the fir engraver beetle. One or
more major fires on the Timberlands could adversely affect the Company's
operating results. Although damage from such causes usually is localized and
affects only a limited percentage of the timber, there can be no assurance
that any damage to the Timberlands will, in fact, be so limited. The risks to
the Company described above are somewhat heightened because of the
concentration of the Timberlands in central Oregon. As is typical in the
forest products industry, the Company does not maintain insurance coverage
with respect to damage to its timberlands. Even if such insurance were
available, the cost would be prohibitive.
A substantial portion of the Klamath Falls Timberlands consists of sections
of land that are intermingled with or adjacent to sections of federal land
managed by the United States Department of Agriculture--Forest Service
("USFS") and the United States Department of Interior Bureau of Land
Management ("BLM"). In many cases, access is only, or most economically,
achieved through a road or roads built across adjacent federal land. In order
to access such intermingled timberlands, the Company has in the past obtained
and will need to continue to obtain either temporary or permanent access
rights across these public lands. Although the Company currently has legal
access to substantially all of the merchantable timber included in the
Timberlands, this process has often been, and will likely continue to be,
affected by, among other things, the requirements of the Endangered Species
Act, the National Environmental Policy Act and the Clean Water Act. See
"Business and Properties--Federal and State Regulation."
The Company is Subject to Federal and State Environmental and Endangered
Species Regulation
The Company is subject to regulation under various environmental laws,
including the Endangered Species Act, as well as similar state laws and
regulations. The Endangered Species Act and state legislation protect species
threatened with possible extinction. A number of species indigenous to the
Timberlands have been and in the future may be protected under these laws,
including the northern spotted owl, bald eagle, northern goshawk and bull
trout. Protection of endangered and threatened species may include
restrictions or prohibitions on timber harvesting, road building and other
silvicultural activities on private, federal and state land containing the
affected species. See "Business and Properties--Federal and State Regulation."
Although the Company has identified bald eagle, northern spotted owl and
northern goshawk nesting areas on the Timberlands and the presence of bull
trout in certain of its streams, the Company, in cooperation with the Oregon
Department of Fish and Wildlife, has developed plans for managing such species
and does not believe that such plans will have a material adverse effect on
the Company's ability to harvest the Timberlands in accordance with current
harvest plans. There can be no assurance, however, that species on or around
the Timberlands may not subsequently receive protected status under the
Endangered Species Act or that currently protected species may not be
discovered in significant numbers on or around the Timberlands. Any such
changes could materially and adversely affect the results of operations of the
Company.
The Federal Water Pollution Control Act authorizes the regulation of wetland
areas. Timberlands within a wetlands area may be subject to access limitations
or prohibitions, and may involve the expenditure of substantial sums for the
protection of such wetland areas. The Federal Insecticide, Fungicide, and
Rodenticide Act regulates the use of pesticides that may be used in forestry
practices. Violations of various statutory and regulatory programs that apply
to the Company's operations can result in civil penalties, remediation
expenses, natural resource damages, potential injunctions, cease and desist
orders and criminal penalties. Some environmental statutes impose strict
liability, rendering a person liable for environmental damage without regard
to negligence or fault on the part of such person. There can be no assurance
that such laws or future legislation or administrative or judicial action with
respect to protection of the environment will not adversely affect the
Company.
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The Company Experiences Significant Competition
The forest products industry is highly competitive in terms of price and
quality. Many of the Company's competitors have substantially greater
financial and operating resources than the Company. Wood products are subject
to increasing competition from a variety of non-wood products, which affects
the demand for logs. In addition, competition from imported logs and end-use
wood products from foreign sources into the United States may adversely affect
the demand and prices for the Company's timber. To the extent there is a
significant increase in competitive pressures, the Company's results of
operations could be materially and adversely affected. See "Business and
Properties--The Timberlands--Competition."
Risks of Acquisition Strategy
The Company intends to pursue acquisitions as one means of increasing both
the value of the Company's Units and its cash flow. The Company cannot predict
whether it will be successful in consummating any such acquisitions or what
the consequences of any such acquisitions would be. Moreover, there can be no
assurance that general economic or industry conditions will be conducive to
the Company's acquisition strategy, that the Company will be able to identify
and acquire any such assets or businesses on economically acceptable terms,
that any acquisitions will not be dilutive to earnings and distributions to
Unitholders or that any additional debt incurred to finance an acquisition
will not affect the ability of the Company to make distributions to
Unitholders. The Company is subject to certain covenants in agreements
governing its indebtedness that might restrict the ability of the Company to
incur indebtedness to finance acquisitions. The Company currently has no
commitments to acquire any material assets.
The Company's acquisition strategy involves numerous risks, including
difficulties inherent in the integration of operations and systems, the
diversion of management's attention from other business concerns and the
potential loss of key employees of acquired businesses. In addition, future
acquisitions also may involve the expenditure of significant funds. Depending
upon the nature, size and timing of future acquisitions, the Company may be
required to secure additional financing. There is no assurance that such
additional financing will be available to the Company on acceptable terms.
The Company Will Be Dependent Upon Key Personnel
The Company believes that its success will depend to a significant extent
upon the efforts and abilities of its senior operating management team. The
failure by the General Partner to retain the key members of its senior
operating management team could adversely affect the financial condition or
results of operations of the Company.
Dependence on Certain Key Customers
The Company currently derives a significant portion of its revenues from
sales of timber to certain key customers. Between August 29, 1996 (the date of
the Weyerhaeuser Acquisition), and June 30, 1997, four of these customers,
Collins, Boise Cascade Corporation, WTD Lumber Company and Crown Pacific
Partners, L.P., purchased timber representing approximately 37%, 17%, 13% and
10%, respectively, of the Company's revenues. Collins made its purchases
pursuant to the 10-year Collins Supply Agreement, while the other purchases
were made pursuant to short-term arrangements. The loss of these or other
significant customers could materially adversely affect the Company's results
of operations.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of interest could arise as a result of the relationships between
the Company, on the one hand, and the General Partner and its affiliates, on
the other. The directors and officers of the General Partner have fiduciary
duties to manage the General Partner in a manner beneficial to its members. At
the same time, the General Partner has fiduciary duties to manage the Company
in a manner beneficial to the Company and the Unitholders. The duties of the
General Partner, as general partner, to the Company and the Unitholders,
therefore, may come into conflict with the duties of management of the General
Partner to its members. Certain affiliates of the General Partner will own all
of the outstanding Subordinated Units.
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Conflicts of interest might arise with respect to the following matters,
among others:
(i) Decisions of the General Partner with respect to the amount and
timing of timber harvests, stumpage sales, property sales, cash
expenditures, borrowings, issuances of additional Units and creation of
reserves in any quarter will affect whether, or the extent to which, there
is sufficient Available Cash from Operating Surplus to meet the Minimum
Quarterly Distribution and Target Distribution Levels on all Units in a
given quarter. In addition, actions by the General Partner may have the
effect of enabling the General Partner to receive distributions on the
Subordinated Units or Incentive Distributions or hastening the expiration
of the Subordination Period or the conversion of Subordinated Units into
Common Units.
(ii) The Company will not have any employees and will rely solely on
employees of the General Partner and its affiliates.
(iii) Under the terms of the Partnership Agreement, the Company will
reimburse the General Partner and its affiliates for costs incurred in
managing and operating the Company, including costs incurred in rendering
corporate staff and support services to the Company.
(iv) Whenever possible, the General Partner intends to limit the
Company's liability under contractual arrangements to all or particular
assets of the Company, with the other party thereto to have no recourse
against the General Partner or its assets.
(v) Any agreements between the Company and the General Partner and its
affiliates will not grant to the holders of Common Units, separate and
apart from the Company, the right to enforce the obligations of the General
Partner and such affiliates in favor of the Company. Therefore, the General
Partner, in its capacity as the general partner of the Company, will be
primarily responsible for enforcing such obligations.
(vi) Under the terms of the Partnership Agreement, the General Partner is
not restricted from causing the Company to pay the General Partner or its
affiliates for any services rendered on terms that are fair and reasonable
to the Company or entering into additional contractual arrangements with
any of such entities on behalf of the Company. Neither the Partnership
Agreement nor any of the other agreements, contracts and arrangements
between the Company, on the one hand, and the General Partner and its
affiliates, on the other, are or will be the result of arm's-length
negotiations.
(vii) The General Partner may exercise its right to call for and purchase
Units as provided in the Partnership Agreement or assign such right to one
of its affiliates or to the Company.
(viii) The Partnership Agreement provides that the General Partner will
generally be restricted from engaging in any business activities other than
those incidental to its ownership of interests in the Company. In addition,
affiliates of the General Partner are restricted from engaging in
Restricted Activities (as defined in the Glossary) in North America.
Affiliates may, however, engage in any other activity in competition with
the Company and may engage in Restricted Activities outside of North
America. There can be no assurance that there will not be competition
between the Company and affiliates of the General Partner in the future.
See "Conflicts of Interest and Fiduciary Responsibilities--Conflicts of
Interest--The General Partner's Affiliates May Compete With the Company
Under Certain Circumstances."
Unless provided for otherwise in the partnership agreement, Delaware law
generally requires a general partner of a Delaware limited partnership to
adhere to fiduciary duty standards under which it owes its limited partners
the highest duties of good faith, fairness and loyalty and which generally
prohibit such general partner from taking any action or engaging in any
transaction as to which it has a conflict of interest. The Partnership
Agreement expressly permits the General Partner to resolve conflicts of
interest between itself or its affiliates, on the one hand, and the Company or
the Unitholders, on the other, and to consider, in resolving such conflicts of
interest, the interests of other parties in addition to the interests of the
Unitholders. In addition, the Partnership Agreement provides that a purchaser
of Common Units is deemed to have consented to certain conflicts of interest
and actions of the General Partner and its affiliates that might otherwise be
prohibited, including those described in clauses (i)-(viii) above, and to have
agreed that such conflicts of interest and actions do not
35
<PAGE>
constitute a breach by the General Partner of any duty stated or implied by
law or equity. The General Partner will not be in breach of its obligations
under the Partnership Agreement or its duties to the Company or the
Unitholders if the resolution of such conflict is fair and reasonable to the
Company. The latitude given in the Partnership Agreement to the General
Partner in resolving conflicts of interest may significantly limit the ability
of a Unitholder to challenge what might otherwise be a breach of fiduciary
duty.
The Partnership Agreement expressly limits the liability of the General
Partner by providing that the General Partner, its affiliates and its officers
and directors will not be liable for monetary damages to the Company, the
limited partners or assignees for errors of judgment or for any acts or
omissions if the General Partner and such other persons acted in good faith.
In addition, the Company is required to indemnify the General Partner, its
affiliates and their respective officers, directors, employees, agents and
trustees to the fullest extent permitted by law against liabilities, costs and
expenses incurred by the General Partner or such other persons, if the General
Partner or such persons acted in good faith and in a manner they reasonably
believed to be in, or (in the case of a person other than the General Partner)
not opposed to, the best interests of the Company and, with respect to any
criminal proceedings, had no reasonable cause to believe the conduct was
unlawful.
The provisions of Delaware law that allow the common law fiduciary duties of
a general partner to be modified by a partnership agreement have not been
tested in a court of law, and the General Partner has not obtained an opinion
of counsel covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict the fiduciary duties of the General Partner that
would be in effect under common law were it not for the Partnership Agreement.
See "Conflicts of Interest and Fiduciary Responsibilities--Conflicts of
Interest."
TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of Common Units, see "Tax Considerations."
Tax Treatment is Dependent on Partnership Status
The availability to a Common Unitholder of the federal income tax benefits
of an investment in the Company depends on the classification of the Company
as a partnership for federal income tax purposes. Assuming the accuracy of
certain factual matters as to which the General Partner and the Company have
made representations, Counsel is of the opinion that, under current law, the
Company will be classified as a partnership for federal income tax purposes.
No ruling from the IRS as to classification has been or is expected to be
requested. Instead, the Company intends to rely on such opinion of Counsel
(which is not binding on the IRS). One of the representations of the Company
on which the opinion of Counsel is based is that at least 90% of the Company's
gross income for each taxable year in the future will be "qualifying income."
Whether the Company will continue to be classified as a partnership in part
depends, therefore, on the Company's ability to meet this qualifying income
test in the future. See "Tax Considerations--Partnership Status."
If the Company were classified as an association taxable as a corporation
for federal income tax purposes, the Company would pay tax on its income at
corporate rates (currently a 35% federal rate), distributions would generally
be taxed again to the Unitholders as corporate distributions, and no income,
gains, losses or deductions would flow through to the Unitholders. Because a
tax would be imposed upon the Company as an entity, the cash available for
distribution to the holders of Common Units would be substantially reduced.
Treatment of the Company as an association taxable as a corporation or
otherwise as a taxable entity would result in a material reduction in the
anticipated cash flow and after-tax return to the holders of Common Units and
thus would likely result in a substantial reduction in the value of the Common
Units. See "Tax Considerations--Partnership Status."
There can be no assurance that the law will not be changed so as to cause
the Company to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level
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<PAGE>
taxation. The Partnership Agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subjects the Company
to taxation as a corporation or otherwise subjects the Company to entity-level
taxation for federal, state or local income tax purposes, certain provisions
of the Partnership Agreement will be subject to change, including a decrease
in the Minimum Quarterly Distribution and the Target Distribution Levels to
reflect the impact of such law on the Company. See "Cash Distribution Policy--
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels."
No IRS Ruling With Respect to Tax Consequences
No ruling has been requested from the IRS with respect to classification of
the Company as a partnership for federal income tax purposes, whether the
Company's timber operations generate "qualifying income" under Section 7704 of
the Code or any other matter affecting the Company. Accordingly, the IRS may
adopt positions that differ from Counsel's conclusions expressed herein. It
may be necessary to resort to administrative or court proceedings in an effort
to sustain some or all of Counsel's conclusions, and some or all of such
conclusions ultimately may not be sustained. Any such contest with the IRS may
materially and adversely impact the market for the Common Units and the prices
at which Common Units trade. In addition, the costs of any contest with the
IRS will be borne directly or indirectly by some or all of the Unitholders and
the General Partner.
Tax Liability Exceeding Cash Distributions
A Unitholder will be required to pay federal income taxes and, in certain
cases, state and local income taxes on his allocable share of the Company's
income, whether or not he receives cash distributions from the Company. There
is no assurance that a Unitholder will receive cash distributions equal to his
allocable share of taxable income from the Company or even the tax liability
to him resulting from that income. Further, a holder of Common Units may incur
a tax liability, in excess of the amount of cash received, upon the sale of
his Common Units. See "Tax Considerations--Tax Consequences of Unit Ownership"
and "--Disposition of Common Units."
Ownership of Common Units by Tax-Exempt Organizations and Certain Other
Investors
Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such persons.
For example, much of the taxable income derived by most organizations exempt
from federal income tax (including IRAs and other retirement plans) from the
ownership of a Common Unit will be unrelated business taxable income and thus
will be taxable to such a Unitholder. See "Tax Considerations--Tax-Exempt
Organizations and Certain Other Investors."
Limitation on Deductibility of Losses
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the Company
will only be available to offset future income generated by the Company and
cannot be used to offset income from other activities, including other passive
activities or investments. Passive losses which are not deductible because
they exceed the Unitholder's income generated by the Company may be deducted
in full when the Unitholder disposes of his entire investment in the Company
in a fully taxable transaction to an unrelated party. Net passive income from
the Company may be offset by unused Company losses carried over from prior
years, but not by losses from other passive activities, including losses from
other publicly traded partnerships. See "Tax Considerations--Tax Consequences
of Unit Ownership--Limitations on Deductibility of Company Losses."
Tax Shelter Registration; Potential IRS Audit
The Company will be registered with the Secretary of the Treasury as a "tax
shelter." No assurance can be given that the Company will not be audited by
the IRS or that tax adjustments will not be made. The rights of a Unitholder
owning less than a 1% interest in the Company to participate in the income tax
audit process are very limited. Further, any adjustments in the Company's tax
returns will lead to adjustments in the Unitholders' tax
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<PAGE>
returns and may lead to audits of Unitholders' tax returns and adjustments of
items unrelated to the Company. Each Unitholder would bear the cost of any
expenses incurred in connection with an examination of such Unitholder's
personal tax return. Registration as a tax shelter may increase the risk of an
audit.
Possible Loss of Tax Benefits Relating to Non-uniformity of Common Units and
Nonconforming Depreciation Conventions
Because the Company cannot match transferors and transferees of Common
Units, uniformity of the economic and tax characteristics of the Common Units
to a purchaser of Common Units must be maintained. To maintain uniformity and
for other reasons, the Company will adopt certain depreciation and
amortization conventions that do not conform with all aspects of certain
proposed and final Treasury Regulations. A successful challenge to those
conventions by the IRS could adversely affect the amount of tax benefits
available to a purchaser of Common Units and could have a negative impact on
the value of the Common Units. See "Tax Considerations--Uniformity of Units."
State, Local and Other Tax Considerations
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which the Company does business or owns property. A
Unitholder will likely be required to file state and local income tax returns
and pay state and local income taxes in some or all of the various
jurisdictions in which the Company does business or owns property and may be
subject to penalties for failure to comply with those requirements. The
Company will initially own property and conduct business in Oregon, which
imposes a personal income tax. It is the responsibility of each Unitholder to
file all United States federal, state and local tax returns that may be
required of such Unitholder. Counsel has not rendered an opinion on the state
or local tax consequences of an investment in the Company. See "Tax
Considerations--State, Local and Other Tax Considerations."
Changes in Federal Income Tax Laws
The TRA of 1997 alters the tax reporting system and the deficiency
collection system applicable to large partnerships that elect to have the
provisions apply and makes certain additional changes to the treatment of
large partnerships. The legislation contained in the TRA of 1997 is generally
intended to simplify the administration of the tax rules governing large
partnerships. See "Tax Considerations--Tax Consequences of Unit Ownership." It
is not expected that the Company will elect to have these provisions apply
because of the cost of their application.
The TRA of 1997 also affects the taxation of certain financial products,
including partnership interests, by treating a taxpayer as having sold an
"appreciated" partnership interest (one in which gain would be recognized if
it were sold, assigned or otherwise terminated at its fair market value) if
the taxpayer or related persons enter into a short sale of, enter into an
offsetting notional principal contract with respect to, enter into a futures
or forward contract to deliver, or in the case of an appreciated financial
position that is a short sale or offsetting notional principal or futures or
forward contract, acquire, the same or substantially identical property. The
Secretary of Treasury is also authorized to issue regulations that treat a
taxpayer that enters in transactions or positions that have substantially the
same effect as the preceding transactions as having constructively sold the
financial position. See "Tax Considerations--Disposition of Common Units."
Tax Gain or Loss on Disposition of Common Units
A Unitholder who sells Common Units will recognize gain or loss equal to the
difference between the amount realized (including his share of Company
nonrecourse liabilities) and his adjusted tax basis in such Common Units
(which also includes his share of Company nonrecourse liabilities). Thus,
prior Company distributions in excess of cumulative net taxable income in
respect of a Common Unit which decreased a
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Unitholder's tax basis in such Common Unit will, in effect, become taxable
income if the Common Unit is sold at a price greater than the Unitholder's tax
basis in such Common Units, even if the price is less than his original cost.
A portion of the amount realized (whether or not representing gain) may be
ordinary income. Furthermore, should the IRS successfully contest certain
conventions to be used by the Company, a Unitholder could realize more gain on
the sale of Units than would be the case under such conventions without the
benefit of decreased income in prior years.
Reporting of Company Tax Information and Risk of Audits
The Company will furnish each holder of Common Units with a Schedule K-1
that sets forth his share of Company income, gains, losses and deductions. In
preparing these schedules, the Company will use various accounting and
reporting conventions and adopt various depreciation and amortization methods.
There is no assurance that these schedules will yield a result that conforms
to statutory or regulatory requirements or to administrative pronouncements of
the IRS. Further, the Company's tax return may be audited, and any such audit
could result in an audit of a Unitholder's individual tax return as well as
increased liabilities for taxes because of adjustments resulting from the
audit.
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THE TRANSACTIONS
Concurrent with the closing of this offering, Old Services will contribute
all of its assets, including its timber operations, to the General Partner in
exchange for interests therein. Immediately thereafter, USTK will assume
certain indebtedness of Holdings and the General Partner will contribute its
timber operations to USTK in exchange for a member interest in USTK. Then, the
General Partner will contribute all but a 1% member interest in USTK to the
Company in exchange for a general partner interest, the right to receive
Incentive Distributions and 1,428,571 Subordinated Units and Holdings will
contribute all of its interest in USTK to the Company in exchange for
2,978,833 Subordinated Units. The General Partner will then distribute the
Subordinated Units to Old Services. Approximately 145,278 Subordinated Units
will be used by Old Services to redeem interests in Old Services held by
Messrs. Stephens and Hornig, founding directors of the General Partner. As a
result of such transactions, USTK will become the Operating Company and the
General Partner will own an aggregate 2% interest in the Company and the
Operating Company, and the right to receive Incentive Distributions; Old
Services will own 1,283,293 Subordinated Units; Holdings will own 2,978,833
Subordinated Units; and Messrs. Stephens and Hornig will own an aggregate of
145,278 Subordinated Units. The 4,407,404 Subordinated Units owned by Old
Services, Holdings and Messrs. Stephens and Hornig will represent an aggregate
36.4% interest in the Company.
The Company will contribute the net proceeds from the sale of Common Units
offered hereby (estimated to be approximately $143.4 million after deducting
underwriting discounts and commissions and expenses associated with this
offering) to the Operating Company. Concurrent with the closing of this
offering, the Operating Company will issue $225.0 million aggregate principal
amount of Notes in the Public Note Offering. Net proceeds from the sale of the
Notes (estimated to be approximately $217.8 million after deducting
underwriting discounts and commissions and expenses associated with the Public
Note Offering), together with the net proceeds from the sale of Common Units
offered hereby, approximately $25.1 million to be borrowed by the Operating
Company under the Acquisition Facility and cash on hand (estimated to be
approximately $43.0 million), will be used by the Operating Company to repay
approximately $429.3 million of indebtedness of the Operating Company
(including accrued interest).
Concurrent with the closing of this offering, the Operating Company will
enter into the Bank Credit Facility, which will include the $25.0 million
Working Capital Facility to be used for working capital purposes, and the
$75.0 million Acquisition Facility to be used for acquisitions and capital
improvements. For additional information regarding the terms of the Notes and
the Bank Credit Facility, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Description of Indebtedness."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Units offered hereby
(assuming an initial public offering price of $21.00 per Common Unit) are
expected to be approximately $143.4 million, after deducting underwriting
discounts and commissions and expenses of this offering. The Company will
contribute such proceeds to the Operating Company and the Operating Company
will apply all such proceeds, together with the net proceeds from the sale of
the Notes (estimated to be approximately $217.8 million after deducting
underwriting discounts and commissions and expenses associated with the Public
Note Offering), approximately $25.1 million borrowed under the Acquisition
Facility and cash on hand (estimated to be approximately $43.0 million), to
repay the indebtedness assumed by the Operating Company in connection with the
Transactions and other indebtedness of the Company. The indebtedness to be
repaid consists of: (i) $130.0 million of bank indebtedness incurred by
Holdings (the "Holdings Debt") in connection with USTK's acquisition of the
Klamath Falls Timberlands in August 1996, $3.6 million in Guarantee Fees and
approximately $9.3 million in accrued interest; and (ii) $283.0 million of
bank indebtedness incurred by USTK in July 1997 to refinance indebtedness
incurred in connection with the acquisition of the Klamath Falls Timberlands
and to finance the acquisition of the Ochoco Timberlands (the "USTK Debt") and
approximately $3.4 million in accrued interest. The Holdings Debt matures in
September 1999 and bears interest at a floating rate, adjusted monthly (6.19%
per annum at September 30, 1997). The USTK Debt consists of $83.0 million
outstanding under a revolving credit facility and $200.0 million outstanding
under a term credit facility, each of which matures in June 2004 and bears
interest at a variable rate (7.94% per annum at September 30, 1997). The
Company will use the net proceeds from any exercise of the Underwriters' over-
allotment option to repay indebtedness incurred by the Operating Company under
the Acquisition Facility.
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CAPITALIZATION
The following table sets forth: (i) the combined capitalization of USTK and
Old Services (including the Holdings Debt) as of June 30, 1997, (ii) the pro
forma adjustments required to reflect the Transactions, including the sale of
the Common Units offered hereby and the application of the net proceeds
therefrom as described in "Use of Proceeds," and (iii) the pro forma
capitalization of the Company as of June 30, 1997 after giving effect thereto.
The table should be read in conjunction with the historical and pro forma
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------------------------
USTK
AND OLD
SERVICES
COMBINED PRO FORMA CONSOLIDATED
HISTORICAL ADJUSTMENTS(A) PRO FORMA
---------- -------------- ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Long-term debt:
Acquisition Facility.................. $ -- $ 41,714 $ 41,714
Prior revolving credit facility(b).... 90,000 (90,000) --
Prior term loans(b)................... 205,000 (205,000) --
Notes................................. -- 225,000 225,000
-------- --------- --------
Total indebtedness.................. 295,000 (28,286) 266,714
Minority interest....................... -- 1,233 1,233
Members' deficit........................ (9,901) 9,901 --
Partners' equity:
Common Units.......................... -- 120,796 120,796
Subordinated Units.................... -- -- --
General partner interests............. -- 1,233 1,233
-------- --------- --------
Total partners' and members' equity
(deficit).......................... (9,901) 133,163 123,262
-------- --------- --------
Total capitalization................ $285,099 $ 104,877 $389,976
======== ========= ========
</TABLE>
- --------
(a) See Notes to Pro Forma Consolidated Financial Statements of U.S.
Timberlands Company, L.P.
(b) This table reflects indebtedness of the Company as of June 30, 1997. On
August 29, 1996, USTK entered into a $90.0 million revolving credit
facility and an $85.0 million term loan facility with several banks to
finance a portion of the Weyerhaeuser Acquisition, and Holdings entered
into a $130.0 million loan agreement with several banks to finance the
remaining portion of the Weyerhaeuser Acquisition. On July 14, 1997, the
Company entered into a loan agreement with a commercial bank to refinance
a portion of the debt incurred in connection with the Weyerhaeuser
Acquisition and to finance the Ochoco Acquisition. This debt consists of a
$200.0 million seven-year amortizing secured facility and an $85.0 million
revolving credit facility (of which $83.0 million is outstanding as of the
date of this Prospectus). This indebtedness will be paid in full at the
closing of this offering.
42
<PAGE>
DILUTION
On a pro forma basis as of June 30, 1997, after giving effect to the
Transactions, the net tangible book value was $114.8 million or $9.48 per
Common Unit. Purchasers of Common Units in this offering will experience
substantial and immediate dilution in net tangible book value per Common Unit
for financial accounting purposes, as illustrated in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per Common Unit..... $ 21.00
Net tangible book value per Unit before the
offering(a)(b)........................................... (2.88)
Increase in net tangible book value per Common Unit
attributable to new investors............................ 12.36
--------
Less: Pro forma net tangible book value per Common Unit
after the offering(b)(c)................................. 9.48
--------
Immediate dilution in net tangible book value per Common
Unit to new investors.................................... $ 11.52
========
</TABLE>
- --------
(a) Determined by dividing the number of Units (4,407,404 Subordinated Units
and the combined 2% interest of the General Partner having a dilutive
effect equivalent to 242,165 Units) to be issued to the General Partner
and its affiliates for the contribution of their interests in USTK and the
assets of Old Services to the Company into the negative net tangible book
value of the contributed assets and liabilities.
(b) The net tangible book value does not include deferred financing fees.
(c) Determined by dividing the total number of Units (7,458,684 Common Units,
4,407,404 Subordinated Units and the combined 2% interest of the General
Partner having a dilutive effect equivalent to 242,165 Units) to be
outstanding after the offering made hereby, into the pro forma net
tangible book value of the Company allocable to such Units, after giving
effect to the application of the net proceeds of this offering.
The following table sets forth the number of Units issued by the Company and
the total consideration contributed by the General Partner and its affiliates
in respect of their Units and by purchasers of Common Units in this offering
upon the consummation of the Transactions:
<TABLE>
<CAPTION>
UNITS ACQUIRED TOTAL CONSIDERATION
------------------ ---------------------
NUMBER PERCENT NUMBER PERCENT
---------- ------- ------------ -------
<S> <C> <C> <C> <C>
General Partner and its affiliates
(a)(b)............................. 4,649,569 38.4% $ (9,901,000) (6.7%)
New Investors....................... 7,458,684 61.6% 156,632,000 106.7%
---------- ----- ------------ -----
12,108,253 100.0% 146,731,000 100.0%
========== ===== ============ =====
</TABLE>
- --------
(a) Upon the consummation of the Transactions, certain affiliates of the
General Partner will own 4,407,404 Subordinated Units and the General
Partner will own the combined 2% interest in the Company having a dilutive
effect equivalent to 242,165 Units.
(b) Total consideration for the General Partner and its affiliates represents
the negative book value (members' deficit) at June 30, 1997 of $9,901,000.
The members' deficit to be assumed by the new investors will be recorded
at historical cost rather than fair value by the Company in accordance
with generally accepted accounting principles.
43
<PAGE>
CASH DISTRIBUTION POLICY
GENERAL
The Company will distribute to its partners, on a quarterly basis, all of
its Available Cash in the manner described herein. Available Cash is defined
in the Glossary and generally means, with respect to any quarter of the
Company, all cash on hand at the end of such quarter less the amount of cash
reserves that is necessary or appropriate in the reasonable discretion of the
General Partner to (i) provide for the proper conduct of the Company's
business, (ii) comply with applicable law or any Company debt instrument or
other agreement, or (iii) provide funds for distributions to Unitholders and
the General Partner in respect of any one or more of the next four quarters.
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to Unitholders relative to the General Partner, and under certain
circumstances it determines whether holders of Subordinated Units receive any
distributions. See "--Quarterly Distributions of Available Cash."
Operating Surplus is defined in the Glossary and refers generally to (i) the
cash balance of the Company on the date the Company commences operations, plus
$15.0 million, plus all cash receipts of the Company from its operations since
the closing of the Transactions, less (ii) all Company operating expenses,
debt service payments (including reserves therefor but not including payments
required in connection with the sale of assets or any refinancing with the
proceeds of new indebtedness or an equity offering), maintenance capital
expenditures and reserves established for future Company operations, in each
case since the closing of the Transactions.
Capital Surplus is also defined in the Glossary and will generally be
generated only by borrowings (other than for working capital purposes), sales
of debt and equity securities and sales or other dispositions of assets for
cash (other than inventory, accounts receivable and other assets all as
disposed of in the ordinary course of business and up to $50.0 million of land
sales).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Company is from Operating Surplus or from Capital Surplus,
all Available Cash distributed by the Company from any source will be treated
as distributed from Operating Surplus until the sum of all Available Cash
distributed since the commencement of the Company equals the Operating Surplus
as of the end of the quarter prior to such distribution. Any Available Cash in
excess of such amount (irrespective of its source) will be deemed to be from
Capital Surplus and distributed accordingly.
If Available Cash from Capital Surplus is distributed in respect of each
Common Unit in an aggregate amount per Common Unit equal to the initial public
offering price of the Common Units (the "Initial Unit Price"), plus any Common
Unit Arrearages, the distinction between Operating Surplus and Capital Surplus
will cease, and all distributions of Available Cash will be treated as if they
were from Operating Surplus. The Company does not anticipate that there will
be significant distributions from Capital Surplus.
The Subordinated Units are a separate class of interests in the Company, and
the rights of holders of such interests to participate in distributions to
partners differ from the rights of the holders of Common Units. For any given
quarter, any Available Cash will be distributed to the General Partner and to
the holders of Common Units, and may also be distributed to the holders of
Subordinated Units depending upon the amount of Available Cash for the
quarter, the amount of Common Unit Arrearages, if any, and other factors
discussed below.
The Incentive Distributions are nonvoting limited partner interests that
represent the right to receive an increasing percentage of quarterly
distributions of Available Cash from Operating Surplus after the Target
Distribution Levels have been achieved. The Target Distribution Levels are
based on the amounts of Available Cash from Operating Surplus distributed in
excess of the payments made with respect to the Minimum Quarterly Distribution
and Common Unit Arrearages, if any, and the related 2% distribution to the
General Partner.
44
<PAGE>
Subject to the limitations described under "The Partnership Agreement--
Issuance of Additional Securities," the Company has the authority to issue
additional Common Units or other equity securities of the Company for such
consideration and on such terms and conditions as are established by the
General Partner in its sole discretion and without the approval of the
Unitholders. It is possible that the Company will fund acquisitions of other
timber assets through the issuance of additional Common Units or other equity
securities of the Company. Holders of any additional Common Units issued by
the Company will be entitled to share equally with the then-existing holders
of Common Units in distributions of Available Cash by the Company. In
addition, the issuance of additional Partnership Interests may dilute the
value of the interests of the then-existing holders of Common Units in the net
assets of the Company. The General Partner will be required to make an
additional capital contribution to the Company or the Operating Company (other
than in connection with the exercise of the over-allotment option) in
connection with the issuance of additional Partnership Interests.
The discussion in the sections below indicates the percentages of cash
distributions required to be made to the General Partner and the holders of
Common Units and the circumstances under which holders of Subordinated Units
are entitled to cash distributions and the amounts thereof. For a discussion
of Available Cash from Operating Surplus available for distributions with
respect to the Common Units on a pro forma basis, see "Cash Available for
Distribution."
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Company will make distributions to its partners with respect to each
quarter of the Company prior to its liquidation in an amount equal to 100% of
its Available Cash for such quarter. The Company expects to make distributions
of all Available Cash within approximately 45 days after the end of each
quarter, commencing with the quarter ending March 31, 1998, to holders of
record on the applicable record date. The Minimum Quarterly Distribution and
the Target Distribution Levels for the period from the closing of this
offering through March 31, 1998 will be adjusted upward based on the actual
length of such period. The Minimum Quarterly Distribution and the Target
Distribution Levels are also subject to certain other adjustments as described
below under "--Distributions from Capital Surplus" and "--Adjustment of
Minimum Quarterly Distribution and Target Distribution Levels."
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distribution, plus any Common Unit
Arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. This subordination feature will enhance the Company's
ability to distribute the Minimum Quarterly Distribution on the Common Units
during the Subordination Period. There is no guarantee, however, that the
Minimum Quarterly Distribution will be made on the Common Units. Upon
expiration of the Subordination Period, all Subordinated Units will be
converted on a one-for-one basis into Common Units and will participate pro
rata with all other Common Units in future distributions of Available Cash.
Under certain circumstances, up to 2,203,702 Subordinated Units may convert
into Common Units prior to the expiration of the Subordination Period. Common
Units will not accrue arrearages with respect to distributions for any quarter
after the Subordination Period and Subordinated Units will not accrue any
arrearages with respect to distributions for any quarter.
DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD
The Subordination Period will generally extend from the closing of this
offering until the first day of any quarter beginning after December 31, 2002
in respect of which (i) distributions of Available Cash from Operating Surplus
on the Common Units and the Subordinated Units with respect to each of the
three consecutive four-quarter periods immediately preceding such date equaled
or exceeded the sum of the Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated Units during such periods, (ii) the
Adjusted Operating Surplus generated during each of the three consecutive
four-quarter periods immediately preceding such date equaled or exceeded the
sum of the Minimum Quarterly Distribution on all of the Common Units and
Subordinated Units that were outstanding during such period on a fully diluted
basis and the related
45
<PAGE>
distribution on the general partner interest in the Company and the managing
member interest in the Operating Company, and (iii) there are no outstanding
Common Unit Arrearages.
Prior to the end of the Subordination Period, a portion of the Subordinated
Units will convert into Common Units on a one-for-one basis on the first day
after the record date established for the distribution in respect of any
quarter ending on or after (a) December 31, 2000 with respect to one-quarter
of the Subordinated Units (1,101,851 Subordinated Units), and (b) December 31,
2001 with respect to one-quarter of the Subordinated Units (1,101,851
Subordinated Units), in respect of which (i) distributions of Available Cash
from Operating Surplus on the Common Units and the Subordinated Units with
respect to each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
during such periods, (ii) the Adjusted Operating Surplus generated during each
of the two consecutive four-quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on all of
the Common Units and Subordinated Units that were outstanding during such
period on a fully diluted basis and the related distribution on the general
partner interest in the Company and the managing member interest in the
Operating Company, and (iii) there are no outstanding Common Unit Arrearages;
provided, however, that the early conversion of the second one-quarter of
Subordinated Units may not occur until at least one year following the early
conversion of the first one-quarter of Subordinated Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will
thereafter participate, pro rata, with the other Common Units in distributions
of Available Cash. In addition, if the General Partner is removed as the
general partner of the Company under circumstances where Cause does not exist
and Units held by the General Partner and its affiliates are not voted in
favor of such removal, (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be
extinguished and (iii) the General Partner will have the right to convert its
general partner interest (and its right to receive Incentive Distributions)
into Common Units or to receive cash in exchange for such interests.
"Adjusted Operating Surplus" for any period generally means Operating
Surplus generated during such period, less (a) any net increase in working
capital borrowings during such period and (b) any net reduction in cash
reserves for Operating Expenditures during such period not relating to an
Operating Expenditure made during such period; and plus (x) any net decrease
in working capital borrowings during such period and (y) any net increase in
cash reserves for Operating Expenditures during such period required by any
debt instrument for the repayment of principal, interest or premium. Operating
Surplus generated during a period is equal to the difference between (i) the
Operating Surplus determined at the end of such period and (ii) the Operating
Surplus determined at the beginning of such period.
Distributions by the Company of Available Cash from Operating Surplus with
respect to any quarter during the Subordination Period will be made in the
following manner:
first, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding
Common Unit an amount equal to the Minimum Quarterly Distribution for such
quarter;
second, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding
Common Unit an amount equal to any Common Unit Arrearages accrued and
unpaid with respect to any prior quarters during the Subordination Period;
third, 98% to the Subordinated Unitholders, pro rata, and 2% to the
General Partner, until there has been distributed in respect of each
outstanding Subordinated Unit an amount equal to the Minimum Quarterly
Distribution for such quarter; and
thereafter, in the manner described in "--Incentive Distributions--
Hypothetical Annualized Yield" below.
46
<PAGE>
Notwithstanding the foregoing, no distributions may be made on the
Subordinated Units with respect to any quarter if the Consolidated Fixed
Charge Coverage Ratio (as defined in the Partnership Agreement) for the four-
quarter period ended with such quarter is equal to or less than 1.75 to 1.00.
The above references to the 2% of Available Cash from Operating Surplus
distributed to the General Partner are references to the amount of the
percentage interest in distributions from the Company and the Operating
Company of the General Partner (exclusive of its or any of its affiliates'
interests as holders of Common Units or the Subordinated Units). The General
Partner will own a 1% general partner interest in the Company and a 1.0101%
managing member interest in the Operating Company. Other references in this
Prospectus to the General Partner's 2% interest or to distributions of 2% of
Available Cash are also references to the amount of the combined percentage
interest in the Company and the Operating Company of the General Partner
(exclusive of its or any of its affiliates' interests as holders of Common
Units or the Subordinated Units). With respect to any Common Unit, the term
"Common Unit Arrearages" refers to the amount by which the Minimum Quarterly
Distribution in any quarter during the Subordination Period exceeds the
distribution of Available Cash from Operating Surplus actually made for such
quarter on a Common Unit issued in this offering, cumulative for such quarter
and all prior quarters during the Subordination Period. Common Unit Arrearages
will not accrue interest.
DISTRIBUTIONS FROM OPERATING SURPLUS AFTER SUBORDINATION PERIOD
Distributions by the Company of Available Cash from Operating Surplus with
respect to any quarter after the Subordination Period will be made in the
following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit an amount equal to
the Minimum Quarterly Distribution for such quarter; and
thereafter, in the manner described in "--Incentive Distributions--
Hypothetical Annualized Yield" below.
INCENTIVE DISTRIBUTIONS--HYPOTHETICAL ANNUALIZED YIELD
For any quarter for which Available Cash from Operating Surplus is
distributed to the Common and Subordinated Unitholders in an amount equal to
the Minimum Quarterly Distribution on all Units and to the Common Unitholders
in an amount equal to any unpaid Common Unit Arrearages, then any additional
Available Cash from Operating Surplus in respect of such quarter will be
distributed among the Unitholders and the General Partner in the following
manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate Common Unit Arrearages) a total of $0.550
for such quarter in respect of each outstanding Unit (the "First Target
Distribution");
second, 85% to all Unitholders, pro rata, and 15% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate Common Unit Arrearages) a total of $0.633
for such quarter in respect of each outstanding Unit (the "Second Target
Distribution");
third, 75% to all Unitholders, pro rata, and 25% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate Common Unit Arrearages) a total of $0.822
for such quarter in respect of each outstanding Unit (the "Third Target
Distribution"); and
thereafter, 50% to all Unitholders, pro rata, and 50% to the General
Partner.
The distributions to the General Partner set forth above that are in excess
of its aggregate 2% general partner interest represent the Incentive
Distributions. The right to receive Incentive Distributions is not part of the
general partner interest and may be transferred separately from such interest
in certain limited circumstances. See "The Partnership Agreement--Transfer of
General Partner's Interests and Incentive Distribution Rights."
47
<PAGE>
The following table illustrates the percentage allocation of the additional
Available Cash from Operating Surplus between the Unitholders and the General
Partner up to the various Target Distribution Levels and a hypothetical
annualized percentage yield to be realized by a Unitholder at each Target
Distribution Level. For purposes of the following table, the annualized
percentage yield is calculated on a pretax basis assuming that (i) the Common
Unit was purchased at an amount equal to the assumed initial public offering
price of $21.00 per Common Unit and (ii) the Company distributed each quarter
during the first year following the investment the amount set forth under the
column "Total Quarterly Distribution Target Amount." The calculations are also
based on the assumption that the quarterly distribution amounts shown do not
include any Common Unit Arrearages. The amounts set forth under "Marginal
Percentage Interest in Distributions" are the percentage interests of the
General Partner and the Unitholders in any Available Cash from Operating
Surplus distributed up to and including the corresponding amount in the column
"Total Quarterly Distribution Target Amount," until Available Cash distributed
reaches the next Target Distribution Level, if any. The percentage interests
shown for the Unitholders and the General Partner for the Minimum Quarterly
Distribution are also applicable to quarterly distribution amounts that are
less than the Minimum Quarterly Distribution.
<TABLE>
<CAPTION>
MARGINAL PERCENTAGE
TOTAL INTEREST IN
QUARTERLY DISTRIBUTIONS
DISTRIBUTION HYPOTHETICAL -------------------
TARGET ANNUALIZED GENERAL
AMOUNT YIELD UNITHOLDERS PARTNER
------------ ------------- ----------- -------
<S> <C> <C> <C> <C>
Minimum Quarterly Distribu-
tion...................... $0.500 9.524% 98% 2%
First Target Distribution.. $0.550 10.476% 98% 2%
Second Target Distribu-
tion...................... $0.633 12.057% 85% 15%
Third Target Distribution.. $0.822 15.657% 75% 25%
Thereafter................. above $0.822 above 15.657% 50% 50%
</TABLE>
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Company of Available Cash from Capital Surplus will be
made in the following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until the Company has distributed, in respect of each outstanding Common
Unit issued in this offering, Available Cash from Capital Surplus in an
aggregate amount per Common Unit equal to the Initial Unit Price;
second, 98% to the holders of Common Units, pro rata, and 2% to the
General Partner, until the Company has distributed, in respect of each
outstanding Common Unit, Available Cash from Capital Surplus in an
aggregate amount equal to any unpaid Common Unit Arrearages with respect to
such Common Unit; and
thereafter, all distributions of Available Cash from Capital Surplus will
be distributed as if they were from Operating Surplus.
As a distribution of Available Cash from Capital Surplus is made, it is
treated as if it were a repayment of the Initial Unit Price. To reflect such
repayment, the Minimum Quarterly Distribution and the Target Distribution
Levels will be adjusted downward by multiplying each such amount by a
fraction, the numerator of which is the Unrecovered Capital (as defined in the
Glossary) of the Common Units immediately after giving effect to such
repayment and the denominator of which is the Unrecovered Capital of the
Common Units immediately prior to such repayment. This adjustment to the
Minimum Quarterly Distribution may make it more likely that Subordinated Units
will be converted into Common Units (whether pursuant to the termination of
the Subordination Period or to the provisions permitting early conversion of
some Subordinated Units) and may accelerate the dates at which such
conversions occur.
When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Capital of the Common Units is zero (and any accrued Common Unit
Arrearages have been paid), then in effect the Minimum Quarterly
48
<PAGE>
Distribution and each of the Target Distribution Levels will have been reduced
to zero for subsequent quarters. Thereafter, all distributions of Available
Cash from all sources will be treated as if they were from Operating Surplus.
Because the Minimum Quarterly Distribution and the Target Distribution Levels
will have been reduced to zero, the General Partner will be entitled
thereafter to receive 50% of all distributions of Available Cash in its
capacity as General Partner and as holder of the Incentive Distribution Rights
(in addition to any distributions to which it or its affiliates may be
entitled as holders of Units).
Distributions of Available Cash from Capital Surplus will not reduce the
Minimum Quarterly Distribution or Target Distribution Levels for the quarter
with respect to which they are distributed.
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to reductions of the Minimum Quarterly Distribution and Target
Distribution Levels made upon a distribution of Available Cash from Capital
Surplus, the Minimum Quarterly Distribution, the Target Distribution Levels,
the Unrecovered Capital, the number of additional Common Units issuable during
the Subordination Period without a Unitholder vote, the number of Common Units
issuable upon conversion of the Subordinated Units and other amounts
calculated on a per Unit basis will be proportionately adjusted upward or
downward, as appropriate, in the event of any combination or subdivision of
Common Units (whether effected by a distribution payable in Common Units or
otherwise), but not by reason of the issuance of additional Common Units for
cash or property. For example, in the event of a two-for-one split of the
Common Units (assuming no prior adjustments), the Minimum Quarterly
Distribution, each of the Target Distribution Levels and the Unrecovered
Capital of the Common Units would each be reduced to 50% of its initial level.
The Minimum Quarterly Distribution and the Target Distribution Levels may
also be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Company to become taxable as a corporation or otherwise subjects the Company
to taxation as an entity for federal, state or local income tax purposes. In
such event, the Minimum Quarterly Distribution and the Target Distribution
Levels would be reduced to an amount equal to the product of (i) the Minimum
Quarterly Distribution and each of the Target Distribution Levels,
respectively, multiplied by (ii) one minus the sum of (x) the maximum
effective federal income tax rate to which the Company is then subject as an
entity plus (y) any increase that results from such legislation in the
effective overall state and local income tax rate to which the Company is
subject as an entity for the taxable year in which such event occurs (after
taking into account the benefit of any deduction allowable for federal income
tax purposes with respect to the payment of state and local income taxes). For
example, assuming the Company was not previously subject to state and local
income tax, if the Company were to become taxable as an entity for federal
income tax purposes and the Company became subject to a maximum marginal
federal, and effective state and local, income tax rate of 38%, then the
Minimum Quarterly Distribution and the Target Distribution Levels would each
be reduced to 62% of the amount thereof immediately prior to such adjustment.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
Following the commencement of the dissolution and liquidation of the
Company, assets will be sold or otherwise disposed of from time to time and
the partners' capital account balances will be adjusted to reflect any
resulting gain or loss. The proceeds of such liquidation will, first, be
applied to the payment of creditors of the Company in the order of priority
provided in the Partnership Agreement and by law and, thereafter, be
distributed to the Unitholders and the General Partner in accordance with
their respective capital account balances as so adjusted.
Partners are entitled to liquidating distributions in accordance with
capital account balances. The allocations of gains and losses upon liquidation
are intended, to the extent possible, to entitle the holders of outstanding
Common Units to a preference over the holders of outstanding Subordinated
Units upon the liquidation of the Company, to the extent required to permit
Common Unitholders to receive their Unrecovered Capital plus any
49
<PAGE>
unpaid Common Unit Arrearages. Thus, net losses recognized upon liquidation of
the Company will be allocated to the holders of the Subordinated Units to the
extent of their capital account balances before any loss is allocated to the
holders of the Common Units, and net gains recognized upon liquidation will be
allocated first to restore negative balances in the capital account of the
General Partner and any Unitholders and then to the Common Unitholders until
their capital account balances equal their Unrecovered Capital plus unpaid
Common Unit Arrearages. However, no assurance can be given that there will be
sufficient gain upon liquidation of the Company to enable the holders of
Common Units to fully recover all of such amounts, even though there may be
cash available after such allocation for distribution to the holders of
Subordinated Units.
The manner of such adjustment is as provided in the Partnership Agreement,
the form of which is included as Appendix A to this Prospectus. If the
liquidation of the Company occurs before the end of the Subordination Period,
any net gain (or unrealized gain attributable to assets distributed in kind)
will be allocated to the partners as follows:
first, to the General Partner and the holders of Units having negative
balances in their capital accounts to the extent of and in proportion to
such negative balances;
second, 98% to the holders of Common Units, pro rata, and 2% to the
General Partner, until the capital account for each Common Unit is equal to
the sum of (i) the Unrecovered Capital in respect of such Common Unit, (ii)
the amount of the Minimum Quarterly Distribution for the quarter during
which liquidation of the Company occurs and (iii) any unpaid Common Unit
Arrearages in respect of such Common Unit;
third, 98% to the holders of Subordinated Units, pro rata, and 2% to the
General Partner, until the capital account for each Subordinated Unit is
equal to the sum of (i) the Unrecovered Capital in respect of such
Subordinated Unit and (ii) the amount of the Minimum Quarterly Distribution
for the quarter during which the liquidation of the Company occurs;
fourth, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until there has been allocated under this paragraph fourth an amount per
Unit equal to (a) the sum of the excess of the First Target Distribution
per Unit over the Minimum Quarterly Distribution per Unit for each quarter
of the Company's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
Minimum Quarterly Distribution per Unit that were distributed 98% to the
Unitholders, pro rata, and 2% to the General Partner for each quarter of
the Company's existence;
fifth, 85% to the Unitholders, pro rata, and 15% to the General Partner,
until there has been allocated under this paragraph fifth an amount per
Unit equal to (a) the sum of the excess of the Second Target Distribution
per Unit over the First Target Distribution per Unit for each quarter of
the Company's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
First Target Distribution per Unit that were distributed 85% to the
Unitholders, pro rata, and 15% to the General Partner for each quarter of
the Company's existence;
sixth, 75% to all Unitholders, pro rata, and 25% to the General Partner,
until there has been allocated under this paragraph sixth an amount per
Unit equal to (a) the sum of the excess of the Third Target Distribution
per Unit over the Second Target Distribution per Unit for each quarter of
the Company's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
Second Target Distribution per Unit that were distributed 75% to the
Unitholders, pro rata, and 25% to the General Partner for each quarter of
the Company's existence; and
thereafter, 50% to all Unitholders, pro rata, and 50% to the General
Partner.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that clauses
(ii) and (iii) of paragraph second above and all of paragraph third above will
no longer be applicable.
50
<PAGE>
Upon liquidation of the Company, any loss will generally be allocated to the
General Partner and the Unitholders as follows:
first, 98% to holders of Subordinated Units in proportion to the positive
balances in their respective capital accounts and 2% to the General
Partner, until the capital accounts of the holders of the Subordinated
Units have been reduced to zero;
second, 98% to the holders of Common Units in proportion to the positive
balances in their respective capital accounts and 2% to the General
Partner, until the capital accounts of the Common Unitholders have been
reduced to zero; and
thereafter, 100% to the General Partner.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that all of
paragraph first above will no longer be applicable.
In addition, interim adjustments to capital accounts will be made at the
time the Company issues additional interests in the Company or makes
distributions of property. Such adjustments will be based on the fair market
value of the interests or the property distributed and any gain or loss
resulting therefrom will be allocated to the Unitholders and the General
Partner in the same manner as gain or loss is allocated upon liquidation. In
the event that positive interim adjustments are made to the capital accounts,
any subsequent negative adjustments to the capital accounts resulting from the
issuance of additional interests in the Company, distributions of property by
the Company, or upon liquidation of the Company, will be allocated in a manner
which results, to the extent possible, in the capital account balances of the
General Partner equaling the amount which would have been the General
Partner's capital account balances if no prior positive adjustments to the
capital accounts had been made.
51
<PAGE>
CASH AVAILABLE FOR DISTRIBUTION
Based on the amount of working capital that the Company is expected to have
at the time it commences operations and the availability of the Working
Capital Facility, the Company believes that, if its assumptions about
operating conditions prove correct, the Company should have sufficient
Available Cash from Operating Surplus to enable the Company to distribute the
Minimum Quarterly Distribution on the Common Units and Subordinated Units to
be outstanding immediately after the consummation of this offering, and the
related distribution on the combined 2% interest of the General Partner, with
respect to each of its quarters at least through the quarter ending December
31, 1998. However, no assurance can be given respecting such distributions or
any future distributions. The Company's belief is based on a number of
assumptions, including the assumptions (i) that there will be an increase of
4% in average realized log or stumpage prices in 1998 from those realized
during 1997, (ii) that the Company will be able to harvest the timber volumes
(including stumpage sales) reflected in its harvest plan, (iii) that the
Company will be able to complete the sale of certain properties that it has
identified for aggregate gross proceeds of at least $9.6 million, (iv) that
there will be no regulatory changes that materially adversely affect the
Company's operations, (v) that there will be no significant change in the rate
of inflation and (vi) that market and overall economic conditions will not
change substantially. Although the Company believes such assumptions are
within range of reasonableness, whether the assumptions are realized is not,
in a number of cases, within the control of the Company and cannot be
predicted with any degree of certainty. If the Company's assumptions,
particularly with respect to prices, harvest volumes or property sales, are
not realized, Available Cash from Operating Surplus generated by the Company
could be substantially less than that currently expected and could, therefore,
be insufficient to permit the Company to make distributions at the levels
described above. See "Risk Factors--The Company's Assumptions Concerning
Future Operations May Not Be Realized." In addition, the terms of the
Company's indebtedness under certain circumstances will restrict the ability
of the Company to distribute cash to Unitholders. Accordingly, no assurance
can be given that distributions of the Minimum Quarterly Distribution or any
other amounts will be made. See "Cash Distribution Policy" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Description of Indebtedness."
The amount of Available Cash from Operating Surplus needed to distribute the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units to be outstanding immediately after this offering and on
the combined 2% interest of the General Partner is approximately $24.2 million
($14.9 million for the Common Units, $8.8 million for the Subordinated Units
and $0.5 million for the combined 2% interest of the General Partner). If the
Underwriters' over-allotment option is exercised in full, such amounts will be
$17.2 million for the Common Units, $8.8 million for the Subordinated Units
and $0.5 million for the combined 2% interest of the General Partner, or an
aggregate of approximately $26.5 million. Available Cash from Operating
Surplus as defined in the Partnership Agreement is a cash accounting concept,
while the Company's historical and pro forma financial statements have been
prepared on an accrual basis. As a consequence, the Company's pro forma cash
flow information derived from the Company's pro forma financial statements
should only be viewed as a general indication of the amount of Available Cash
from Operating Surplus that might in fact have been generated by the Company
had it been formed in earlier periods. On a pro forma basis, the Company would
have had a deficit in its cash flow (pro forma EBITDDA less pro forma interest
expense and pro forma maintenance capital expenditures) during 1996 of
approximately $18 million. Consequently, on a pro forma basis, the Company
would have been unable to make any distributions for such year from operating
cash flow on any of the Common Units offered hereby, any of the Subordinated
Units or the related distribution on the combined 2% interest of the General
Partner. The pro forma adjustments are based upon currently available
information and certain estimates and assumptions. The pro forma financial
statements do not purport to present the results of operations of the Company
had the Transactions actually been completed as of the dates indicated.
The Company does not believe, however, that the pro forma operating results
for 1996 are indicative of its ability to generate cash from the Timberlands
in 1997 and beyond for several reasons. Most significantly, the
52
<PAGE>
pro forma results of operations for 1996 do not reflect any revenues from the
Ochoco Timberlands, which contain large quantities of higher valued, mature
timber that the Company intends to harvest over the next several years. Most
significantly, the Company believes it will be able to operate the Ochoco
Timberlands without a commensurate increase in overhead costs. In addition,
the pro forma results of operations for 1996 reflect eight months of
operations by Weyerhaeuser, which managed the Klamath Falls Timberlands
significantly differently from the Company, and a four-month transitional
period of operations by the Company during which the Company did not have
sufficient time to realize the benefits of implementing its strategy. The
principal difference between Weyerhaeuser's operations and the Company's
operations is that while Weyerhaeuser sold a majority of its harvested logs to
its own plywood facility, the Company does not own any conversion facilities
and sells its entire harvest to unaffiliated conversion facilities. The
Company has therefore developed a flexible marketing strategy intended to
enable it to structure sales of timber assets in various ways (as sales of
logs, stumpage sales, timber deed sales or land sales or exchanges) depending
upon the needs of its customers and current market conditions in order to
manage its Available Cash. Furthermore, under Weyerhaeuser's management,
approximately half of the harvesting and delivery of logs on the Klamath Falls
Timberlands were conducted by Weyerhaeuser employees. In contrast, the Company
uses independent contractors to conduct such activities, which the Company
believes will result in a significant reduction in logging and hauling costs
per MBF. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General." As discussed above, however, the Company has
a limited operating history and no assurances can be given that the Company
will generate sufficient Available Cash from Operating Surplus to pay the
Minimum Quarterly Distribution on all the Units. See "Risk Factors--Risks
Inherent in an Investment in the Company--Cash Distributions Are Not
Guaranteed, May Fluctuate with Company Performance and Are Limited by Debt
Instruments", and "--The Company's Assumptions Concerning Future Operations
May Not Be Realized."
53
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables set forth for the periods and at the dates indicated,
selected historical financial and operating data for the Company, and pro
forma financial and operating data after giving effect to the Weyerhaeuser
Acquisition and the Transactions. The selected historical operating statement
data for the two years ended December 31, 1995, the eight months ended August
29, 1996 and the balance sheet data as of December 31, 1995 are derived from
the historical audited financial statements of the Predecessor which were
prepared by the Company, and the selected historical operating statement data
for the six months ended June 30, 1996 are derived from the historical
unaudited financial statements of the Predecessor which were prepared by the
Company, and should be read in conjunction with such financial statements
included elsewhere in this Prospectus. The selected historical combined
financial data for the four months ended December 31, 1996 are derived from
the historical combined audited financial statements of the Company, and the
summary historical financial data for the six months ended June 30, 1997 are
derived from the historical audited combined financial statements of the
Company included elsewhere in this Prospectus. In the opinion of management
each of the unaudited financial statements include all adjustments, consisting
of normal recurring adjustments, necessary for a fair statement of the results
for the unaudited periods. The selected pro forma financial and operating data
of the Company are derived from the unaudited pro forma consolidated financial
statements and notes thereto included elsewhere in this Prospectus and should
be read in conjunction therewith. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The dollar amounts
in the table below, except per Unit data, are in thousands.
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(a) FORMA(b)
--------------------------------------------------- ------------ ------------
JANUARY 1, AUGUST 30,
1996 1996
YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED
--------------------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1996 1996 1996
----------- ----------- ------- ------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT
DATA:
Revenues:
Logs................... $27,225 $28,609 $29,102 $29,110 $14,077 $ 13,590 $ 27,667
Timberland and property
sales................. -- 4,180 -- -- -- -- --
By-products and other.. 4,354 3,537 3,240 2,623 1,501 429 1,930
------- ------- ------- ------- ------- -------- --------
Total revenues......... 31,579 36,326 32,342 31,733 15,578 14,019 29,597
Operating costs:
Cost of products sold.. 12,830 15,697 16,351 14,951 9,225 6,179 15,404
Cost of timber and
property sales........ -- 58 -- -- -- -- --
Depreciation, depletion
and road
amortization.......... 1,531 1,443 1,455 1,486 927 3,323 8,376
Selling, general and
administrative
expenses.............. 4,069 4,034 4,454 4,235 2,730 9,284 7,079(c)
------- ------- ------- ------- ------- -------- --------
Operating income
(loss)................ 13,149 15,094 10,082 11,061 2,696 (4,767) (1,262)
Interest expense....... -- -- -- -- -- 7,316 24,299
Amortization of
deferred financing
fees and debt
guarantee fees........ -- -- -- -- -- 1,326 725
Interest income........ -- -- -- -- -- (409) (409)
Other (income) expense,
net................... (322) 297 140 (555) 1 36 37
------- ------- ------- ------- ------- -------- --------
Net income (loss)
before minority
interest.............. 13,471 14,797 9,942 11,616 2,695 (13,036) (25,914)
Minority interest(d)... -- -- -- -- -- -- 259
------- ------- ------- ------- ------- -------- --------
Net income (loss)...... $13,471 $14,797 $ 9,942 $11,616 $ 2,695 $(13,036) $(25,655)
======= ======= ======= ======= ======= ======== ========
Limited partners'
interests in net
loss.................. $(25,396)
========
Pro forma loss per
Unit(e)............... $ (2.14)
========
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(a) FORMA(b)
----------------------------------------------------- ------------ ------------
JANUARY 1,
1996 AUGUST 30,
YEAR ENDED DECEMBER 31, THROUGH 1996 THROUGH YEAR ENDED
----------------------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1996 1996 1996
----------- ----------- -------- ------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS AND OTHER
DATA:
EBITDDA(f)............. $ 14,680 $ 16,595 $ 11,537 $12,547 $ 3,623 $ (1,444) $ 7,114
Capital expenditures--
Maintenance(g)........ 1,553 1,157 2,098 2,082 459 360
Cash flow from (used
in) operations........ 16,784 15,124 13,173 11,810 5,512 (2,984)
Cash flow used in
investing............. (1,553) (1,157) (2,013) (1,859) (459) (291,450)
Cash flow from (used
in) financing......... (15,231) (13,967) (11,160) (9,951) (5,054) 311,047
BALANCE SHEET DATA (AT
PERIOD END):
Working capital........ $ 793 $ 2,068 $ 211 $ 1,304 $ 524 $ 21,459
Timber, timberlands and
logging roads, net,... 22,050 21,495 20,885 20,822 21,275 273,457
Total assets........... 30,787 32,292 29,844 30,947 27,839 310,191
Long-term debt......... -- -- -- -- -- 305,000
Excess of assets over
liabilities........... 29,220 29,643 27,745 29,155 27,839
Members' deficit....... (2,936)
OPERATING DATA
(UNAUDITED):
Harvest volumes (MBF):
Used in log and
stumpage sales(h)..... 70,982 69,291 68,208 63,614 32,760 27,389 60,149
Used in chip sales..... 33,012 18,996 10,224 18,315 5,196 -- 5,196
Total................. 103,994 88,287 78,432 81,929 37,956 27,389 65,345
Sales volumes:
Log and stumpage sales
(MBF)(h).............. 70,903 66,250 68,302 63,822 32,760 30,210 62,970
Timber and property
sales (MBF)........... -- 9,449 -- -- -- -- --
Chip sales (BDT)....... 98,802 52,278 38,380 25,702 20,568 7,174 27,742
</TABLE>
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(a) FORMA(b)
----------- ---------- -----------
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------------- 1997
-----------
1996 1997
----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenues:
Logs....................................... $ 9,816 $19,813 $19,813
Timberland and property sales.............. -- 3,494 3,494
By-products and other...................... 1,174 489 489
------- ------- -------
Total revenues............................. 10,990 23,796 23,796
Operating costs:
Cost of products sold...................... 6,750 7,811 7,811
Cost of timber and property sales.......... -- 1,191 1,191
Depreciation, depletion and road
amortization.............................. 707 5,395 5,395
Selling, general and administrative
expenses.................................. 2,028 2,892 2,892
------- ------- -------
Operating income........................... 1,505 6,507 6,507
Interest expense........................... -- 10,877 12,150
Amortization of deferred financing fees and
debt guarantee fees....................... -- 2,198 362
Interest income............................ -- (774) (774)
Other (income) expense, net................ 31 (20) (20)
------- ------- -------
Net income (loss) before minority
interest.................................. 1,474 (5,774) (5,211)
Minority interest(d)....................... -- -- 52
------- ------- -------
Net income (loss).......................... $ 1,474 $(5,774) $(5,159)
======= ======= =======
Limited partners' interests in net loss.... $(5,107)
=======
Pro forma loss per Unit(e)................. $ (.43)
=======
CASH FLOWS AND OTHER DATA:
EBITDDA(f)................................. $ 2,212 $13,093 $13,093
Capital expenditures--Maintenance(g)....... 298 690
Cash flow from operations.................. 2,265 6,123
Cash flow from (used in) investing......... (298) 9,710
Cash flow used in financing................ (1,967) (2,059)
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(a) FORMA(b)
----------- ---------- -----------
SIX MONTHS SIX MONTHS
ENDED ENDED JUNE
JUNE 30, 30,
---------------------- -----------
1996 1997 1997
----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit).................. $1,220 $ 6,567 $ (2,757)
Timber, timberlands and logging roads...... 21,271 270,630 381,060
Total assets............................... 29,803 313,637 398,951
Long-term debt............................. -- 295,000 266,714
Excess of assets over liabilities.......... 28,282
Members' deficit........................... (9,901)
Partners' capital.......................... 122,029
OPERATING DATA (UNAUDITED):
Harvest volumes (MBF):
Used in log and stumpage sales(h) ......... 22,989 46,770 46,770
Used in chip sales......................... 3,168 1,589 1,589
Total..................................... 26,157 48,359 48,359
Sales volumes:
Log and stumpage sales (MBF)(h) ........... 22,846 46,770 46,770
Timber and property sales (MBF)............ -- 11,045 11,045
Chip sales (BDT)........................... 14,879 4,739 4,739
</TABLE>
- -------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial and
operating data for the period after August 30, 1996 are not comparable to
financial and operating data of the Predecessor. See the financial
statements of the Company and accompanying notes included elsewhere in
this Prospectus for additional information.
(b) The Company's pro forma consolidated financial and operating data are
derived from the unaudited pro forma consolidated financial statements of
the Company included elsewhere in this Prospectus.
(c) Includes $2,800 paid to an affiliate for management services. The Company
does not intend to pay such management fees subsequent to completion of
the Transactions.
(d) Reflects the General Partner's 1% minority interest in USTK's pro forma
net income (loss).
(e) Pro forma loss per Unit is computed by dividing the limited partners' 99%
interest in net loss by the number of Units expected to be outstanding at
the closing of this offering.
(f) EBITDDA is defined as operating income plus depreciation, depletion and
amortization and cost of timber and property sales. EBITDDA should not be
considered as an alternative to net income, operating income, cash flows
from operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles.
EBITDDA is not intended to represent cash flow and does not represent the
measure of cash available for distribution, but provides additional
information for evaluating the Company's ability to make the Minimum
Quarterly Distribution. In addition, EBITDDA does not necessarily
represent funds available for management's discretionary use as it is
calculated prior to debt service obligations and capital expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Description of Indebtedness."
(g) Maintenance capital expenditures include the replacement of property,
plant and equipment, capitalized seed orchard and nursery costs and
additions to timber, timberlands and logging roads.
(h) The Company had no stumpage sales prior to April 1997.
56
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the historical financial condition and results
of operations of the Company and the Predecessor, should be read in
conjunction with the Summary Pro Forma Financial and Operating Data and notes
thereto, the Selected Historical Financial and Operating Data and notes
thereto and the historical and pro forma financial statements and notes
thereto included elsewhere in this Prospectus. The results of operations for
the six-month period ended June 30, 1997 are not necessarily indicative of the
results to be expected for any other interim period or for the entire year as
a whole.
GENERAL
The combined financial statements for the Company represent the combined
financial position, results of operations, equity and cash flows of USTK and
Old Services. In addition, the long-term debt obligations, related interest
costs and debt guarantee fees of Holdings, the parent entity of USTK, have
been reflected in the combined financial statements as such debt will be
assumed by USTK as part of the Transactions. The comparability of the
financial results of the Company and the Predecessor is primarily affected by
(i) increased revenues resulting from increased harvest levels on the Klamath
Falls Timberlands, (ii) increased depletion charges resulting from the step-up
in asset values of the Timberlands, (iii) reduced per MBF logging and hauling
costs resulting from the use of independent contractors rather than Company
employees to conduct silvicultural activities and the harvesting and delivery
of logs due to lower hourly wage rates, the elimination of compensation
payments during seasonal down time and the reduction in associated capital
costs and (iv) a different customer base, as a majority of the Predecessor's
sales were to an affiliated customer at internally established transfer prices
whereas all of the Company's sales are to unaffiliated conversion facilities
at market based prices (although whether the transfer prices or market-based
prices were higher changed from time to time). Following the consummation of
the Transactions, the Company expects to reduce the harvest levels on the
Klamath Falls Timberlands; however, future financial results will reflect the
acquisition of the Ochoco Timberlands.
SUPPLY AND DEMAND FACTORS
The Company's results of operations are affected by various factors, many of
which are beyond its control, including general industry conditions, domestic
and international prices and supply and demand for logs, lumber and other wood
products, seasonality and competition from other domestic and international
supplying regions and substitute products.
Supply
The supply of logs available for purchase has been most affected in recent
years by significant reductions in timber harvested from public timberlands,
principally as a result of efforts to preserve the habitat of certain
endangered species, as well as a change in the emphasis of government policy
toward habitat preservation, conservation and recreation and away from timber
management. Since the early 1970s, environmental and other similar concerns
and governmental policies have substantially reduced the volume of timber
under contract to be harvested from public lands. The pace of regulatory
activity accelerated in the late 1980s. Federal timber under contract in
Washington and Oregon decreased approximately 88% from approximately 8.4 BBF
in January 1988 to approximately 1.0 BBF in January 1997. The resulting supply
decrease caused prices for logs to increase significantly, reaching peak
levels during 1993 and early 1994. Although prices have declined from these
record levels, current prices still exceed pre-1993 levels. The low supply of
timber from public lands, which is expected to continue for the foreseeable
future, has benefited private timber holders such as the Company through
higher stumpage and log prices.
Industry participants do not expect environmental restrictions to ease
materially within any reasonable planning horizon. Consequently, many
producers of lumber and wood products are attempting to adapt to the new
supply environment by increasing their emphasis on raw material yields,
entering into long term timber
57
<PAGE>
supply arrangements and value added manufacturing, and accessing previously
untapped supplies (such as private wood lot owners, timber with difficult
access, alternative species and imports). These factors have tended to
restrict prices from even greater increases. While raw material supply is
expected to be an ongoing challenge for the lumber and wood products industry,
such conditions are likely to cause the favorable operating environment for
timber owners such as the Company to continue for the foreseeable future.
In response to an increase in timber prices in the early 1990s, imports of
logs and lumber from abroad (from countries such as Canada and New Zealand)
increased. These imports, however, only partially offset the lost volume of
timber from public timberlands and did not replace the mature, high-quality
timber found in greater quantities on public timberlands. Since 1993, imports
have decreased and their impact on timber prices currently is minimal.
Demand
Changes in general economic and demographic factors, including the strength
of the economy and interest rates for home mortgages and construction loans,
have historically caused fluctuations in housing starts and, in turn, demand
and prices for lumber and commodity wood products. With the growth of the home
center distribution business, the repair and remodeling markets have become a
significant factor in terms of the demand for lumber and commodity wood
products and have dampened the wide fluctuations that occurred when new
housing starts were the primary factor. A large portion of the Company's
property consists of Pine species, which are used in the finishing market, for
molding trim, doors and windows. This market is more affected by repair and
remodeling than new housing construction. Prices for these species, primarily
Ponderosa Pine, reached a peak in the spring of 1993 and as a result attracted
imports of Radiata Pine from New Zealand and Chile. The market absorbed these
relatively small quantities with little impact on prices. The demand for logs
in the United States is also affected by the level of lumber imports. In
response to increasing lumber imports from Canada, the United States and
Canada signed an agreement in 1996 which restricts the availability of
Canadian softwood lumber in the United States. The Company believes that this
agreement has not had a material impact on the price or demand for logs in the
United States although its long-term effect is uncertain.
Due to transportation costs, domestic conversion facilities in the Pacific
Northwest tend to purchase raw materials within relatively confined geographic
areas, generally within a 200-mile radius. The conversion facilities in the
vicinity of the Timberlands need more wood supply to run at capacity than can
be produced by nearby timberlands. As a result, the demand from this region is
relatively steady, although prices fluctuate with market conditions.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
(unaudited)
Revenues. Revenues for the first six months of 1997 were $23.8 million, an
increase of 117% over revenues of $11.0 million for the first six months of
1996. This increase was primarily attributable to a $10.0 million increase in
revenues from log and stumpage sales and a $3.5 million increase in timber and
property sales, partially offset by a decrease of $0.7 million in by-products
and other revenues.
Log and stumpage sales volumes for the first six months of 1997 were 46,800
MBF, an increase of 105% over log and stumpage sales volumes of 22,800 MBF for
the first six months of 1996. The significant increase in the volume harvested
was mainly due to the Company's aggressive harvest plan compared to that of
the Predecessor. Average log prices decreased by 1% from $430 per MBF for the
first six months of 1996 to $427 per MBF for the first six months of 1997.
Revenues from a single Lodgepole Pine timber deed sale were $3.5 million
during the first six months of 1997. There were no such timber or property
sales during the first six months of 1996.
58
<PAGE>
The reduction in revenues from by-products and other was primarily
attributable to a 68% decrease in chip sales volume. Due to low demand in the
pulp and paper industry, by the first half of 1997 chip prices had decreased
to a level where it was no longer profitable for the Company to process
residual fiber for use as chips.
Operating Costs. Operating costs were $17.3 million for the first six months
of 1997, an increase of 82% over operating costs of $9.5 million for the first
six months of 1996. This increase was the result of a $1.0 million increase in
cost of products sold, a $1.2 million increase in the cost of timber and
property sales, a $4.7 million increase in depreciation, depletion and road
amortization ("DD&A") expense and a $0.9 million increase in selling, general
and administrative expenses.
The increase in cost of products sold was primarily the result of a $2.2
million increase in logging costs, a $0.2 million increase in severance taxes,
offset by a $1.4 million decrease in wood fiber processing costs. Logging
costs and severance taxes increased primarily as a result of a 105% increase
in the level of merchantable grade logs harvested and sold, partially offset
by a 23% decrease in the Company's logging cost per MBF from $193 per MBF
during the first six months of 1996 to $148 per MBF during the 1997 period.
The decrease in the Company's logging cost per MBF was primarily the result of
the Company's changing from a mix of Company logging crews and outside
contractors during the first six months of 1996 to the use of outside
contractors for all its logging operations during the 1997 period. Wood fiber
processing costs decreased by 86% as a result of a 68% decrease in volume of
chips processed and sold and a writedown to fiber log inventories during the
first six months of 1996, resulting from a decline in chip prices during the
period. During the first six months of 1997, the Company had a timber deed
sale with a cost basis of $1.2 million, whereas no sales of tracts of timber
or timberland were made during the first six months of 1996.
DD&A expense was $5.4 million for the first six months of 1997, a $4.7
million increase over DD&A expense of $0.7 million in the 1996 period. This
increase was primarily due to the significant increase in the Company's
depletion rate combined with a 95% increase in the volume of logs harvested
and sold during the first six months of 1997 compared to the 1996 period. The
increase in the depletion rate was the result of the step-up in asset values
of the Klamath Falls Timberlands upon their acquisition from Weyerhaeuser.
Selling, general and administrative expenses were $2.9 million for the first
six months of 1997, an increase of 43% over comparable expenses of $2.0
million for the first six months of 1996, primarily as a result of a $0.5
million payment to an incoming member of management in consideration for
having forfeited certain in-the-money options granted to him by his prior
employer and increased professional fees. Professional fees increased as a
result of the Company operating as an independent entity rather than as a
division of Weyerhaeuser. The Company expects professional fees to continue at
such level in the near term.
Interest Expense. Interest expense was $10.9 million during the first six
months of 1997 and related to $215.0 million of term debt and $90.0 million of
revolving debt incurred in connection with the Weyerhaeuser Acquisition in
August 1996. There was no interest expense and no debt outstanding during the
first six months of 1996, as the Predecessor participated in Weyerhaeuser's
centralized cash management system.
Amortization of Deferred Financing Fees and Debt Guarantee Fees. The Company
deferred $4.1 million of fees incurred in connection with the financing of the
Weyerhaeuser Acquisition. These costs are being amortized over the life of the
related debt. In addition, the Company is accreting $3.6 million of estimated
Guarantee Fees from August 30, 1996 through the estimated Holdings Debt
extinguishment date of November 15, 1997. The amortization of deferred
financing fees and debt guarantee fee expense during the first six months of
1997 were $0.3 million and $1.7 million, respectively. In addition, the
Company incurred other financing fees in connection with its efforts to obtain
financing totaling $0.2 million which were expensed during the first six
months of 1997. There was no deferred financing fee amortization or debt
guarantee fee expense during the first six months of 1996.
Interest Income. Interest income was $0.8 million during the first six
months of 1997. There was no interest income during the first six months of
1996, as the Predecessor participated in Weyerhaeuser's centralized cash
management system.
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Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The results of operations for 1996 are based on combining the periods
January 1, 1996 through August 29, 1996 (the period prior to the Weyerhaeuser
Acquisition) and August 30, 1996 through December 31, 1996 both as shown in
the historical financial statements appearing elsewhere in this Prospectus.
The principal effect of the Weyerhaeuser Acquisition in 1996 was an increase
in DD&A expense (due to a higher cost basis for the Company's timber,
timberlands and logging roads) and interest expense (due to borrowings to
finance the Weyerhaeuser Acquisition).
Revenues. Revenues were $29.6 million in 1996, a decrease of 7% from
revenues of $31.7 million in 1995. Revenues from the sale of logs were $27.7
million in 1996, as compared to $29.1 million in 1995 while by-products and
other revenues were $1.9 million in 1996, as compared to $2.6 million in 1995.
Log sales volumes remained relatively constant, decreasing from 63,800 MBF
in 1995 to 63,000 MBF in 1996. The majority of the revenue decrease was due to
a reduction in the average log sales price of $17 per MBF from $456 in 1995 to
$439 in 1996. Sales prices were negatively affected in 1996 by uncertainty
surrounding the possible sale of the Klamath Falls Timberlands, as some
customers obtained other sourcing commitments. The average sales price was
also reduced due to a change in the species mix of the logs sold, with a
higher percentage of lower valued White Fir and a lower percentage of higher
valued Douglas Fir logs.
The reduction in revenues from by-products and other was primarily
attributable to a 26% decrease in chip sales revenue. Due to low demand in the
pulp and paper industry, average chip prices decreased by 26% in 1996 compared
to 1995.
Operating Costs. Operating costs were $31.7 million in 1996, a 53% increase
over operating costs of $20.7 million in 1995. This increase was the result of
a $7.8 million increase in selling, general and administrative expense, a $2.8
million increase in DD&A expense and a $0.4 million increase in cost of
products sold. The increase in selling, general and administrative expense was
primarily the result of $4.9 million in one time payments for advisory
services paid to affiliates of the Company in connection with the Weyerhaeuser
Acquisition and $2.8 million of management fees paid to an affiliate of the
Company for management services. The advisory fees were incurred in connection
with the Weyerhaeuser Acquisition and its initial financing. The management
fee generally relates to services rendered in connection with the initial
formation of USTK and Old Services. The increase in DD&A was primarily due to
the significant increase in the Company's depletion rate as a result of the
step-up in asset values of the Klamath Falls Timberlands upon their
acquisition from Weyerhaeuser. The increase in cost of goods sold was
primarily due to an increase in wood fiber processing costs.
Interest Expense. Interest expense was $7.3 million in 1996 and related to
$215.0 million of term debt and $90.0 million of revolving debt incurred in
connection with the Weyerhaeuser Acquisition in August 1996. There was no
interest expense and no debt outstanding during 1995, as the Predecessor
participated in Weyerhaeuser's centralized cash management system.
Amortization of Deferred Financing Fees and Debt Guarantee Fees. The Company
deferred $4.1 million of fees incurred in connection with the financing of the
Weyerhaeuser Acquisition. These costs are being amortized over the life of the
related debt. In addition, the Company is accreting $3.6 million of estimated
Guarantee Fees from August 30, 1996 through the estimated Holdings Debt
extinguishment date of November 15, 1997. The Guarantee Fees payable to
Weyerhaeuser relate to the Holdings Debt which was incurred in connection with
the Weyerhaeuser Acquisition. The amortization of deferred financing fees and
debt guarantee fee expense during 1996 were $0.2 million and $1.1 million,
respectively. There was no deferred financing fee amortization or debt
guarantee fee expense during 1995.
Interest Income. Interest income was $0.4 million during 1996. There was no
interest income during 1995, as the Predecessor participated in Weyerhaeuser's
centralized cash management system.
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Other (Income) Expense, Net. Other (income) expense, net changed from income
of $0.6 million in 1995 to near zero in 1996. Nonrecurring income from
easements and road use permits represents $0.4 million of the 1995 other
income, net.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues were $31.7 million in 1995, a decrease of 2% from
revenues of $32.3 million in 1994. Revenues from the sale of logs remained
constant at $29.1 million, while by-products and other revenues were $2.6
million in 1995 as compared to $3.2 million in 1994.
Log sales volumes for 1995 were 63,800 MBF, a decrease of 7% from log sales
volumes of 68,300 MBF in 1994. This decrease was largely attributable to a 34%
decrease in the volume of logs sold to unaffiliated customers from 34,900 MBF
in 1994 to 23,000 MBF in 1995, partially offset by a 22% increase in the
volume of logs sold to Weyerhaeuser facilities, from 33,400 MBF in 1994 to
40,700 MBF in 1995. The higher level of sales to unaffiliated customers in
1994 was mainly attributable to accelerated harvesting by the Predecessor of
certain tracts of timberland which were susceptible to fire and insect loss in
the then-prevailing drought conditions.
The average log sales price per MBF increased by $30 per MBF, or 7%, to $456
per MBF in 1995, as compared to $426 per MBF in 1994. This increase was
primarily attributable to an increase of 12% in the average price per MBF of
log sales to unaffiliated customers from $436 per MBF in 1994 to $490 per MBF
in 1995 and a 5% increase in the price per MBF of log sales to Weyerhaeuser
facilities from $415 per MBF in 1994 to $437 per MBF in 1995. The increase in
the average unaffiliated customer selling price per MBF was primarily due to
an increase in the mix of Douglas Fir from 29% of total unaffiliated customer
sales volume in 1994 to 54% in 1995. The average sales price per MBF for
Douglas Fir was $512 and $544 in 1994 and 1995, respectively, as compared to
an average of $405 and $427, respectively, for the combined sales of all other
species. The increase in the average sales prices per MBF was consistent with
an industry-wide increase in log prices during this period. The log sales
price per MBF for sales to Weyerhaeuser facilities was based on internal
transfer prices determined by Weyerhaeuser.
Operating Costs. Operating costs were $20.7 million in 1995, a decrease of
7% from operating costs of $22.3 million in 1994. This decrease was primarily
due to a $1.4 million decrease in cost of products sold. Cost of products sold
decreased because of a $1.0 million decrease in wood fiber processing costs
due to a 34% decline in chip volume processed and sold and a $0.6 million
decrease in logging costs resulting from a decrease in the harvest levels of
merchantable grade logs, partially offset by an increase in logging costs on a
per MBF basis.
Other Income and Expense, Net. Other income and expense, net, showed a
change from an expense of $0.1 million in 1994 to income of $0.6 million in
1995. Nonrecurring income from easements and road use permits represents $0.4
million of the 1995 income.
LIQUIDITY AND CAPITAL RESOURCES
Since inception of operations on August 30, 1996, the Company's primary
source of liquidity has been cash and cash equivalents from borrowings under
its revolving credit facility drawn on at the closing of the Weyerhaeuser
Acquisition. As of June 30, 1997, the Company had a cash balance of $30.4
million and working capital of $0.6 million and had no internal borrowing
capacity under its revolving credit facility based on the terms of the credit
facility. On July 14, 1997, this revolving credit facility and certain term
debt was refinanced. See the further discussion of this refinancing below.
The following comparison of cash flows from operating, investing and
financing activities for 1996 are based on combining the periods January 1,
1996 through August 29, 1996 (the period prior to the Weyerhaeuser
Acquisition) and August 30, 1996 through December 31, 1996 both as shown in
the historical financial statements appearing elsewhere in this Prospectus.
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Operating Activities. Cash flows provided by operating activities for the
six months ended June 30, 1997 was $6.1 million as compared to $2.3 million
for the six months ended June 30, 1996. The $3.8 million increase in cash
flows provided by operating activities was primarily due to an increase in the
volume of log and stumpage sales, proceeds from a timber deed sale, and $1.0
million of advance deposits on stumpage sales contracts. These increases were
partially offset by $6.8 million in interest payments.
Cash flows provided by operating activities for the year ended December 31,
1996 were $2.5 million as compared to $11.8 million for the year ended
December 31, 1995. The $9.3 million decrease in cash flows from operating
activities from 1995 to 1996 is primarily attributable to $4.9 million in one
time payments to certain affiliates of the Company in connection with the
Weyerhaeuser Acquisition, $2.8 million in management fees paid to an affiliate
of the Company and $2.1 million in interest payments. The Predecessor had no
interest costs, as the Predecessor participated in Weyerhaeuser's centralized
cash management system. The increase in accounts receivable from December 31,
1995 to December 31, 1996 is attributable to the change in ownership of the
Company's Timberlands. The Predecessor reflected receivables from other
Weyerhaeuser entities as a component of Weyerhaeuser's Investment and
Advances, net rather than as accounts receivable. The decrease in inventories
from December 31, 1995 to December 31, 1996 is attributable to the build up of
fiber log inventories in 1995 due to the profitability of the chip market
during that period. As the chip market softened in 1996, these inventories
were liquidated.
Investing Activities. Cash flows provided by investing activities was $9.7
million for the first six months of 1997, as compared to cash flows used by
investing activities of $0.3 million during the 1996 period. During the first
six months of 1997, a $10.0 million receivable from an affiliate was repaid.
Cash flows used in investing activities was $291.9 million for 1996 as
compared to $1.9 million in 1995. In 1996, $283.5 million was used in the
Weyerhaeuser Acquisition and $10.0 million was paid to an affiliate. This was
partially offset by $2.4 million in proceeds from logging equipment
dispositions as a result of the Company's discontinuance of the company
logging crews upon consummation of the Weyerhaeuser Acquisition.
Financing Activities. Cash flow used in financing activities was $2.1
million for the first six months of 1997, as compared to $2.0 million during
the 1996 period. During the first six months, the Company distributed $1.2
million to a member related to his 1997 estimated tax liability and incurred
$0.9 million of costs in connection with this offering. Cash used in financing
activities of $2.0 million during the first six months of 1996 reflects the
Predecessor's normal practice of distributing net operating and investment
cash flows to Weyerhaeuser.
Cash flows provided by financing activities were $306.0 million for 1996.
These cash flows principally represent borrowings under debt facilities and
equity contributions from members in connection with the Weyerhaeuser
Acquisition. Cash flows used in financing activities of $10.0 million in 1995
reflects the Predecessor's normal practice of distributing net operating and
investment cash flows to Weyerhaeuser.
On August 29, 1996, USTK entered into a $90.0 million revolving credit
facility and an $85.0 million term loan facility with several banks to finance
a portion of the Weyerhaeuser Acquisition, and Holdings incurred the $130.0
million in Holdings Debt pursuant to an agreement with several banks to
finance the remaining portion of the Weyerhaeuser Acquisition.
On July 14, 1997, the Company refinanced the debt incurred by USTK to
finance the Weyerhaeuser Acquisition pursuant to a loan agreement with a
commercial bank and on July 15, 1997, increased USTK's debt to finance the
Ochoco Acquisition. The refinancing will result in an extraordinary loss on
extinguishment of debt of approximately $3.4 million in the third quarter of
1997 due to the write-off of existing unamortized deferred financing fees. As
of September 30, 1997, the USTK Debt consists of a $200.0 million seven-year
amortizing secured facility and $83.0 million outstanding under an $85.0
million secured revolving credit facility.
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Concurrent with this offering the Operating Company will issue $225.0
million aggregate principal amount of Notes in the Public Note Offering and
will enter into the Bank Credit Facility providing for the $25.0 million
Working Capital Facility and the $75.0 million Acquisition Facility. See
"--Description of Indebtedness--Description of Notes"; and "--Description of
Bank Credit Facility." The Company will use the net proceeds of this offering,
the Public Note Offering, approximately $25.1 million of borrowings under the
Acquisition Facility and cash on hand at the closing of the Transactions
(estimated to be approximately $43.0 million) in order to retire the Holdings
Debt and the USTK Debt.
Capital expenditures for the ten months ended June 30, 1997 totaled
approximately $1.1 million. Capital expenditures incurred were mainly in the
nature of land management/silvicultural expenses and office equipment and
vehicle purchases. Capital expenditures were financed through cash flow
generated by operations. As the Company does not currently own and does not
plan to own manufacturing facilities, and all logging is subcontracted to
third parties, it is anticipated that capital expenditures in the future will
not be material and will consist mainly of land management/silvicultural
expenditures. It is not currently anticipated that the Company will either
maintain log inventories, although small log inventories may be maintained for
a short period of time, or incur material capital expenditures for machinery
and equipment. The Company anticipates that capital expenditures will be
approximately $0.8 million in 1998. Capital expenditures will consist
primarily of capitalized silvicultural expenses and miscellaneous equipment
and computer hardware and software expenses.
Distributions of Available Cash
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distribution, plus any Common Unit
Arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. Upon expiration of the Subordination Period, all
Subordinated Units will be converted on a one-on-one basis into Common Units
and will participate pro rata with all other Common Units in future
distributions of Available Cash. Under certain circumstances, up to 2,203,702
Subordinated Units may convert into Common Units prior to the expiration of
the Subordination Period. Common Units will not accrue arrearages with respect
to distribution for any quarter after the Subordination Period and
Subordinated Units will not accrue any arrearages with respect to
distributions for any quarter. See "Cash Distribution Policy."
Available Cash from Operating Surplus will generally be distributed 98% to
Unitholders and 2% to the General Partner. If distributions of Available Cash
from Operating Surplus exceed the Target Distribution Levels, the General
Partner will receive a percentage of such excess distributions that will
increase to 50% of the excess distributions above the highest Target
Distribution Level. See "Cash Distribution Policy--Incentive Distributions--
Hypothetical Annualized Yield."
DESCRIPTION OF INDEBTEDNESS
Description of Notes
Concurrent with this offering, the Operating Company will issue $225.0
million aggregate principal amount of Notes in a public offering registered
under the Securities Act. The net proceeds of the sale of the Notes will be
used, together with the proceeds of the sale of the Common Units offered
hereby, borrowings under the Acquisition Facility and cash on hand, to retire
the Holdings Debt and the USTK Debt. The sale of the Common Units offered
hereby is subject to, among other things, the sale of the Notes.
The following is a summary of the terms of the Notes, which will be issued
pursuant to an Indenture (the "Indenture"), a form of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
This summary is qualified in its entirety by reference to the Indenture. The
Notes will be unsecured general obligations of the Company and will bear
interest at % per annum from the date of issuance, payable
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semi-annually in arrears. The Notes will mature 10 years from the date of
issuance. The Notes will not require any mandatory redemption or sinking fund
payments prior to maturity and are redeemable at the option of the Company, in
whole or in part, at any time on or after five years from the date of issuance
at redemption prices specified in the Indenture, plus accrued interest. Upon
the occurrence of certain events constituting a "change of control" (as
defined in the Indenture), the Company must offer to purchase the Notes, at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase.
The Indenture contains various affirmative and restrictive covenants
applicable to the Operating Company and its subsidiaries, including
limitations on the ability of the Operating Company and its subsidiaries to,
among other things, (i) incur additional indebtedness (other than certain
permitted indebtedness) unless the Operating Company's Consolidated Fixed
Charge Coverage Ratio (as defined in the Indenture) is greater than 2.25 to
1.00, and (ii) make distributions on the Units, make investments (other than
permitted investments) in any person, create liens, engage in transactions
with affiliates, suffer to exist any restrictions on the ability of a
subsidiary to make distributions or repay indebtedness to the Company, engage
in sale and leaseback transactions, enter into a merger, consolidation or sale
of all or substantially all of its assets, sell assets or harvest timber in
excess of certain limitations or engage in a different line of business. Under
the Indenture, the Operating Company will be permitted to make cash
distributions to the Company so long as no default or event of default exists
or would exist upon making such distribution (a) if the Operating Company's
Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is
greater than 1.75 to 1.00, in an amount, in any quarter, equal to Available
Cash (as defined in the Indenture) for the immediately preceding fiscal
quarter or (b) if the Operating Company's Consolidated Fixed Charge Coverage
Ratio is equal to or less than 1.75 to 1.00, in an aggregate amount after the
closing of this offering not to exceed (i) $7.5 million less the aggregate of
all restricted payments made under this clause (b)(i) during the immediately
preceding 16 fiscal quarters (or shorter period, if applicable, beginning on
the issue date of the Notes), plus (ii) the net proceeds of certain capital
contributions (including the sale of Units) received by the Company.
Description of Bank Credit Facility
Concurrent with this offering, the Operating Company will enter into the
Bank Credit Facility with one or more commercial banks. The following is a
summary of the terms of the Bank Credit Facility, the form of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is
a part. This summary is qualified in its entirety by reference to the Bank
Credit Facility. The Bank Credit Facility will consist of a $75.0 million
Acquisition Facility and a $25.0 million Working Capital Facility. The Bank
Credit Facilities will bear interest at a rate based upon, at the Operating
Company's option, either the London Interbank Offered Rate plus a margin or a
Base Rate (each as defined in the Bank Credit Facilities). The Working Capital
Facility will expire after years, but may be extended annually thereafter
with the consent of banks representing at least % of the commitments
thereunder. The Acquisition Facility will revolve for years, after which
time any outstanding loans thereunder will amortize semiannually in equal
principal payments over a period of years. Amounts borrowed under both
facilities are due at maturity.
CONTINGENCIES
Revenues, net income and cash flow from the Company's operations will be
dependent to a significant extent on its ability to harvest timber at adequate
levels. There can be no assurance that the Company will in the future achieve
harvest levels necessary to maintain or increase revenues, net income or cash
flows. Weather conditions, timber growth cycles, access limitations and
regulatory requirements associated with the protection of wildlife and water
resources or any shortage of contract loggers may restrict harvesting of the
Timberlands, as may other factors, including damage by fire, insect
infestation, disease, prolonged drought and natural disasters.
Although damage from such causes usually is localized and affects only a
limited percentage of the timber, there can be no assurance that any damage to
the Timberlands will, in fact, be so limited. The risks to the Company
described above are somewhat heightened because of the concentration of the
Timberlands in central
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Oregon. As is typical in the forest products industry, the Company does not
maintain insurance coverage with respect to damage to its timberlands. Even if
such insurance were available, the cost would be prohibitive. The Company
believes that any losses that it has experienced from the circumstances
described above have not been significant enough to warrant maintaining such
insurance.
EFFECTS OF INFLATION
Prices for the Company's stumpage and logs may be subject to sharp cyclical
fluctuations due to market or other economic conditions, including the level
of construction activity but generally do not directly follow inflationary
trends. Costs of forest operations and general and administrative expenses
generally do tend to reflect inflationary trends.
OTHER
Pursuant to an agreement dated as of July 29, 1997 between Mr. Stephens and
USTK, Old Services, Mr. Rudey and certain of his affiliates, Mr. Stephen's
interest in Old Services will be redeemed for 95,238 Subordinated Units upon
the consummation of the Transactions and $1.0 million payable in January 1998.
Pursuant to an agreement dated as of July 29, 1997 between Mr. Hornig and
USTK, Old Services, Mr. Rudey and certain of his affiliates, Mr. Hornig's
interest in Old Services will be redeemed upon the closing of the Transactions
for 50,040 Subordinated Units.
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BUSINESS AND PROPERTIES
GENERAL
The Company's business consists of the growing of trees and the sale of logs
and standing timber. The Company owns approximately 630,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 1997 to
be approximately 2.2 BBF in Oregon east of the Cascade Range. Logs harvested
from the Timberlands are sold to unaffiliated domestic conversion facilities.
These logs are processed for sale as lumber, plywood and other wood products,
primarily for use in new residential home construction, home remodeling and
repair and general industrial applications. The Company also owns and operates
its own seed orchard and produces approximately five million conifer seedlings
annually from its nursery, approximately half of which are used for its own
internal reforestation programs, with the balance sold to other forest
products companies.
The Timberlands include substantial holdings of merchantable, good quality
timber. The Timberlands' merchantable timber consists of Ponderosa Pine
(approximately 42%) and Douglas Fir (approximately 14%), species which have
historically commanded premium prices over other softwood species, with the
balance consisting of Lodgepole Pine, White Fir and other softwood species.
The Timberlands have stands of varying ages and are unique in the forests east
of the Cascade Range in Oregon in that approximately 184,000 acres are
actively managed tree farms or Plantations. The Plantations were first
established by Weyerhaeuser in the early 1960s and acreage has been planted
each year since then. Currently, the Plantations contain age classes ranging
generally from two to 35 years old. Initial thinning of the Plantation stands,
including the thinning of commercial quantities of merchantable timber, is
expected to begin within the next five years. Because the timber on the
Plantations is generally not yet considered merchantable, volumes of timber on
the Plantations are not included in the Company's estimated merchantable
timber volume. The balance of the Timberlands are composed of natural stands.
The Company was recently formed to acquire and own substantially all of the
equity interests in USTK and to acquire and own the business and assets of Old
Services. USTK and Old Services acquired the Klamath Falls Timberlands,
containing an estimated merchantable timber volume of approximately 1.9 BBF
and related assets from Weyerhaeuser in August 1996 for a cash purchase price
of $281.5 million. Most of the Klamath Falls Timberlands had been owned by
Weyerhaeuser for more than 50 years. The Company recently sold approximately
12,000 acres from the Klamath Falls Timberlands. On July 15, 1997, USTK
acquired the Ochoco Timberlands, containing an estimated merchantable timber
volume of approximately 280 MMBF and related assets, for a cash purchase price
of approximately $110.4 million. Over 45% of the merchantable timber on the
Ochoco Timberlands is at least 80 years old. The Company believes that the age
classes and species mix of the Ochoco Timberlands fit well with the Klamath
Falls Timberlands and provide the Company flexibility in developing its
harvest plans. Most of the land comprising the Ochoco Timberlands had been
owned by Ochoco since the 1920s. The Company expects that during 1997,
including the five and one-half months of its operations on the Ochoco
Timberlands, it will harvest approximately 153 MMBF of timber (including the
sale of harvest rights) from the Timberlands.
During the period from January 1, 1994 through the acquisition of the
Klamath Falls Timberlands by USTK, approximately 58% of the logs harvested
from the Klamath Falls Timberlands had been delivered to a plywood mill owned
by Weyerhaeuser at Klamath Falls, Oregon. In recent years, substantially all
of the timber harvested from the Ochoco Timberlands had been delivered to
Ochoco's mills. The Company does not currently own any conversion facilities
nor does it intend in the future to own any such facilities on a long-term
basis; consequently, all of the Company's sales are made to unaffiliated third
parties. Concurrent with USTK's acquisition of the Klamath Falls Timberlands,
USTK arranged for Collins, a privately owned forest products company located
within the Klamath Falls Timberlands area, to purchase Weyerhaeuser's Klamath
Falls mill facilities. The Company has entered into the Collins Supply
Agreement, a 10-year log supply agreement with Collins providing for the
purchase by the plywood mill and delivery by the Company of a minimum of 34
MMBF of logs each year at market prices (approximately 25% of the Company's
estimated annual harvest in the next three years). In addition to its sales
under the Collins Supply Agreement, the Company sells logs to conversion
facilities located
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in the area surrounding the Timberlands and operated by third parties. There
are currently more than 50 primary conversion facilities located within a 150
mile radius of the Company's base of operations in Klamath Falls.
The Company believes that it is well positioned to compete successfully in
the timber business for the following reasons: (i) the Company has substantial
holdings of timber properties which include over 2.2 BBF of merchantable, good
quality timber, approximately 184,000 acres of plantation timberland and a
full-scale seed orchard and nursery operation located in a region where
conversion facilities have been experiencing shortages in the supply of wood
fiber; (ii) the Company focuses on owning timberlands rather than operating
conversion facilities, which minimizes the Company's cost structure and
capital expenditures, allows the Company to seek the most favorable markets
for its timber rather than being committed to supply to its own facilities,
and ensures that the Company will not compete with its customers; (iii) the
Company's senior operating management team has an average of more than 20
years of experience in the forest products industry, including experience in
identifying, evaluating, completing and integrating acquisitions of timber
properties; (iv) the Company's lean operating structure allows it to
efficiently manage its Timberlands, and should enable it to acquire additional
timberlands without commensurate increases in overhead; and (v) the Company's
GIS enables the Company to evaluate the optimal timing and patterns of the
harvest of its Timberlands and evaluate and integrate acquisitions of
additional timberlands.
BUSINESS STRATEGY
The Company's business strategy is to manage its Timberlands in a manner
that will enable it to pay the Minimum Quarterly Distribution on all the Units
and to increase the per Unit value of the Company's assets and cash flow.
Management intends to pursue this strategy in a number of ways:
Continue to Increase Productivity of the Timberlands
The Company intends to continue to utilize and increase the use of various
modern forestry practices on its Timberlands in order to increase their
productivity. Examples of these practices include the use of the Company's
GIS, which enables it to develop optimal harvest plans; the application of
selective harvesting and thinning practices, which improve the productivity of
the remaining stand while providing merchantable timber for sale; and the
development of genetically improved seedlings to grow trees with desirable
traits such as superior size and disease resistance. Certain members of senior
management were involved in the development of these practices while at
Weyerhaeuser, and the Company expects to benefit from their experience.
Maximize Investment in Ochoco Timberlands
In order to maximize its investment in the Ochoco Timberlands, the Company
intends to harvest the mature timber thereon over the next five to six years.
As a result, the Company will convert Ochoco's older, slower growing forests
to younger, more productive forests. In addition, by increasing the harvest on
the Ochoco Timberlands, the Company will be able to reduce the amount of
timber harvested on the Klamath Falls Timberlands, allowing these faster
growing Timberlands to continue to mature, thereby increasing their commercial
value.
Pursue Accretive Acquisition Opportunities
The Company intends to identify, evaluate and acquire undervalued
timberlands in North America with the objective of increasing both the value
of the Company's Units and its cash flow. The Company believes that
management's relationships within the timber industry, as well as its focus on
operating timberlands, rather than conversion facilities, give it a
competitive advantage in developing acquisition opportunities. The Company
believes that its use of independent contractors to conduct its silviculture
and harvesting activities should enable it to operate significantly increased
acreage without a commensurate increase in fixed overhead costs. The Company
intends to evaluate and pursue those opportunities that are located within
markets distinguished by strong demand, that include ages and species that
complement the Company's existing inventory, and that fit the
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Company's current and long-term value objectives. In addition, the Company may
in the future acquire timberlands located in areas, and containing timber
suitable for export. By early January 1998, it is expected that Edward J.
Kobacker, the current Executive Vice President and Chief Operating Officer of
the General Partner, will become the President and Chief Executive Officer of
the General Partner and that John J. Stephens, the current President and Chief
Executive Officer, will become Vice Chairman of the Board of Directors of the
General Partner in order to devote more time to the Company's acquisition
program.
Implement Flexible Marketing Strategies
The Company's marketing strategy emphasizes flexibility in structuring the
sales of its timber assets. Depending upon the needs of its customers and
current market conditions, the Company can either sell harvested logs or
stumpage and can sell forest by-products, such as wood chips. The Company
believes that its strategy of owning timberlands rather than conversion
facilities that compete with its customers is an important factor in
developing and maintaining strong customer relationships. Since the
Weyerhaeuser Acquisition, the Company has sold logs to 17 different customers
and expects to sell to a greater number in the future. In addition to log and
stumpage sales, the Company may also sell or exchange parcels of land with
other timberland owners. For example, the Company may seek to realize the
value of portions of the Plantations by exchanging them for more mature timber
owned by timberland owners or by selling them for immediate cash proceeds.
Sell Land for Higher and Better Uses
The Company seeks to realize the value of land that may have a higher and
better use than for timberland management or that is otherwise a candidate for
sale or exchange. For example, some of the Timberlands may have greater value
if used for ranching, farming or recreational purposes. The Company intends to
sell approximately 30,000 acres of small tracts for higher and better uses
over the next ten years. The Company recently sold approximately 12,000 acres
from the Klamath Falls Timberlands. In addition, the Company has identified a
tract of approximately 23,000 acres that it intends to sell within the next
five years. The Company will also seek to exchange lands with significant
environmental and recreational values for lands that are more suitable for
commercial timberland management.
TRANSACTION BACKGROUND
USTK and Old Services were formed in mid-1996 to own and operate the Klamath
Falls Timberlands. USTK acquired the Klamath Falls Timberlands from
Weyerhaeuser in August 1996 for consideration of $281.5 million plus
approximately $11.0 million of fees and expenses. To finance such acquisition,
USTK entered into a $90.0 million revolving credit facility and an $85.0
million term loan facility with a group of banks. In addition, Holdings
incurred the $130.0 million in Holdings Debt pursuant to an agreement with a
group of banks and the members of Holdings contributed $10.0 million of equity
capital to Holdings. Holdings then contributed $140.0 million of equity
capital to USTK. Included among the fees incurred in connection with the
Weyerhaeuser Acquisition was a one-time $4.9 million advisory fee paid to
affiliates of the Company. In addition, Weyerhaeuser guaranteed the Holdings
Debt and will receive the Guarantee Fees in connection therewith upon the
closing of the Transactions. The Company paid $2.8 million in management fees
to an affiliate of the Company for management services rendered in connection
with the initial formation of USTK and Old Services. During the period from
August 30, 1996 through December 31, 1996, the Company paid $10.0 million to
an affiliate of the Company; however, such amount, with related interest, was
repaid to the Company in February 1997.
On July 15, 1997, USTK acquired the Ochoco Timberlands from Ochoco for
consideration of approximately $110.4 million plus approximately $5.2 million
of bank fees and expenses. Contemporaneously therewith, USTK entered into a
loan agreement with a commercial bank to refinance the USTK Debt incurred in
connection with the Weyerhaeuser Acquisition and to finance the Ochoco
Acquisition. This debt consists of a $200.0 million
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seven-year amortizing facility and an $85.0 million revolving credit facility.
All of the Company's outstanding indebtedness will be paid in full at the
closing of this offering. See "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Currently, all of the Timberlands are owned by USTK while all of the
management staff, operating equipment and systems and nursery operations
reside at Old Services. Old Services conducts all of the marketing activities
relating to the Timberlands pursuant to a cutting contract with USTK.
Following the closing of the Transactions, all of the Timberlands and related
assets will be owned, and all of the marketing activities will be conducted
by, the Operating Company while all management will be employed by the General
Partner.
THE TIMBERLANDS
Timber Inventory
The Company currently owns and manages approximately 630,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 1997 to
be approximately 2.2 BBF in Oregon east of the Cascade Range. The Timberlands
include substantial holdings of merchantable, good-quality timber. A
merchantable tree is a tree that will produce a sound log 16 feet in length
and at least five inches in diameter, inside bark, at the small end. The
Company's merchantable timber inventory consists of premium species of
softwood, consisting of Ponderosa Pine (approximately 42%) and Douglas Fir
(approximately 14%), species which have historically commanded premium prices
over other softwood species, as well as Lodgepole Pine (approximately 20%),
White Fir (approximately 19%) and other species (approximately 5%).
The Timberlands have stands of varying sizes and ages and are unique in the
forests east of the Cascade Range in Oregon in that approximately 184,000
acres of the 630,000 acre total consist of actively managed pine Plantations
with stands ranging in age from two to 35 years. The Plantations are stocked
with high quality Ponderosa Pine (approximately 73%) and Lodgepole Pine
(approximately 27%). Because the timber on the Plantations is generally not
yet considered merchantable, volumes of timber on the Plantations are not
included in the Company's estimated merchantable timber volume. However,
initial thinning of the Plantation stands, including the thinning of
commercial quantities of merchantable timber, is expected to begin within the
next five years. See "--Harvest Plans."
The following table demonstrates the estimated merchantable timber inventory
by species within the Timberlands as of January 1, 1997 (all volumes are as
verified by Mason, Bruce & Girard, Inc. ("MBG") and are based, in some cases,
on information developed by Company personnel):
MERCHANTABLE TIMBER INVENTORY BY SPECIES
(MMBF)
<TABLE>
<CAPTION>
KLAMATH
FALLS
SPECIES TIMBERLANDS OCHOCO TIMBERLANDS TOTAL
------- ------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ponderosa Pine................ 732.7 37% 214.2 78% 946.9 42%
Lodgepole Pine................ 451.4 23% -- 0% 451.4 20%
White Fir..................... 424.1 21% 17.1 6% 441.2 19%
Douglas Fir................... 266.9 14% 44.3(a) 16% 311.2 14%
Other Species(b).............. 102.9 5% 0.5 (c) 103.4 5%
------- ---- --------- -------- ------- ------
Total....................... 1,978.0 100% 276.1 100% 2,254.1 100.0%
======= ==== ========= ======== ======= ======
</TABLE>
- --------
(a) Includes Grand Fir
(b) Includes Cedar, Sugar Pine, Western Larch and other species
(c) Less than 1%
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<PAGE>
Size and Species Distribution of Merchantable Timber
The Company's Timberlands are well diversified, not only by species mix but
also by size distribution. Timber on the Timberlands generally reaches
merchantable size between 40 and 50 years in natural stands and between 25 and
35 years in the Plantations. The following table describes the estimated
volume distribution of merchantable timber on the Timberlands by species and
diameter breast height ("DBH") classes (as verified by MBG) as of January 1,
1997. Lodgepole Pine having a DBH of 6p is generally considered merchantable,
while the other timber species are generally considered merchantable at a DBH
of 7 1/2p. Such other species, to the extent their DBH is less than 7 1/2p,
are not included in any of the tables on this page.
MERCHANTABLE TIMBER VOLUME DISTRIBUTION BY SPECIES AND BY DBH
(MMBF)
<TABLE>
<CAPTION>
KLAMATH FALLS TIMBERLANDS
-------------------------------------------------
PONDEROSA LODGEPOLE WHITE DOUGLAS OTHER
DBH PINE PINE FIR FIR SPECIES TOTAL
--- --------- --------- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
6"-10"........................ 92.4 105.3 60.6 31.5 24.8 314.6
11"-15"....................... 355.8 229.5 198.3 115.6 31.8 931.0
16"-19"....................... 181.5 84.3 99.4 70.2 19.4 454.8
20"-23"....................... 52.1 23.7 29.1 24.0 9.6 138.5
24"+.......................... 50.9 8.6 36.7 25.6 17.3 139.1
----- ----- ----- ----- ----- -------
Total....................... 732.7 451.4 424.1 266.9 102.9 1,978.0
===== ===== ===== ===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
OCHOCO TIMBERLANDS
-------------------------------------------------
PONDEROSA LODGEPOLE WHITE DOUGLAS OTHER
DBH PINE PINE FIR FIR SPECIES TOTAL
--- --------- --------- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
6"-10"........................ 24.4 -- 2.1 4.7 0.0 31.2
11"-15"....................... 51.6 -- 7.3 18.6 0.4 77.9
16"-19"....................... 33.0 -- 3.4 10.8 0.1 47.3
20"-23"....................... 33.1 -- 2.1 5.9 0.0 41.1
24"+.......................... 72.1 -- 2.2 4.3 0.0 78.6
----- ----- ----- ----- ----- -------
Total....................... 214.2 -- 17.1 44.3 0.5 276.1
===== ===== ===== ===== ===== =======
</TABLE>
The following table describes the acreage distribution of timber on the
Plantations by age class (as verified by MBG) as of January 1, 1997:
ACREAGE DISTRIBUTION BY AGE CLASS ON PLANTATIONS
<TABLE>
<CAPTION>
AGE CLASS IN YEARS ACREAGE
------------------ -------
<S> <C>
1-5........................................................... 28,987
6-10.......................................................... 11,893
11-15.......................................................... 20,531
16-20.......................................................... 75,441
21-25.......................................................... 43,296
26+............................................................ 4,220
-------
Total........................................................ 184,368
=======
</TABLE>
Timber Growth
Timber growth rates reflect timberland productivity and the rate of return
on a timber investment. Growth rate is an important factor in determining when
to harvest timber and the harvest potential of timberlands over the long term.
Merchantable timber is economically mature for harvesting when its current
growth rate falls below the desired rate of return on the investment in the
standing trees. The average growth rate from
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regeneration to economic maturity measures the capacity of the land for timber
production. The Company's older and natural stands on the Timberlands that are
expected to provide the near term harvest have a current average growth rate
of approximately at least 160 board feet per acre per annum. The younger
Plantations are growing at a rate that is expected to average at least 315
board feet per acre per annum to economic maturity in 60 years. This growth
rate is based on calculated volumes at the time of maturity. The Company has
achieved higher growth rates on the Plantations by planting seedlings which
are able to begin growing immediately (as compared to the slower natural
regeneration process), by eliminating competing non-timber growth from the
Timberlands and by applying modern forestry practices to assist the growth of
the timber. Management can take actions that help to enhance growth rate in
the natural stands as well. For example, selective harvesting in the slower
growing natural stands opens up the timber stand allowing for more vigorous
growth of the remaining trees. When it is no longer possible to maintain
acceptable growth rates in these stands they will be harvested entirely and
converted to faster growing plantations.
Harvest Plans
The Company strives to manage all of its Timberlands, including the
Plantations, in an economically prudent and environmentally sensitive manner
in order to maximize their value over time. Integral to this management
process are the Company's long-term harvest plans. The Company prepares its
harvest plans annually based on analyses of the size and age class
distribution of the Timberlands and the economic maturity of each harvest
tract. A tract is considered ready to be harvested when the expected value of
future tree growth on such tract falls below a target rate of return. The
factors the Company considers in determining its long-term harvest plans
include, among other things, current and expected market conditions,
competition, customer requirements, the age, size and species distribution of
the Company's timber, assumptions about timber growth rates (which improve
over time as a result of technological, biological and genetic advances that
improve forest management practices and the increasing proportion of the
Timberlands converted to Plantations), expected acquisitions and dispositions,
access to the Timberlands, availability of contractors, sales contracts and
environmental and regulatory constraints. The Company's harvest plans reflect
the Company's expectations for each year's harvest, including the sites to be
harvested, the manner of harvesting such sites, the volume of each species to
be harvested, the prices expected to be received for the Company's timber, the
amount of stumpage sales, logging and other costs, thinning operations and
other relevant information. The Company has the flexibility to update its
harvest plans during the year to take into consideration changes in these
factors. Under the current harvest plan, the Company intends to harvest 153
MMBF in 1997, 129 MMBF in 1998, 137 MMBF in 1999 and 130 MMBF in 2000 to
maximize the value of the mature, old growth timber located on the Ochoco
Timberlands. The harvest level for each such year includes stumpage and timber
deed sales. The cash flows resulting from such sales will be determined by
contract; however, the timing of the actual harvests could vary depending on
the harvest plans of the buyer of such stumpage or timber deed. From 2001
through 2009, the annual harvest level is expected to range from approximately
117 MBF to approximately 132 MBF, an average of approximately 123 MMBF per
annum. After 2009, the harvest level is expected to decline to an average of
approximately 110 MMBF per annum, which the Company considers to be a more
sustainable level over the long term. The Company believes this harvest plan
can be achieved; however, since harvest plans are based on certain
assumptions, many of which are beyond the Company's control, there can be no
assurance that the Company will be able to harvest the volumes projected in
its harvest plans. While the Company's debt obligations place certain
limitations on the harvest plans, the Company believes that it has sufficient
flexibility to permit modifications in response to fluctuations in the market
for logs and lumber and the other factors described above. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." If
the Company's current harvest plans are pursued unaltered for the next 10
years, if it consummates the land sales contemplated by its strategic plan and
if its other strategic assumptions prove to be accurate, the Company expects
that its timber inventory would decline to approximately 1.7 BBF by the end of
2009 and that its more valuable species of timber would decline as a
percentage of its total timber inventory by such date. The Company expects
that its inventory would remain relatively stable thereafter. Such harvest
plans, land sales and other strategic assumptions do not take into account any
acquisition that the Company may consummate during such period. See "--Business
Strategy," "--Timber Inventory," and "--Resource Management--"Higher and Better
Use' Timberlands."
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<PAGE>
Access
The Timberlands are accessible by a system of approximately 5,000 miles of
Company-owned and established roadways or low-maintenance roads. The Company
uses third-party road crews to conduct construction and maintenance on its
timberlands. The Company regularly enters into reciprocal road-use agreements
with the USFS and the BLM and cooperates with such agencies in numerous cost-
sharing arrangements regarding jointly used roads. See "--Federal and State
Regulation."
Sales and Markets
Once a block of timberland is ready to be harvested, the Company solicits
offers from its customers for delivery of logs. After a price and volume have
been agreed to among the parties, the Company either (i) contracts a third
party to harvest the acreage and deliver to a roadside site on the
Timberlands, where a contracted trucking company picks up the logs and
delivers them to the customer, or (ii) sells the timber on a stumpage basis
where the customer arranges to harvest and deliver the logs. When the Company
sells timber on a stumpage basis, depending on the length of the contract, it
may either receive payment in full upon the execution of the contract, or may
receive a portion of the payment upon execution of the contract and the
balance of payment when the timber is cut. In a stumpage sale, the Company
retains the risk of loss on the timber until such time as it has been
harvested by the buyer. The Company may also occasionally sell timber to
customers pursuant to timber deeds. In a timber deed sale, the Company may
receive a portion of the payment for the timber at the time of execution of
the contract and the balance of payment at various intervals throughout the
duration of the contract, and the risk of loss on the timber covered by the
contract passes immediately to the buyer, regardless of when the buyer
harvests the timber. The Company currently sells its sawlogs or stumpage
directly to unaffiliated wood products manufacturers and sells its chips to
unaffiliated pulp mills or hardboard plants. The percentage of logs which are
sold as sawlogs/stumpage or pulp logs is dependent upon, among other things,
the species mix and quality of the inventory harvested and the market dynamics
affecting the region. Sawlogs and stumpage sales accounted for approximately
93% of the Company's revenues in 1996.
Most of the timber on the Timberlands is softwood which, due to its long
fiber, strength, flexibility and other characteristics, is generally preferred
over hardwood for construction lumber and plywood. Once processed, sawlogs are
suitable for use as structural grade lumber, appearance grade boards, plywood
and laminated veneer and can also be manufactured for such end uses as window
trim, molding and door jambs. Chips, which can be used to make hardboard or
pulp, accounted for approximately 6% of the Company's revenues in 1996. The
market price of chips has historically been volatile, rising and falling with
the price of pulp. Sales of seedlings accounted for the remaining 1% of the
Company's revenues in 1996.
The Company's customers include numerous unaffiliated operators of
conversion facilities. Since its acquisition of the Klamath Falls Timberlands
in August 1996, the Company has sold logs from such timberlands to 17
different customers. Concurrent with the Weyerhaeuser Acquisition, USTK
arranged for Collins, a privately owned forest products company located within
the Klamath Falls Timberlands, to purchase Weyerhaeuser's Klamath Falls mill
facilities. At such time, the Company entered into the Collins Supply
Agreement, a 10-year log supply agreement with Collins providing for purchase
by the plywood mill and delivery by the Company of a minimum of 34 MMBF of
logs each year at market prices. Between August 29, 1996 (the date of the
Weyerhaeuser Acquisition) and June 30, 1997, timber sales to Collins, Boise
Cascade Corporation, WTD Lumber Company and Crown Pacific Partners, L.P.
accounted for approximately 37%, 17%, 13% and 10%, respectively, of the
Company's revenue. Collins made its purchases pursuant to the 10-year Collins
Supply Agreement, while the other purchases were made pursuant to short-term
arrangements. Although the loss of one or more of such customers or other
significant customers could have a material adverse effect on the Company's
results of operations, the Company believes that the capacity for processing
wood fiber in the Company's markets currently exceeds the supply and that,
therefore, such customers could readily be replaced. Prior to the Company's
acquisition of the Ochoco Timberlands, virtually all of the logs sold from
such timberlands were sold to Ochoco's own facilities. Subsequent to the
Ochoco Acquisition in July 1997, all of the sales from the Ochoco Timberlands
will be made to unaffiliated customers. See "Risk Factors--Risks Inherent in
the
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<PAGE>
Company's Business--Dependence on Certain Key Customers." There are currently
more than 50 primary conversion facilities located within a 150-mile radius of
the Company's base of operations in Klamath Falls, Oregon.
Competition
Due to transportation costs, domestic conversion facilities in the Pacific
Northwest tend to purchase raw materials within relatively confined geographic
areas, generally within a 200-mile radius. It is generally recognized that log
suppliers such as the Company provide their market with a commodity product.
The Company and its competitors all benefit from the same competitive
advantages in the region--namely, excess of demand, close proximity to
numerous mills, and positive demographic trends of the Pacific Northwest and
the West Coast. Therefore, the Company and its competitors are currently able
to sell all the logs they are able to produce. Additional competitive factors
within a market area generally will include species and grade, quality,
ability to supply logs which consistently meet the customers' specifications
and ability to meet delivery requirements. The Company believes that it has a
reputation as a stable and consistent supplier of well-merchandised, high-
quality logs. The Company has no conversion facilities and therefore does not
compete with its customers for logs. The Company believes that this gives it
an advantage over certain of its competitors that also own conversion
facilities.
The Company competes with numerous private land and timber owners in the
northwestern United States and the state agencies of Oregon, as well as
immaterial amounts of foreign imports, primarily from Canada and New Zealand.
In addition, the Company competes with the USFS, the BLM and the Bureau of
Indian Affairs. Certain of the Company's competitors have significantly
greater financial resources than the Company.
RESOURCE MANAGEMENT
Timber Resource Management
All of the silvicultural activities on the Timberlands and the harvesting
and delivery of logs are conducted by independent contractors who are not
employees of the Company. The Company's operations involve intensive timber
management and harvesting operations, which include road construction and
reforestation, as well as wildlife and watershed management, all of which are
carefully monitored using the Company's GIS. See "--Geographic Information
System." The Company employs a number of traditional and recently developed
harvesting techniques on its lands based on site-specific characteristics and
other considerations. Due to the topography of the Timberlands, over 95% of
the Timberlands can be harvested using lower-cost mechanical methods as
opposed to higher-cost cable systems.
Harvesting on the Timberlands is conducted using both selective and
regeneration harvesting. In selective harvesting, a partial harvest provides
merchantable timber and opens up the stand for supplemental growth on the
remaining stand. Harvest entries are separated by approximately 10 to 15 years
and each entry is prescribed for volume to be removed, spacing to be provided,
and diameter limits to be harvested. In regeneration harvesting, which is used
to harvest approximately 30% of the Company's timber, all merchantable volume
is removed in a single harvest. After an area has been regeneration harvested,
the Company employs a reforestation contractor to plant two year old seedlings
at a density of approximately 350 trees per acre. The Company also attempts to
protect and maintain the ecosystem within the Timberlands while providing for
a reasonable harvest. For example, the Company typically leaves a mix of green
and dead trees at the harvest site, including some large trees, snags and
downed logs to enrich and protect the soil for successive generations of trees
and to provide habitats for a variety of wildlife species.
Particular forestry practices vary by geographic region and depend upon
factors such as soil productivity, weather, terrain, tree size, age and
stocking. The rain, site and soil conditions on the east side of the Cascade
Range, for example, permit management to harvest on an optimal rotation, or
harvest cycle, of 55 to 65 years. Forest stands are thinned periodically to
improve growth and stand quality until harvested. The Company actively
utilizes commercial thinning timber management practices. Pre-commercial
thinning, which occurs only in the
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<PAGE>
Plantation stands, is utilized when the timber harvested is not merchantable.
The Company believes that such thinning improves the overall productivity of
the Timberlands by enhancing the growth of the remaining trees. Occasionally,
revenues are generated from pre-merchantable thinning, as was the case in 1995
due to the strong markets for wood chips.
The Company's policy is to ensure that every acre harvested is reforested in
order to enhance the long-term value of its timberlands. Based on the
geographic and climatic conditions of a given harvest site, harvested areas
may be regenerated naturally, by leaving mature trees to reseed the area, or
replanted with seedlings. Natural regeneration methods are widely used on
approximately 70% of the Company's harvested land. Approximately 28% of the
Timberlands acreage currently consist of Plantations. The Company expects to
convert approximately 3,000 to 6,000 acres of natural stands to Plantations
annually. During 1996, the Company planted approximately 2.5 million
seedlings. The Company uses genetically improved seedlings (representing
approximately 90% to 95% of seedlings planted) to grow trees with desirable
traits such as superior growth characteristics, good form and disease
resistance, resulting in greater wood volume over a rotation than that
generated by naturally regenerated seedlings. The seedlings are grown in the
Company's nursery, which uses seeds from the Company's seed orchard, which was
established in 1973. Such seeds are generated by trees that are created by
grafting selected superior genetic stock to mature root stock.
Geographic Information System
The GIS is a computer software program that the Company acquired from
Weyerhaeuser as part of the acquisition of the Klamath Falls Timberlands. The
GIS data, which has been compiled over a period of four years, includes
detailed topographical field maps for every stand within the Timberlands
(including data for the Ochoco Timberlands which was recently added by the
Company), setting forth the characteristics, including age, species, size and
other characteristics for the timber growing on each such stand. Using the
data in the GIS, the Company can use a computer model to "grow" the timber
over time, enabling it to generate long-term harvest plans and to update its
inventory annually. To maintain the integrity of the data in the GIS, the
Company performs a detailed ground survey of the remaining timber inventory on
a tract after each harvest and updates the data in the GIS for that tract.
With the aid of the GIS, the Company is able to actively manage the
Timberlands, track its inventory and develop site-specific harvest plans on
multiple scales, adding additional layers of detail, such as the location of
roadways or wildlife nesting areas, as required. The GIS also permits the
Company to analyze the impact that new legislation may have on its timberlands
by inputting the proposed constraints imposed by such legislation in light of
the particular field characteristics of its Timberlands. For example, the
Company has recently analyzed the impact on its Timberlands of the potential
listing of the bull trout as an endangered species under the Endangered
Species Act, by using the GIS to review the particular characteristics of the
streams and rivers located on its properties for suitability for bull trout
habitat, and by overlaying the proposed regulatory restraints on harvest at
the sites it determined might be suitable habitat for bull trout. The GIS will
also be used to evaluate potential acquisition opportunities.
Although GIS systems are generally available for purchase, many of the
Company's competitors do not utilize GIS systems, mainly due to the relatively
high initial cost and to the length of time necessary to collect sufficient
data to optimize the use of the GIS. Thus, the Company believes the GIS gives
it an advantage over its competitors.
"Higher and Better Use" Timberlands
The Company seeks to realize the value of land that may have a higher and
better use than for timberland management or that is otherwise a candidate for
sale or exchange. For example, some of the Timberlands may have greater value
if used for ranching, farming or recreational purposes. The Company intends to
sell approximately 30,000 acres of small tracts for higher and better uses
over the next ten years. The Company recently sold approximately 12,000 acres
from the Klamath Falls Timberlands. In addition, the Company has identified a
tract of approximately 23,000 acres that it intends to sell within the next
five years. The Company will also seek to exchange lands with significant
environmental and recreational values for lands that are more suitable for
commercial timberland management.
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FEDERAL AND STATE REGULATION
Endangered Species
The federal Endangered Species Act and counterpart state legislation protect
species threatened with possible extinction. Protection of endangered species
may include restrictions on timber harvesting, road building and other
silvicultural activities in areas containing the affected species. A number of
species indigenous to the Pacific Northwest have been protected under the
Endangered Species Act, including the northern spotted owl, marbled murrelet,
Columbian white-tail deer, mountain caribou, grizzly bear, bald eagle, red
cockaded woodpecker, northern goshawk, bull trout and various anadromous fish
species. Currently, the Company has identified several spotted owl, bald eagle
and northern goshawk nesting areas affecting the Timberlands and the presence
of bull trout in certain of its streams, which may affect harvesting on
approximately 26,000 acres.
In 1990, the United States Fish and Wildlife Service (the "USFWS") listed
the northern spotted owl as a threatened species throughout its range in
Washington, Oregon and California. At the time of the listing, the USFWS
issued suggested guidelines ("Guidelines") to be followed by landowners in
order to comply with the Endangered Species Act's prohibition against harming
or harassing owls. The Guidelines recommend several measures, including the
restriction of harvest activities in areas within a certain proximity of known
owl activity centers. The USFWS also proposed a rule for the conservation of
the owl on non-federal land. Such proposed rule was subsequently withdrawn.
The Oregon Forest Practices Act and related regulations also protect
endangered species and has specific provisions governing habitat protection
for the spotted owl, the bald eagle and other threatened species.
Weyerhaeuser regularly surveyed for bald eagles on its properties and
submitted the results of its surveys and its annual site management plan for
each known eagle site to the Oregon Department of Fish and Wildlife. The
latest survey showed that there were approximately 80 eagle sites on the
Klamath Falls Timberlands. The Company observes the harvesting restrictions
around the eagle sites. In addition, commencing in 1990, Weyerhaeuser utilized
independent wildlife consultants to survey for the presence of northern
spotted owls on or affecting the Klamath Falls Timberlands. The surveys have
been conducted every year in order to (i) meet the regulatory requirements for
timber harvest and other management activities, (ii) monitor existing sites
and determine the current status of such sites, (iii) determine if areas
identified as containing suitable habitat are supporting owls and (iv)
investigate potential spotted owl sightings. The most recent of such surveys
was completed in July 1997, and identified approximately 27 northern spotted
owl sites affecting the Klamath Falls Timberlands, three of which are located
on the Klamath Falls Timberlands. The Company has continued these practices
for Klamath Fall Timberlands and is implementing such practices on the Ochoco
Timberlands.
The Company believes that it is managing its harvesting operations in the
areas affected by protected species in substantial compliance with applicable
federal and state regulations. Based on certain consultants' reports, and on
management's knowledge of the Timberlands, the Company does not believe that
there are any species protected under the Endangered Species Act or similar
state laws that, under current regulations and Court interpretation, would
materially adversely affect the Company's ability to harvest the Timberlands
in accordance with current harvest plans. There can be no assurance, however,
that species within the Timberlands may not subsequently receive protected
status under the Endangered Species Act or that currently protected species
may not be discovered in significant numbers within the Timberlands.
Additionally, there can be no assurance that future legislative,
administrative or judicial activities related to protected species will not
adversely affect the Company or its ability to continue its activities and
operations as currently conducted.
Timberlands
The operation of the Timberlands is subject to specialized statutes and
regulations in the State of Oregon, which has enacted laws which regulate
forestry operations, including the Forest Practices Act, which addresses many
growing, harvesting and processing activities on forest lands. Among other
requirements, these laws restrict the size and spacing of harvest units, and
impose certain reforestation obligations on the owners of forest lands. The
State of Oregon requires a company to provide prior notification before
beginning harvesting activity.
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The Forest Practices Act and other state laws and regulations control timber
slash burning, operations during fire hazard periods, logging activities
affecting or utilizing water courses or in proximity to certain ocean and
inland shore lines, water anti-degradation and certain grading and road
construction activities. A number of other timber states have been considering
legislation and regulations governing forest practices, and some tightening of
existing controls is expected.
Environmental Laws and Superfund
The Company's operations are subject to federal, state and local
environmental laws and regulations relating to the protection of the
environment. Although the Company believes that it is in material compliance
with these requirements, there can be no assurance that significant costs,
civil and criminal penalties, and liabilities will not be incurred, including
those relating to claims for damages to property or natural resources
resulting from the Company's operations.
Environmental laws and regulations have changed substantially and rapidly
over the last 20 years, and the Company anticipates there will be continuing
changes. The trend in environmental regulations is to place more restrictions
and limitations on activities that may affect the environment, such as
emissions of pollutants and the generation and disposal of wastes.
Increasingly strict environmental restrictions and limitations have resulted
in increased operating costs for the Company and it is possible that the costs
of compliance with environmental laws and regulations will continue to
increase.
Although the Company does not consider current laws and regulations relating
to the environment to be materially burdensome, there can be no assurance that
future legislative, administrative or judicial actions, which are becoming
increasingly stringent, will not adversely affect the Company or its ability
to continue its activities and operations as currently conducted. As of the
date of this Prospectus, the Company is not aware of any pending legislative,
administrative or judicial action relating to the protection of the
environment that could materially and adversely affect the Company.
The Federal Comprehensive Environmental Response, Compensation and Liability
Act, also known as Superfund, and comparable state laws impose liability,
without regard to fault or the legality of the original act, on certain
classes of persons that contributed to the release of a "hazardous substance"
into the environment. These persons include the owner or operator of a site
and companies that disposed or arranged for the disposal of the hazardous
substances found at a site. Those statutes also authorize government
environmental authorities such as the U.S. Environmental Protection Agency
and, in some instances, third parties, to take actions in response to threats
to the public health or the environment and to seek recovery of the costs
incurred from the responsible persons. Based on environmental compliance
auditing programs, the Company is not aware of any activities by the Company
or any conditions on the Timberlands that would be likely to result in the
Company being named a potentially responsible party.
Access to Timberlands May be Limited by Federal Regulation
A substantial portion of the Timberlands consists of sections of land that
are intermingled with or adjacent to sections of federal land managed by the
USFS and the BLM. Removal of trees from those portions of the Timberlands
requires transportation of the logs by truck across logging and general
purpose roads. In many cases, access is only, or most economically, achieved
through a road or roads built across adjacent federal land pursuant to a
reciprocal right-of-way ("RROW"). Removal of federal timber often requires
similar access across the Timberlands. Recent litigation (not involving the
Company) before the United States Court of Appeals for the Ninth Circuit held
that the BLM was not required to consult with the USFWS, which administers the
Endangered Species Act, prior to approving a private landowner's proposal to
build an access road across federal land pursuant to an existing RROW entered
into prior to the enactment of the Endangered Species Act wherein the BLM did
not have discretion to disapprove a road segment due to endangered species
concerns. A reversal on appeal or a rehearing of that case, or future federal
law or regulation requiring the BLM to consult with the USFWS in connection
with an RROW, could materially adversely affect the Company's ability to
harvest the
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affected portion of the Timberlands. Certain of the Company's RROW agreements
contain provisions that require compliance with state and federal
environmental laws and regulations. To the extent that the Company acquires
new Timberlands that require access through federal lands, the Company may
enter into new RROW agreements with the BLM or other federal agencies which
would require consultation with the USFWS. In addition, the BLM has published
advance notice of its intent to revise regulations governing RROW agreements
entered into the future to, among other things, expand the BLM's consideration
of environmental and cultural factors in granting, issuing or renewing rights-
of-way, provide the BLM with regulatory authority to object to the location of
roads because of potential effects on threatened or endangered species and
allow for the abandonment of rights-of-way under certain circumstances.
Safety and Health
The operations of the Timberlands are subject to the requirements of the
Federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes relating to the health and safety of employees. The Company believes
that it is in compliance with OSHA regulations, including general industry
standards, permissible exposure levels for toxic chemicals and record-keeping
requirements.
LITIGATION
There is no pending litigation, and to the knowledge of the Company, there
is no threatened litigation, the unfavorable resolution of which could have a
material adverse effect on the business or financial condition of Company.
EMPLOYEES
As of June 30, 1997, the Company had approximately 30 salaried employees,
including employees of the General Partner that manage the businesses of the
Company. The employees of the Timberlands are not unionized, and the Company
believes that its employee relations are good. The Company's wage scale and
benefits are generally competitive with other forest products companies. All
of the silvicultural activities on the Timberlands and the harvesting and
delivery of logs are conducted by independent contractors who are not
employees of the Company.
The Company employee benefits include a 401(k) savings plan for all
employees, a health insurance plan (including co-payments and deductibles) for
all employees and a medical savings plan for all employees.
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MANAGEMENT
COMPANY MANAGEMENT
The General Partner will manage and operate the activities of the Company.
Unitholders will not directly or indirectly participate in the management or
operation of the Company or have actual or apparent authority to enter into
contracts on behalf of, or to otherwise bind, the Company. Notwithstanding any
limitation on its obligations or duties, the General Partner will be liable,
as the general partner of the Company, for all debts of the Company (to the
extent not paid by the Company), except to the extent that indebtedness or
other obligations incurred by the Company are made specifically non-recourse
to the General Partner. Whenever possible, the General Partner intends to make
any such indebtedness or other obligations non-recourse to the General
Partner.
At least two of the members of the Board of Directors of the General Partner
who are neither officers, employees or security holders of the General Partner
nor directors, officers, employees or security holders of any affiliate of the
General Partner will serve on the Conflicts Committee, which will have the
authority to review specific matters as to which the Board of Directors
believes there may be a conflict of interests in order to determine if the
resolution of such conflict proposed by the General Partner is fair and
reasonable to the Company. Any matters approved by the Conflicts Committee
will be conclusively deemed to be fair and reasonable to the Company, approved
by all partners of the Company and not a breach by the General Partner or its
Board of Directors of any duties they may owe the Company or the Unitholders.
See "Conflicts of Interest and Fiduciary Responsibilities--Fiduciary and Other
Duties." The Board of Directors will also have an Audit Committee composed of
the two independent directors as well as Robert F. Wright, which will review
the external financial reporting of the Company, will recommend engagement of
the Company's independent public accountants and will review the Company's
procedures for internal auditing and the adequacy of the Company's internal
accounting controls. The Board of Directors will also have a compensation
committee (the "Compensation Committee"), which will initially consist of five
directors, including the two independent directors, which will determine the
compensation of the officers of the General Partner and administer its
employee benefit plans.
As is commonly the case with publicly traded limited partnerships, the
Company will not directly employ any of the persons responsible for managing
or operating the Company. In general, the current management of USTK will
manage and operate the Company's business as officers and employees of the
General Partner and its affiliates. The Unitholders will not directly or
indirectly participate in the management or operation of the Company.
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE GENERAL PARTNER
The following table sets forth certain information with respect to the
members of the Board of Directors of the General Partner, its executive
officers and certain key employees. Executive officers and directors are
elected for one-year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH GENERAL PARTNER
- ---- --- -----------------------------
<S> <C> <C>
John M. Rudey.................... 54 Chairman and Director(1)
John J. Stephens................. 69 President, Chief Executive Officer and
Director(2)
Edward J. Kobacker............... 59 Executive Vice President, Chief Operating
Officer and Director(3)
Michael J. Morgan................ 41 Vice President and Chief Financial Officer
John H. Beuter................... 61 Director(4)
Aubrey L. Cole................... 73 Director(5)
George R. Hornig................. 43 Director(6)
Robert F. Wright................. 71 Director(7)
Walter L. Barnes................. 55 Harvesting Manager
Robert A. Broadhead.............. 46 Marketing Manager
Martin Lugus..................... 56 General Manager
Kurt A. Muller................... 39 Planning Manager
Christopher J. Sokol............. 48 Forestry Manager
</TABLE>
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- --------
(1) Member of the Executive (Chairman), Nominating (Chairman), Finance and
Compensation (Chairman) Committees.
(2) Member of the Executive, Nominating, Finance and Compensation Committees.
The Company expects that on or prior to January 5, 1998, Mr. Stephens will
become the Vice Chairman of the Board of Directors of the General Partner
and will resign as President and Chief Executive Officer.
(3) Member of the Executive and Finance (Chairman) Committees. The Company
expects that, upon the resignation of Mr. Stephens as an officer of the
General Partner and subject to the approval of the Board of Directors of
the General Partner, Mr. Kobacker will become the President and Chief
Executive Officer of the General Partner.
(4) Member of the Nominating and Finance Committees.
(5) Member of the Executive and Nominating Committees.
(6) Member of the Executive and Finance Committees.
(7) Member of the Nominating, Finance, Compensation and Audit (Chairman)
Committees.
Shortly after the consummation of the Transactions, the General Partner will
appoint two additional directors, who will be neither members, officers nor
employees of the General Partner nor members, officers, directors or employees
of any affiliate of the General Partner, to the Conflicts Committee, the Audit
Committee and the Compensation Committee.
John M. Rudey will serve as Chairman and a Director of the General Partner.
Since 1992, Mr. Rudey has served as Chief Executive Officer of Garrin
Properties Holdings, Inc., a private investment company that manages and
advises investment portfolios, principally concentrated in the timber and
forest products industries and in real estate. He has previously acquired and
managed for his family investment group a subsidiary of Westinghouse Electric
Co. and a division of Monumental Life Insurance Company. Mr. Rudey holds a
B.A. from Harvard College and an M.B.A. from Harvard Business School.
John J. Stephens will initially serve as President and Chief Executive
Officer and a Director of the General Partner. Since 1991, Mr. Stephens has
served as a business advisor to a number of agricultural and forestry
projects. From 1982 to 1991, Mr. Stephens was the President and Chief
Executive Officer of Roseburg Forest Products Co. (a privately owned forest
products company) ("Roseburg"). From 1972 to 1982, Mr. Stephens was employed
by International Paper Company (a publicly traded forest products company),
serving for his last eight years as Vice President and Group Executive of Wood
Products and Resources. For his initial two years at International Paper
Company, Mr. Stephens served as Vice President Finance. From 1960 to 1972, Mr.
Stephens was a Principal in the Consulting Division of Arthur Andersen & Co.
Mr. Stephens holds a B.S. in civil engineering from the Virginia Military
Institute and a B.S. in Business Administration from Youngstown State
University, Ohio.
Edward J. Kobacker will initially serve as Executive Vice President and
Chief Operating Officer and a Director of the General Partner. From 1992 to
1997, Mr. Kobacker was the President of IP Forest Resources Company (a
subsidiary of International Paper Company and the general partner of IP
Timberlands, Ltd., a publicly traded forest products company) and Vice
President of the Forestlands Division of International Paper Company. From
1987 to 1992, Mr. Kobacker was the general manager and group executive of the
Kraft Paper Group. Mr. Kobacker holds a B.S. in accounting from the University
of Scranton and is a former CPA licensed in New York.
Michael J. Morgan will serve as a Vice President and the Chief Financial
Officer of the General Partner. Since October 1996, Mr. Morgan has served as
the Vice President of Finance of Old Services. From 1991 to 1996 Mr. Morgan
was the Assistant Treasurer and Tax Manager of Roseburg. From 1981 to 1991,
Mr. Morgan was employed in the tax department of Arthur Andersen & Co. Mr.
Morgan holds a B.S. from Portland State University. Mr. Morgan is a CPA
licensed in Oregon.
John H. Beuter will serve as a Director of the General Partner. Since 1993,
Dr. Beuter has been a consulting forester with and the President of Duck Creek
Associates, Inc. (a natural resources consulting firm). From 1991 to 1993, Dr.
Beuter served as Deputy and Acting Assistant Secretary of the Department of
Agriculture overseeing
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the U.S. Forest Service and Soil Conservation Service. From 1970 to 1987, Dr.
Beuter was a professor of forest management at Oregon State University, during
which time he served as Chair of the Department of Forest Management,
Associate Dean and Director of the University Research Forests. Dr. Beuter
holds a B.S. in forestry and an M.S. in forest economics from Michigan State
University and a Ph.D. in forestry and economics from Iowa State University.
Aubrey L. Cole will serve as a Director of the General Partner. Since 1989
Mr. Cole has been a consultant for Aubrey Cole Associates, a sole
proprietorship which provides management consulting services and makes
investments. From 1986 to 1989, Mr. Cole was the Vice Chairman of the Board
and Director of Champion International Corporation (a publicly traded forest
products company) and from 1983 to 1993, Mr. Cole was the Chairman of Champion
Realty Corporation (a land sales subsidiary of Champion International). Mr.
Cole holds a B.B.A. from the University of Texas and serves on the Advisory
Board of the Business School.
George R. Hornig will serve as a Director of the General Partner. Since
1993, Mr. Hornig has been a Managing Director of Deutsche Bank North America
Holdings, Inc. (the United States arm of Deutsche Bank, a German banking
concern) and affiliated entities. From 1991 to 1993, Mr. Hornig was the
President and Chief Operating Officer of Dubin & Swieca Holdings, Inc., an
investment management business. From 1988 to 1991, Mr. Hornig was a co-
founder, Managing Director and Chief Operating Officer of Wasserstein Perella
& Co., Inc. (a mergers and acquisitions investment bank). From 1983 to 1988,
Mr. Hornig was an investment banker in the Mergers and Acquisitions Group of
The First Boston Corporation. Prior to 1983, Mr. Hornig was an attorney with
Skadden, Arps, Slate, Meager & Flom. Mr. Hornig holds a B.A. from Harvard
College, a J.D. from Harvard Law School and an M.B.A. from Harvard Business
School. Mr. Hornig is also a director of SL Industries, Inc. and Forrester
Research, Inc.
Robert F. Wright will serve as a Director of the General Partner. Since
1988, Mr. Wright has served as President and Chief Executive Officer of Robert
F. Wright Associates, Inc., a firm making strategic investments and providing
business consulting services. Previously, Mr. Wright spent 40 years, 28 years
as a partner, at Arthur Andersen & Co. Mr. Wright holds a B.A. from Michigan
State University and an M.B.A. from New York University. Mr. Wright is a
director of the following companies: Hanover Direct Inc. (a catalog marketer),
Reliance Standard Life Insurance Co. and affiliates (life insurance
companies), The Navigators Group Inc. (a property insurance company), Norweb
North America Corporation (an Irish investment company), Rose Technology Group
Limited (a Canadian professional engineering company) and Williams Real Estate
Co., Inc. (a real estate company).
Walter L. Barnes will serve as Harvesting Manager of the General Partner
(the position he currently holds with Old Services), responsible for all solid
wood logging and fiber operations. Mr. Barnes was employed by Weyerhaeuser for
28 years and has extensive experience managing different harvesting systems on
both the East and West sides of the Cascade Range. Mr. Barnes holds a B.S.
degree from the University of Wyoming.
Robert A. Broadhead will serve as Marketing Manager of the General Partner
(the position he currently holds with Old Services), responsible for all log
and stumpage transactions. Mr. Broadhead was employed by Weyerhaeuser for 20
years and gained additional experience in investing and planning while serving
as Planning Manager from 1981 to 1994. Mr. Broadhead holds a B.S. degree from
Humboldt State University.
Martin Lugus will serve as General Manager of the General Partner (the
position he currently holds with Old Services), responsible for all land
management and operations on fee lands. Mr. Lugus was employed by Weyerhaeuser
for 28 years, during which time he served as Forestry Manager from 1981 to
1991 and Timberlands Manager from 1991 to 1996. Mr. Lugus holds a B.S. from
University of Connecticut and a M.F. from Yale School of Forestry and
Environmental Studies.
Kurt A. Muller will serve as Planning Manager of the General Partner (the
position he currently holds with Old Services), responsible for all short,
medium and long term harvest planning, as well as operating and developing the
inventory and GIS systems. From 1982 to 1989, Mr. Muller was President of
Woodland
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Consulting Services, Inc., during which time he gained additional experience
in contracting forestry operations and forest land management as District
Forester. Mr. Muller was employed by Weyerhaeuser for eight years and holds a
B.S. degree from Oregon State University.
Christopher J. Sokol will serve as Forestry Manager of the General Partner
(the position he currently holds with Old Services), responsible for forestry
operations, environmental relationships, harvest prescriptions and
nursery/orchard operations. Mr. Sokol was employed by Weyerhaeuser for 22
years and gained additional experience in forest regeneration and timber sales
while servicing as District Forester from 1982 to 1991. Mr. Sokol holds a B.S.
from Oregon State University.
REIMBURSEMENT OF EXPENSES OF THE GENERAL PARTNER AND ITS AFFILIATES
The General Partner will not receive any management fee or other
compensation in connection with its management of the Company. The General
Partner and its affiliates performing services for the Company will be
reimbursed for all expenses incurred on behalf of the Company, including the
costs of compensation described herein properly allocable to the Company, and
all other expenses necessary or appropriate to the conduct of the business of,
and allocable to, the Company. The Partnership Agreement provides that the
General Partner will determine the expenses that are allocable to the Company
in any reasonable manner determined by the General Partner in its sole
discretion.
EXECUTIVE COMPENSATION
The Company and the General Partner were formed in June 1997. Accordingly,
the General Partner paid no compensation to its directors and officers with
respect to fiscal 1996, nor did any obligations accrue in respect of
management incentive or retirement benefits for the directors and officers
with respect to such year. Officers and employees of the General Partner may
participate in employee benefit plans and arrangements sponsored by the
General Partner, including plans which may be established by the General
Partner in the future. Under the terms of the Partnership Agreement, the
Company is required to reimburse the General Partner for expenses relating to
the operation of the Company, including salaries and bonuses of employees
employed on behalf of the Company, as well as the costs of providing benefits
to such persons under employee benefit plans and for the costs of health and
life insurance. See "Certain Relationships and Related Transactions."
Employment Agreements
The General Partner anticipates that, on or before the closing of the
Transactions, it will enter into employment agreements with Messrs. Rudey,
Stephens, Kobacker, Morgan and Lugus (the "Executives"). The summary of the
Employment Agreements which follows does not purport to be complete and is
qualified in its entirety by reference to the forms of Employment Agreement,
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. Each agreement will have a term of five years and will
include confidentiality provisions and noncompete provisions. In each
agreement, the confidentiality provisions will continue for 18 months
following the later to occur of the Executive's termination of employment or
his resignation or removal from the Board, and, unless the Executive is
terminated without "Cause" or the Executive terminates his employment for
"good reason," the noncompete provisions will continue for a period of 12
months after the termination of such employment.
The agreements will provide for an annual base salary of $300,000, $450,000,
$350,000 and $126,000 for each of Messrs. Rudey, Stephens, Kobacker and
Morgan, respectively, subject to such increases as the Board of Directors of
the General Partner may authorize from time to time. In addition, each of the
Executives will be eligible to receive an annual cash bonus to be determined
by the Compensation Committee not to exceed 100% of his base salary. Mr.
Kobacker will also be entitled to receive three annual payments of $150,000 in
each of 1998, 1999 and 2000 in consideration for having forfeited certain in-
the-money options granted to him by his prior employer. Each of the Executives
will participate in the Long-Term Incentive Plan and Management Incentive Plan
of the General Partner as described below. The Executives will also be
entitled to participate in
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such other benefit plans and programs as the General Partner may provide for
its employees in general. Under his agreement, Mr. Stephens may, after January
1, 1998, elect to resign as President and Chief Executive Officer of the
General Partner and become Vice Chairman of the Board of Directors of the
General Partner and the Company expects that Mr. Stephens will so resign. Upon
such resignation, it is expected that his responsibility for the day-to-day
operations of the Company will be assumed by Mr. Kobacker. As Vice Chairman,
Mr. Stephens will become responsible for conducting the Company's acquisition
program and his compensation will be the same as that of other non-executive
directors of the General Partner plus $200 per hour (up to a maximum of $1,600
per day) for services rendered in respect of such acquisition program.
The agreements provide that in the event an Executive's employment is
terminated without "Cause" (as defined in the Employment Agreements) or if the
Executive terminates his employment for "Good Reason" (as defined below), such
individual will be entitled to receive a severance payment in an amount equal
to his base salary for the remainder of the employment term under the
Employment Agreement or 12 months, whichever is less (in the case of Mr.
Kobacker, if his employment is terminated without "Cause" prior to July 1,
1999, he will be entitled to receive a severance payment in an amount equal to
his base salary for 24 months), plus a prorated bonus for the year of such
termination calculated based on the bonus being equal to 100% of base salary.
In the event of termination due to death or disability, the Executive will be
entitled to accrued salary and benefits up to the date of the termination. In
the event the individual's employment is terminated for "Cause," he will
receive accrued salary and benefits up to the date of termination.
Good Reason is defined in the agreements generally as: (i) in the case of
Messrs. Rudey, Stephens and Kobacker, failure of the General Partner's members
to elect or re-elect the Executive to the Board of Directors (if applicable),
or to vest in him the position, duties and responsibilities contemplated by
the Employment Agreement, (ii) failure of the General Partner to pay any
portion of the individual's compensation, (iii) any material breach by the
General Partner of any material provision of the Employment Agreement and (iv)
a material reduction in the individual's duties, responsibilities or status
upon a "change of control" as defined in the Employment Agreement. "Cause" is
defined generally as: (i) any felony conviction, (ii) any material breach by
the Executive of a material written agreement between the Executive and the
Company, (iii) any breach caused by the Executive of the Partnership
Agreement, (iv) any willful misconduct by the Executive materially injurious
to the Company, (v) any willful failure by the Executive to comply with any
material policies, procedures or directives of the Board of Directors of the
General Partner or (vi) any fraud, misappropriation of funds, embezzlement or
other similar acts of misconduct with respect to the Company.
Long-Term Incentive Plan
The General Partner intends to adopt the U.S. Timberlands 1997 Long-Term
Incentive Plan (the "Long-Term Incentive Plan") for key employees and
directors of the General Partner and its affiliates which will be effective
upon consummation of the Transactions. The summary of the Long-Term Incentive
Plan contained herein does not purport to be complete and is qualified in its
entirety by reference to the Long-Term Incentive Plan, which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
The Long-Term Incentive Plan will consist of two components, a unit option
plan (the "Unit Option Plan") and a restricted unit plan (the "Restricted Unit
Plan"). Initially, the Long-Term Incentive Plan will permit the grant of
Restricted Units and Unit Options covering an aggregate of 745,868 Common
Units (857,749 Common Units if the Underwriters' over-allotment option is
exercised in full).
Unit Option Plan. Initially, the Unit Option Plan will permit the grant of
options ("Unit Options") covering 745,868 Common Units. From these, 633,987
Unit Options will be granted to key employees and directors upon the
consummation of the Transactions, subject to the vesting conditions described
below and subject to other customary terms and conditions, as follows: (i)
Unit Options covering 93,233 Common Units will be granted to each of Messrs.
Rudey, Stephens, Kobacker and Hornig and (ii) Unit Options covering 55,941
Common Units will be granted to Mr. Morgan. Unit Options covering 205,114
Common Units will be allocated among six other key employees of the General
Partner. A total of eleven individuals are currently eligible to receive
awards under the Unit Option Plan. Unit Options covering the remaining 111,881
Common Units under
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the Unit Option Plan will be reserved and may be granted in the future to key
employees or directors on such terms and conditions (including vesting
conditions) as are described below or as the Compensation Committee shall
determine. Each of the amounts set forth above will be adjusted upward by an
amount equal to 10% of the Common Units issued upon any exercise of the
Underwriters' over-allotment option.
Unit Options granted at the closing of this offering will have an exercise
price equal to the initial public offering price for Common Units and will
become exercisable automatically upon, and in the same proportions as, the
conversion of the Subordinated Units to Common Units. If a grantee's
employment is terminated by reason of his death, disability or retirement, the
grantee's Unit Options will become immediately exercisable. In addition, a
grantee's Unit Options will become immediately exercisable in the event of a
"change of control" of the Company (as defined in the Long-Term Incentive
Plan).
Upon exercise of a Unit Option, the General Partner will acquire Common
Units in the open market at a price equal to the then-prevailing price on the
principal national securities exchange upon which the Common Units are then
traded, or directly from the Company or any other person, or use Common Units
already owned by the General Partner, or any combination of the foregoing. The
General Partner will be entitled to reimbursement by the Company for the
difference between the cost incurred by the General Partner in acquiring such
Common Units and the proceeds received by the General Partner from an optionee
at the time of exercise. Thus, the cost of the Unit Options will be borne by
the Company. If the Company issues new Common Units upon exercise of the Unit
Options, the total number of Units outstanding will increase and the General
Partner will remit the proceeds received from the optionee to the Company.
The Unit Option Plan has been designed to furnish additional compensation to
key executives and key directors and to increase their proprietary interest in
the future performance of the Company measured in terms of growth in the
market value of Common Units.
Restricted Unit Plan. A Restricted Unit is a "phantom" unit that entitles
the grantee to receive a Common Unit upon the vesting of the phantom unit. No
grants will initially be made under the Restricted Unit Plan. The Compensation
Committee may, in the future, determine to make grants under such plan to key
employees and directors containing such terms as the Committee shall
determine. Restricted Units granted during the Subordination Period will vest
automatically upon, and in the same proportions as, the conversion of the
Subordinated Units to Common Units. Common Units to be delivered upon the
"vesting" of rights may be Common Units acquired by the General Partner in the
open market, Common Units already owned by the General Partner, Common Units
acquired by the General Partner directly from the Company or any other person,
or any combination of the foregoing. The General Partner will be entitled to
reimbursement by the Company for the cost incurred in acquiring such Common
Units. If the Company issues new Common Units, the total number of Units
outstanding will increase and the Company will receive no remuneration.
The issuance of the Common Units pursuant to the Restricted Unit Plan is
intended to serve as a means of incentive compensation for performance and not
primarily as an opportunity to participate in the equity appreciation in
respect of the Common Units. Therefore, no consideration will be payable by
the plan participants upon vesting and issuance of the Common Units.
The General Partner's Board of Directors in its discretion may terminate the
Long-Term Incentive Plan at any time with respect to any Common Units or Unit
Options for which a grant has not theretofore been made. The General Partner's
Board of Directors will also have the right to alter or amend the Long-Term
Incentive Plan or any part thereof from time to time; provided, however, that
no change in any outstanding grant may be made that would impair the rights of
the participant without the consent of such participant.
Management Incentive Plan
The General Partner intends to adopt the U.S. Timberlands Company, L.P.
Management Incentive Plan (the "Management Incentive Plan") following the
consummation of this offering. The Management Incentive Plan
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is designed to enhance the financial performance of the Company's key
operating managers by rewarding them with cash awards for achieving annual
financial performance objectives. The Management Incentive Plan will be
administered by the Compensation Committee. Individual participants and
payments, if any, for each calendar year will be determined by and in the
discretion of the Compensation Committee. In no event will incentive payments
be made with respect to any year unless (i) distributions of Available Cash
from Operating Surplus on the Common Units and Subordinated Units with respect
to such year equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the outstanding Common Units and Subordinated Units during such
year, (ii) the Adjusted Operating Surplus generated during such year has
equaled or exceeded the sum of the Minimum Quarterly Distribution on all of
the Common Units and Subordinated Units that were outstanding during such year
on a fully diluted basis and the related distribution on the General Partner's
2% interest, and (iii) there are no outstanding Common Unit Arrearages. Any
incentive payments will be at the discretion of the Compensation Committee,
and the General Partner will be able to amend or change the Management
Incentive Plan at any time.
COMPENSATION OF DIRECTORS
No additional remuneration will be paid to employees who also serve as
directors. The Company anticipates that each independent director (there are
expected to be two) will receive $50,000 annually, for which they each agree
to participate in four regular meetings of the Board of Directors and four
Audit/Conflicts Committee meetings. Each other non-employee director will
receive $50,000 annually (to be paid in cash or Subordinated Units, as
determined by each director), for which they each agree to participate in four
regular meetings of the Board of Directors. Each non-employee director will
receive $1,250 for each additional meeting in which he participates. In
addition, each non-employee director will be reimbursed for his out-of-pocket
expenses in connection with attending meetings of the Board of Directors or
committees thereof. Each director will be fully indemnified by the Company for
his actions associated with being a director to the extent permitted under
Delaware law.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Units that will
be issued upon the consummation of the Transactions held by beneficial owners
of five percent or more of the Units, by directors and executive officers of
the General Partner and by all directors and executive officers of the General
Partner as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
COMMON COMMON SUBORDINATED SUBORDINATED TOTAL UNITS
UNITS TO BE UNITS TO BE UNITS TO BE UNITS TO BE TO BE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED OWNED
- ------------------------ ------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Rudey Timber Company,
L.L.C.(1).............. - -% 2,978,833 67.6% 24.9%
U.S. Timberlands
Management Company,
L.L.C.(2).............. - - 1,283,293 29.1 10.8
U.S. Timberlands
Holdings, L.L.C.(3).... - - 2,978,833 67.6 25.1
John M. Rudey(4)........ - - 4,262,126 96.7 35.9
John J. Stephens(5)(7).. - - 95,238 2.2 *
Edward J. Kobacker...... - - - - -
Michael J. Morgan....... - - - - -
George R. Hornig(6)(7).. - - 50,040 1.1 *
Robert F. Wright........ - - - - -
Aubrey L. Cole.......... - - - - -
John H. Beuter.......... - - - - -
All directors and
executive officers as a
group (8 persons)(7)... - -% 4,407,404 100.0% 37.1%
</TABLE>
- --------
* Less than 1% of class.
(1) Current address is 625 Madison Avenue, Suite 10-B, New York, New York
10022. Includes 2,949,045 of the Subordinated Units owned by Holdings.
Rudey Timber Company, L.L.C. has a 99% member interest in Holdings.
(2) Current address is 625 Madison Avenue, Suite 10-B, New York, New York
10022. Excludes 145,278 Subordinated Units to be received by Old Services
in the Transaction which will be transferred to Messrs. Stephens and
Hornig in redemption of their interests therein.
(3) Current address is 625 Madison Avenue, Suite 10-B, New York, New York
10022.
(4) Current address is 625 Madison Avenue, Suite 10-B, New York, New York
10022. Includes 1,283,293 Subordinated Units owned by Old Services and
2,978,833 Subordinated Units owned by Holdings. Mr. Rudey is attributed
100% beneficial ownership of all Subordinated Units owned by Old Services
and Holdings through his interests therein and in Rudey Timber Company,
L.L.C.
(5) Current address is P.O. Box 10 6400 Highway 66, Klamath Falls, Oregon
97601.
(6) Current address is 31 West 52nd Street, New York, New York 10019.
(7) Includes interests directly and indirectly owned by such persons. With
respect to beneficial ownership which may be attributable to Mr. Rudey,
see footnote (4).
Upon consummation of the Transactions, all of the outstanding member
interests in the General Partner will be owned by management, directors and
related persons and entities. The members of the General Partner have entered
into an operating agreement, which, among other things, provides that the
member interests of management and directors who retire, resign or otherwise
terminate their relationship with the General Partner will be repurchased by
the General Partner. In addition, each member other than affiliates of Mr.
Rudey is provided certain "tag along" and "bring along" rights with respect to
sales of member interests in the General Partner by Mr. Rudey's affiliates.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RIGHTS OF THE GENERAL PARTNER
After this offering, Old Services will own 1,283,293 Subordinated Units,
Holdings, an affiliate of the General Partner, will own 2,978,833 Subordinated
Units, and Messrs. Stephens and Hornig, founding directors and members of the
General Partner, will own an aggregate of 145,278 Subordinated Units. The
4,407,404 Subordinated Units owned by Old Services, Holdings and Messrs.
Stephens and Hornig will represent an aggregate 36.4% limited partner interest
in the Company (33.3% if the Underwriters' over-allotment option is exercised
in full). Through the General Partner's ability to manage and operate the
Company and the ownership of Common Units and all of the outstanding
Subordinated Units by affiliates of the General Partner (effectively giving
the General Partner the ability to veto certain actions of the Company), the
General Partner will have the ability to control the management of the
Company.
CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT
In connection with the Transactions, the Company, the Operating Company, the
General Partner, Old Services and certain other parties will enter into the
Contribution, Conveyance and Assumption Agreement (the "Contribution
Agreement"), which will generally govern the Transactions, including the
transfer of certain assets to and the assumption of certain liabilities by the
Operating Company, and the application of the proceeds of this offering. The
Contribution Agreement will not be the result of arm's-length negotiations,
and there can be no assurance that it, or that any of the transactions
provided for therein, will be effected on terms at least as favorable to the
parties to such agreement as could have been obtained from unaffiliated third
parties. All of the transaction expenses incurred in connection with the
Transactions, including the expenses associated with transferring assets into
the Operating Company, will be paid from the proceeds of this offering.
CONSULTING AGREEMENTS
The General Partner intends to enter into consulting agreements with each of
Duck Creek Associates (a consulting firm affiliated with Mr. Beuter), Aubrey
Cole Associates (a consulting firm affiliated with Mr. Cole), Robert F. Wright
Associates, Inc. (a consulting firm affiliated with Mr. Wright) and George R.
Hornig pursuant to which each such person or firm will provide consulting
services to the General Partner. Each such agreement will provide for an
annual retainer of $25,000, plus $150 per hour (with a maximum per diem of
$1,200) for services rendered at the request of the General Partner. Upon his
resignation as President and Chief Executive Officer of the General Partner,
the Company will enter into a similar agreement with Mr. Stephens or one of
his affiliates (except that his agreement will provide for $200 per hour with
a maximum per diem of $1,600). Each consulting agreement will be reviewed
annually by a majority of the directors who do not have consulting agreements.
RELATED PARTY TRANSACTIONS
In connection with the Weyerhaeuser Acquisition, USTK paid a fee of
approximately $4.1 million to U.S. Timberlands Management Group, L.L.C.
("TMG"), an entity 100% owned and controlled by Rudey Timber Company L.L.C.,
and a fee of $0.4 million to each of Mr. Rudey and Mr. Stephens. In addition,
for the period from August 30, 1996 to December 31, 1996, USTK paid TMG
management fees of $2.8 million.
During the period from August 30, 1996 through December 31, 1996, USTK paid
$10.0 million to TMG. Such amount, with related interest, was repaid to the
Company in February 1997.
Pursuant to an agreement dated as of July 29, 1997 between Mr. Stephens and
USTK, Old Services, Mr. Rudey and certain of his affiliates, Mr. Stephen's
interest in Old Services will be redeemed for 95,238 Subordinated Units upon
the consummation of the Transactions and $1.0 million payable in January 1998.
Pursuant to an agreement dated as of July 29, 1997 between Mr. Hornig and
USTK, Old Services, Mr. Rudey and certain of his affiliates, Mr. Hornig's
interest in Old Services will be redeemed upon the closing of the Transactions
for 50,040 Subordinated Units.
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Certain conflicts of interest exist and may arise in the future as a result
of the relationships between the General Partner and its members, on the one
hand, and the Company and its limited partners, on the other hand. The
directors and officers of the General Partner have fiduciary duties to manage
the General Partner, including its investments in its subsidiaries and
affiliates, in a manner beneficial to its members. At the same time, the
General Partner has a fiduciary duty to manage the Company in a manner
beneficial to the Company and the Unitholders. The Partnership Agreement
contains provisions that allow the General Partner to take into account the
interests of parties in addition to the Company in resolving conflicts of
interest, thereby limiting its fiduciary duty to the Unitholders, as well as
provisions that may restrict the remedies available to Unitholders for actions
taken that might, without such limitations, constitute breaches of fiduciary
duty. The duty of the directors and officers of the General Partner to its
members may, therefore, come into conflict with the duties of the General
Partner to the Company and the Unitholders. The Conflicts Committee of the
Board of Directors of the General Partner will, at the request of the General
Partner, review conflicts of interest that may arise between the General
Partner or its affiliates, on the one hand, and the Company, on the other. See
"Management--Company Management" and "--Fiduciary and Other Duties."
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Act that allow the fiduciary duties of a
general partner to be waived or restricted by a partnership agreement have not
been resolved in a court of law, and the General Partner has not obtained an
opinion of counsel covering the provisions set forth in the Partnership
Agreement that purport to waive or restrict fiduciary duties of the General
Partner. Unitholders should consult their own legal counsel concerning the
fiduciary responsibilities of the General Partner and its officers and
directors and the remedies available to the Unitholders.
Conflicts of interest could arise with respect to the situations described
below, among others:
Common Unitholders Will Have No Right to Enforce Obligations of the General
Partner and Its Affiliates Under Agreements with the Company
The agreements between the Company and the General Partner do not grant to
the Unitholders, separate and apart from the Company, the right to enforce the
obligations of the General Partner and its affiliates in favor of the Company.
Therefore, the Company will be primarily responsible for enforcing such
obligations.
Contracts Between the Company, on the One Hand, and the General Partner and
Its Affiliates, on the Other, Will Not be the Result of Arm's-Length
Negotiations
Under the terms of the Partnership Agreement, the Company is not restricted
from paying the General Partner or its affiliates for any services rendered
(provided such services are rendered on terms fair and reasonable to the
Company) or entering into additional contractual arrangements with any of them
on behalf of the Company. Neither the Partnership Agreement nor any of the
other agreements, contracts and arrangements between the Company, on the one
hand, and the General Partner and its affiliates, on the other, are or will be
the result of arm's-length negotiations. All of such transactions entered into
after the sale of the Common Units offered in this offering are to be on terms
which are fair and reasonable to the Company, provided that any transaction
shall be deemed fair and reasonable if (i) such transaction is approved by the
Conflicts Committee, (ii) its terms are no less favorable to the Company than
those generally being provided to or available from unrelated third parties or
(iii) taking into account the totality of the relationships between the
parties involved (including other transactions that may be particularly
favorable or advantageous to the Company), the transaction is fair to the
Company. The General Partner and its affiliates will have no obligation to
permit the Company to use any facilities or assets of the General Partner and
such affiliates, except as may be provided in contracts entered into from time
to time specifically dealing with such use, nor shall there be any obligation
of the General Partner and its affiliates to enter into any such contracts.
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Certain Actions Taken by the General Partner May Affect the Amount of Cash
Available for Distribution to Unitholders or Accelerate the Conversion of
Subordinated Units
Decisions of the General Partner with respect to the amount and timing of
timber harvests, stumpage sales, property sales, cash expenditures,
participation in capital expansions and acquisitions, borrowings, issuances of
additional partnership interests and creation of reserves in any quarter will
affect whether, or the extent to which, there is sufficient Available Cash
from Operating Surplus to meet the Minimum Quarterly Distribution and Target
Distributions Levels on all Units in such quarter or in subsequent quarters.
The Partnership Agreement provides that any borrowings by the Company or the
approval thereof by the General Partner shall not constitute a breach of any
duty owed by the General Partner to the Company or the Unitholders, including
borrowings that have the purpose or effect, directly or indirectly, of
enabling the General Partner to receive distributions on the Subordinated
Units or the Incentive Distributions or hasten the expiration of the
Subordination Period or the conversion of the Subordinated Units into Common
Units. The Partnership Agreement provides that the Company and the Operating
Company may borrow funds from the General Partner and its affiliates. The
General Partner and its affiliates may not borrow funds from the Company or
the Operating Company. Furthermore, any actions taken by the General Partner
consistent with the standards of reasonable discretion set forth in the
definitions of Available Cash, Operating Surplus and Capital Surplus will be
deemed not to constitute a breach of any duty of the General Partner to the
Company or the Unitholders.
The Company Will Reimburse the General Partner and Its Affiliates for Certain
Expenses
Under the terms of the Partnership Agreement, the General Partner and its
affiliates will be reimbursed by the Company for certain expenses incurred on
behalf of the Company, including costs incurred in providing corporate staff
and support services to the Company. The Partnership Agreement provides that
the General Partner will determine the expenses that are allocable to the
Company in any reasonable manner determined by the General Partner in its sole
discretion. See "Management--Reimbursement of Expenses of the General Partner
and its Affiliates."
The General Partner Intends to Limit Its Liability with Respect to the
Company's Obligations
Whenever possible, the General Partner intends to limit the Company's
liability under contractual arrangements to all or particular assets of the
Company, with the other party thereto having no recourse against the General
Partner or its assets. The Partnership Agreement provides that any action by
the General Partner in so limiting the liability of the General Partner or
that of the Company will not be deemed to be a breach of the General Partner's
fiduciary duties, even if the Company could have obtained more favorable terms
without such limitation on liability.
Common Units Are Subject to the General Partner's Limited Call Right
The General Partner may exercise its right to call and purchase Units as
provided in the Partnership Agreement or assign such right to one of its
affiliates or to the Company. The General Partner may use its own discretion,
free of fiduciary duty restrictions, in determining whether to exercise such
right. As a consequence, a Common Unitholder may have his Common Units
purchased from him even though he may not desire to sell them, and the price
paid may be less than the amount the holder would desire to receive upon sale
of his Common Units. For a description of such right, see "The Partnership
Agreement--Limited Call Right."
The Company May Retain Separate Counsel for Itself or for the Holders of
Common Units; Advisors Retained by the Company for this Offering Have Not
Been Retained to Act for Holders of Common Units
The Common Unitholders have not been represented by counsel in connection
with the preparation of the Partnership Agreement or other agreements referred
to herein or in establishing the terms of this offering. The attorneys,
independent public accountants and others who have performed services for the
Company in
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connection with this offering have been retained by the General Partner, its
affiliates and the Company and may continue to be retained by the General
Partner, its affiliates and the Company after this offering. Attorneys,
independent public accountants and others who will perform services for the
Company in the future will be selected by the General Partner or the Conflicts
Committee and may also perform services for the General Partner and its
affiliates. The Company may retain separate counsel for itself or the holders
of Common Units in the event of a conflict of interest arising between the
General Partner and its affiliates, on the one hand, and the Company or the
holders of Common Units, on the other, after the sale of the Common Units
offered hereby, depending on the nature of such conflict, but it does not
intend to do so in most cases.
The General Partner's Affiliates May Compete with the Company Under Certain
Circumstances
The General Partner may not engage in any business or activity or incur any
debts or liabilities except in connection with or incidental to (i) its
performance as a general partner of the Company or one or more affiliates of
the Company, (ii) the acquiring, owning or disposing of debt or equity
securities of the Company or such affiliates, and (iii) permitting its
employees to perform services for its affiliates. Following the closing of the
sale of the Common Units offered hereby, the General Partner's affiliates will
be restricted from competing with the Company by engaging in the following
activities in North America ("Restricted Activities"): the (i) acquisition,
exchange, operation or sale of timber-producing real property or rights to
harvest timber, a principal purpose of which is producing logs or other forest
products, (ii) harvesting of timber other than harvesting which is incidental
to the ownership or operation of real property not owned or operated for a
principal purpose of producing logs or other forest products, (iii) sale,
exchange or purchase of logs other than sales, exchanges or purchases which
are incidental to the ownership or operation of real property not owned or
operated for a principal purpose of producing logs or other forest products,
and (iv) any and all other activities relating to the forest products industry
to the extent such activities compete with activities of the Company or the
Operating Company. Affiliates of the General Partner may, however, engage in
any other activity in competition with the Company and may engage in
Restricted Activities outside of North America. As a result, conflicts of
interest may arise between affiliates of the General Partner on the one hand,
and the Company, on the other. There can be no assurance that there will not
be competition between the Company and affiliates of the General Partner.
FIDUCIARY AND OTHER DUTIES
The General Partner will be accountable to the Company and the Unitholders
as a fiduciary. Consequently, the General Partner must exercise good faith and
integrity in handling the assets and affairs of the Company. In contrast to
the relatively well-developed law concerning fiduciary duties owed by officers
and directors to the shareholders of a corporation, the law concerning the
duties owed by a general partner to other partners and to partnerships is
relatively undeveloped. Neither the Delaware Revised Uniform Limited
Partnership Act (the "Delaware Act") nor case law defines with particularity
the fiduciary duties owed by a general partner to limited partners or a
limited partnership, but the Delaware Act provides that Delaware limited
partnerships may, in their partnership agreements, restrict or expand the
fiduciary duties that might otherwise be applied by a court in analyzing the
standard of duty owed by a general partner to limited partners and the
partnership.
Fiduciary duties are generally considered to include an obligation to act
with the highest good faith, fairness and loyalty. Such duty of loyalty, in
the absence of a provision in a partnership agreement providing otherwise,
would generally prohibit a general partner of a Delaware limited partnership
from taking any action or engaging in any transaction as to which it has a
conflict of interest. In order to induce the General Partner to manage the
business of the Company, the Partnership Agreement, as permitted by the
Delaware Act, contains various provisions intended to have the effect of
restricting the fiduciary duties that might otherwise be owed by the General
Partner to the Company and its partners and waiving or consenting to conduct
by the General Partner and its affiliates that might otherwise raise issues as
to compliance with fiduciary duties or applicable law.
The Partnership Agreement provides that in order to become a limited partner
of the Company, a holder of Common Units is required to agree to be bound by
the provisions thereof, including the provisions discussed
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above. This is in accordance with the policy of the Delaware Act favoring the
principle of freedom of contract and the enforceability of partnership
agreements. The failure of a limited partner or assignee to sign a partnership
agreement does not render the partnership agreement unenforceable against such
person.
The Partnership Agreement provides that whenever a conflict arises between
the General Partner or its affiliates, on the one hand, and the Company or any
other partner, on the other, the General Partner shall resolve such conflict.
The General Partner in general shall not be in breach of its obligations under
the Partnership Agreement or its duties to the Company or the Unitholders if
the resolution of such conflict is fair and reasonable to the Company, and any
resolution shall conclusively be deemed to be fair and reasonable to the
Company if such resolution is (i) approved by the Conflicts Committee
(although no party is obligated to seek such approval and the General Partner
may adopt a resolution or course of action that has not received such
approval), (ii) on terms no less favorable to the Company than those generally
being provided to or available from unrelated third parties or (iii) fair to
the Company, taking into account the totality of the relationships between the
parties involved (including other transactions that may be particularly
favorable or advantageous to the Company). In resolving such conflict, the
General Partner may (unless the resolution is specifically provided for in the
Partnership Agreement) consider the relative interests of the parties involved
in such conflict or affected by such action, any customary or accepted
industry practices or historical dealings with a particular person or entity
and, if applicable, generally accepted accounting practices or principles and
such other factors as its deems relevant. Thus, unlike the strict duty of a
fiduciary who must act solely in the best interests of his beneficiary, the
Partnership Agreement permits the General Partner to consider the interests of
all parties to a conflict of interest, including the interests of the General
Partner. In connection with the resolution of any conflict that arises, unless
the General Partner has acted in bad faith, the action taken by the General
Partner shall not constitute a breach of the Partnership Agreement, any other
agreement or any standard of care or duty imposed by the Delaware Act or other
applicable law. The Company also provides that in certain circumstances the
General Partner may act in its sole discretion, in good faith or pursuant to
other appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself and all other similarly situated limited partners (a class action)
to recover damages from a general partner for violations of its fiduciary
duties to the limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by
law, as required to permit the General Partner and its officers and directors
to act under the Partnership Agreement or any other agreement contemplated
therein and to make any decisions pursuant to the authority prescribed in the
Partnership Agreement, so long as such action is reasonably believed by the
General Partner to be in, or not inconsistent with, the best interests of the
Company. Further, the Partnership Agreement provides that the General Partner
and its officers and directors will not be liable for monetary damages to the
Company, the limited partners or assignees for errors of judgment or for any
acts or omissions if the General Partner and such other persons acted in good
faith.
In addition, under the terms of the Partnership Agreement, the Company is
required to indemnify the General Partner and its officers, directors,
employees, affiliates, partners, members, agents and trustees, to the fullest
extent permitted by law, against liabilities, costs and expenses incurred by
the General Partner or such other persons, if the General Partner or such
persons acted in good faith and in a manner they reasonably believed to be in,
or not opposed to, the best interests of the Company and, with respect to any
criminal proceedings, had no reasonable cause to believe their conduct was
unlawful. See "The Partnership Agreement--Indemnification." Thus, the General
Partner could be indemnified for its negligent acts if it meets such
requirements concerning good faith and the best interests of the Company.
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DESCRIPTION OF THE COMMON UNITS
Upon consummation of this offering, the Common Units will be registered
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules and regulations promulgated thereunder, and the Company will be
subject to the reporting and certain other requirements of the Exchange Act.
The Company will be required to file periodic reports containing financial and
other information with the Commission.
Purchasers of Common Units in this offering and subsequent transferees of
Common Units (or their brokers, agents or nominees on their behalf) who wish
to become Unitholders of record will be required to execute Transfer
Applications, the form of which is included as Appendix B to this Prospectus,
before the purchase or transfer of such Common Units will be registered on the
records of the Transfer Agent and before cash distributions or federal income
tax allocations can be made to the purchaser or transferee. The Company will
be entitled to treat the nominee holder of a Common Unit as the absolute owner
thereof, and the beneficial owner's rights will be limited solely to those
that it has against the nominee holder as a result of or by reason of any
understanding or agreement between such beneficial owner and nominee holder.
THE UNITS
The Common Units and the Subordinated Units represent limited partner
interests in the Company, which entitle the holders thereof to participate in
Company distributions and exercise the rights or privileges available to
limited partners under the Partnership Agreement. For a description of the
relative rights and preferences of holders of Common Units and Subordinated
Units in and to Company distributions, together with a description of the
circumstances under which Subordinated Units may convert into Common Units,
see "Cash Distribution Policy." For a description of the rights and privileges
of limited partners under the Partnership Agreement, see "The Partnership
Agreement."
TRANSFER AGENT AND REGISTRAR
Duties
American Stock Transfer Corporation will serve as registrar and transfer
agent (the "Transfer Agent") for the Common Units and will receive a fee from
the Company for serving in such capacities. All fees charged by the Transfer
Agent for transfers of Common Units will be borne by the Company and not by
the holders of Common Units, except that fees similar to those customarily
paid by stockholders for surety bond premiums to replace lost or stolen
certificates, taxes and other governmental charges, special charges for
services requested by a holder of a Common Unit and other similar fees or
charges will be borne by the affected holder. There will be no charge to
holders for disbursements of the Company's cash distributions. The Company
will indemnify the Transfer Agent, its agents and each of their respective
shareholders, directors, officers and employees against all claims and losses
that may arise out of acts performed or omitted in respect of its activities
as such, except for any liability due to any negligence, gross negligence, bad
faith or intentional misconduct of the indemnified person or entity.
Resignation or Removal
The Transfer Agent may at any time resign, by notice to the Company, or be
removed by the Company, such resignation or removal to become effective upon
the appointment by the Company of a successor transfer agent and registrar and
its acceptance of such appointment. If no successor has been appointed and
accepted such appointment within 30 days after notice of such resignation or
removal, the General Partner is authorized to act as the transfer agent and
registrar until a successor is appointed.
TRANSFER OF COMMON UNITS
Until a Common Unit has been transferred on the books of the Company, the
Company and the Transfer Agent, notwithstanding any notice to the contrary,
may treat the record holder thereof as the absolute owner for
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all purposes, except as otherwise required by law or stock exchange
regulations. The transfer of the Common Units to persons that purchase
directly from the Underwriters will be accomplished through the completion,
execution and delivery of a Transfer Application by such investor in
connection with such Common Units. Any subsequent transfers of a Common Unit
will not be recorded by the Transfer Agent or recognized by the Company unless
the transferee executes and delivers a Transfer Application. By executing and
delivering a Transfer Application (the form of which is set forth as Appendix
B to this Prospectus and which is also set forth on the reverse side of the
certificates representing the Common Units), the transferee of Common Units
(i) becomes the record holder of such Common Units and shall constitute an
assignee until admitted into the Company as a substitute limited partner, (ii)
automatically requests admission as a substituted limited partner in the
Company, (iii) agrees to be bound by the terms and conditions of, and
executes, the Partnership Agreement, (iv) represents that such transferee has
the capacity, power and authority to enter into the Partnership Agreement, (v)
grants powers of attorney to officers of the General Partner and any
liquidator of the Company as specified in the Partnership Agreement, and (vi)
makes the consents and waivers contained in the Partnership Agreement. An
assignee will become a substituted limited partner of the Company in respect
of the transferred Common Units upon the consent of the General Partner and
the recordation of the name of the assignee on the books and records of the
Company. Such consent may be withheld in the sole discretion of the General
Partner.
Common Units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission
as a substituted limited partner in the Company in respect of the transferred
Common Units. A purchaser or transferee of Common Units who does not execute
and deliver a Transfer Application obtains only (a) the right to assign the
Common Units to a purchaser or other transferee and (b) the right to transfer
the right to seek admission as a substituted limited partner in the Company
with respect to the transferred Common Units. Thus, a purchaser or transferee
of Common Units who does not execute and deliver a Transfer Application will
not receive cash distributions or federal income tax allocations unless the
Common Units are held in a nominee or "street name" account and the nominee or
broker has executed and delivered a Transfer Application with respect to such
Common Units, and may not receive certain federal income tax information or
reports furnished to record holders of Common Units. The transferor of Common
Units will have a duty to provide such transferee with all information that
may be necessary to obtain registration of the transfer of the Common Units,
but a transferee agrees, by acceptance of the certificate representing Common
Units, that the transferor will not have a duty to insure the execution of the
Transfer Application by the transferee and will have no liability or
responsibility if such transferee neglects to or chooses not to execute and
forward the Transfer Application to the Transfer Agent. See "The Partnership
Agreement--Status as Limited Partner or Assignee."
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THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of the material provisions of the
Partnership Agreement. The form of the Partnership Agreement for the Company
is included in this Prospectus as Appendix A. The form of Operating Agreement
for the Operating Company (the "Operating Company Agreement") is included as
an exhibit to the Registration Statement of which this Prospectus constitutes
a part. The Company will provide prospective investors with a copy of the form
of the Operating Company Agreement upon request at no charge. The discussions
presented herein and below of the material provisions of the Partnership
Agreement are qualified in their entirety by reference to the Partnership
Agreement for the Company and the Operating Company Agreement for the
Operating Company. The Company will be a 98.9899% non-managing member of the
Operating Company, which will own the Company's business. The General Partner
will serve as the general partner of the Company and the managing member of
the Operating Company, owning an aggregate 2% interest in the Company and the
Operating Company on a combined basis. The General Partner will manage and
operate the Company's business. Unless the context otherwise requires,
references herein to the "Partnership Agreement" constitute references to the
Partnership Agreement and the Operating Company Agreement, collectively.
Certain provisions of the Partnership Agreement are summarized elsewhere in
this Prospectus under various headings. With regard to the transfer of Common
Units, see "Description of the Common Units--Transfer of Common Units." With
regard to distributions of Available Cash, see "Cash Distribution Policy."
With regard to allocations of taxable income and taxable loss, see "Tax
Considerations." Prospective investors are urged to review these sections of
this Prospectus and the Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Company was organized in June 1997, as a Delaware limited partnership.
The Operating Company was organized in 1996 to acquire the Klamath Falls
Timberlands. Following the issuance of the Common Units offered hereby, the
General Partner will own a 1% interest as general partner in the Company and
the right to receive Incentive Distributions and a 1.0101% managing member
interest in the Operating Company (or an aggregate 2% interest in the Company
and the Operating Company on a combined basis), and the Unitholders (including
certain affiliates of the General Partner as holders of Subordinated Units)
will own a 98% interest in the Company and the Operating Company on a combined
basis. The Company will dissolve on December 31, 2087, unless sooner dissolved
pursuant to the terms of the Partnership Agreement.
PURPOSE
The purpose of the Company under the Partnership Agreement is limited to
serving as the non-managing member of the Operating Company and engaging in
any business activity that may be engaged in by the Operating Company. The
Operating Company Agreement provides that the Operating Company may, directly
or indirectly, engage in (i) any activity engaged in by USTK immediately prior
to this offering, (ii) any other activity approved by the General Partner but
only to the extent that the General Partner reasonably determines that, as of
the date of the acquisition or commencement of such activity, such activity
generates "qualifying income" (as such term is defined in Section 7704 of the
Code) or (iii) any activity that enhances the operations of an activity that
is described in (i) or (ii) above. Although the General Partner has the
ability under the Partnership Agreement to cause the Company and the Operating
Company to engage in activities other than the ownership or operation of
timber-producing real property, the General Partner has no current intention
of doing so. The General Partner is authorized in general to perform all acts
deemed necessary to carry out such purposes and to conduct the business of the
Company.
POWER OF ATTORNEY
Each Limited Partner, and each person who acquires a Unit from a Unitholder
and executes and delivers a Transfer Application with respect thereto, grants
to the General Partner and, if a liquidator of the Company has
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been appointed, such liquidator, a power of attorney to, among other things,
execute and file certain documents required in connection with the
qualification, continuance or dissolution of the Company or the amendment of
the Partnership Agreement in accordance with the terms thereof and to make
consents and waivers contained in the Partnership Agreement.
CAPITAL CONTRIBUTIONS
For a description of the initial capital contributions to be made to the
Company, see "The Transactions." The Unitholders are not obligated to make
additional capital contributions to the Company, except as described below
under "--Limited Liability."
LIMITED LIABILITY
Assuming that a Limited Partner does not participate in the control of the
business of the Company within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Company in respect of his Common Units plus his share of any undistributed
profits and assets of the Company. If it were determined, however, that the
right or exercise of the right by the Limited Partners as a group to remove or
replace the General Partner, to approve certain amendments to the Partnership
Agreement or to take other action pursuant to the Partnership Agreement
constituted "participation in the control" of the Company's business for the
purposes of the Delaware Act, then the Limited Partners could be held
personally liable for the Company's obligations under the laws of the State of
Delaware to the same extent as the General Partner with respect to persons who
transact business with the Company reasonably believing, based on the Limited
Partner's conduct, that the Limited Partner is a general partner.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to specific
property of the partnership, exceed the fair value of the assets of the
limited partnership. For the purpose of determining the fair value of the
assets of a limited partnership, the Delaware Act provides that the fair value
of property subject to liability for which recourse of creditors is limited
shall be included in the assets of the limited partnership only to the extent
that the fair value of that property exceeds that nonrecourse liability. The
Delaware Act provides that a limited partner who receives such a distribution
and knew at the time of the distribution that the distribution was in
violation of the Delaware Act shall be liable to the limited partnership for
the amount of the distribution for three years from the date of the
distribution. Under the Delaware Act, an assignee who becomes a substituted
limited partner of a limited partnership is liable for the obligations of his
assignor to make contributions to the partnership, except the assignee is not
obligated for liabilities unknown to him at the time he became a limited
partner and which could not be ascertained from the partnership agreement.
The Company expects that the Operating Company will initially conduct
business in one state. Maintenance of limited liability may require compliance
with legal requirements in such jurisdictions in which the Operating Company
conducts business, including qualifying the Operating Company to do business
there. Limitations on the liability of limited partners for the obligations of
a limited partnership have not been clearly established in many jurisdictions.
If it were determined that the Company was, by virtue of its member interest
in the Operating Company or otherwise, conducting business in any state
without compliance with the applicable limited partnership statute, or that
the right or exercise of the right by the Limited Partners as a group to
remove or replace the General Partner, to approve certain amendments to the
Partnership Agreement, or to take other action pursuant to the Partnership
Agreement constituted "participation in the control" of the Company's business
for the purposes of the statutes of any relevant jurisdiction, then the
Limited Partners could be held personally liable for the Company's obligations
under the law of such jurisdiction to the same extent as the General Partner
under certain circumstances. The Company will operate in such manner as the
General Partner deems reasonable and necessary or appropriate to preserve the
limited liability of the Limited Partners.
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ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the Company to issue an unlimited
number of additional limited partner interests and other equity securities of
the Company for such consideration and on such terms and conditions as are
established by the General Partner in its sole discretion without the approval
of any Limited Partners; provided that, during the Subordination Period,
except as provided in the next sentence below, the Company may not issue
equity securities of the Company ranking prior or senior to the Common Units
or an aggregate of more than 7,458,684 additional Common Units (excluding
Common Units issued upon the exercise of the Underwriters' over-allotment
option, upon conversion of Subordinated Units, pursuant to employee benefit
plans, upon conversion of the general partner interests and Incentive
Distribution Rights as a result of a withdrawal of the General Partner and
subject to adjustment in the event of a combination or subdivision of Common
Units) or an equivalent number of securities ranking on a parity with the
Common Units without the approval of the holders of at least a Unit Majority.
During the Subordination Period, the Company may also issue an unlimited
number of additional Common Units or parity securities without the approval of
the Unitholders if the proceeds from such issuance are used exclusively to
repay up to $50.0 million in indebtedness of a member of the Partnership
Group, in each case only where the aggregate amount of distributions that
would have been paid with respect to such newly issued Units (including Units
deemed issued as described in the following sentence) and the related
additional distributions that would have been made to the General Partner in
respect of the (actual or pro forma) four-quarter period ending prior to the
first day of the quarter in which the issuance is to be consummated (assuming
such additional Units had been outstanding throughout such period and that
distributions equal to the distributions that were actually paid on the
outstanding Units during the period were paid on such additional Units) did
not exceed the interest costs actually incurred during such period on the
indebtedness that is to be repaid (or, if such indebtedness was not
outstanding throughout the entire period, would have been incurred had such
indebtedness been outstanding for the entire period). In the event that the
Company is required to pay a prepayment penalty in connection with the
repayment of such indebtedness, for purposes of the foregoing test the number
of Common Units issued to repay such indebtedness shall be deemed increased by
the number of Common Units that would need to be issued to pay such penalty.
In accordance with Delaware law and the provisions of the Partnership
Agreement, the Company may also issue additional partnership interests that,
in the sole discretion of the General Partner, may have special voting rights
to which the Common Units are not entitled.
Upon issuance of additional Partnership Securities (other than pursuant to
the over-allotment option), the General Partner will be required to make
additional capital contributions to the extent necessary to maintain its 2%
interest in the Company and Operating Company. Moreover, the General Partner
will have the right, which it may from time to time assign in whole or in part
to any of its affiliates, to purchase Common Units, Subordinated Units or
other equity securities of the Company from the Company whenever, and on the
same terms that, the Company issues such securities or rights to persons other
than the General Partner and its affiliates, to the extent necessary to
maintain the percentage interest of the General Partner and its affiliates in
the Company (including its interest represented by Subordinated Units) that
existed immediately prior to each such issuance. The holders of Common Units
will not have preemptive rights to acquire additional Common Units or other
partnership interests that may be issued by the Company.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the General Partner, which consent may be given or withheld in its
sole discretion. In order to adopt a proposed amendment (other than certain
amendments discussed below), the General Partner is required to seek written
approval of the holders of the number of Units required to approve such
amendment or call a meeting of the Limited Partners to consider and vote upon
the proposed amendment, except as described below. Proposed amendments (unless
otherwise specified) must be approved by holders of a Unit Majority, except
that no amendment may be made which would (i) enlarge the obligations of any
Limited Partner without its consent, unless approved by at least a majority of
the type or class of Units so affected, (ii) enlarge the obligations of,
restrict in any way any action by or rights of, or reduce in any way the
amounts distributable, reimbursable or otherwise payable by the Company to the
General Partner or any of its affiliates without its consent, which consent
may be given or withheld in its
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sole discretion, (iii) change the term of the Company, (iv) provide that the
Company is not dissolved upon the expiration of its term or upon an election
to dissolve the Company by the General Partner that is approved by holders of
a Unit Majority or (v) give any person the right to dissolve the Company other
than the General Partner's right to dissolve the Company with the approval of
holders of a Unit Majority. Each of the foregoing provisions may be amended
with the approval of the holders of at least 90% of the Common Units and
Subordinated Units voting as a single class.
The General Partner may generally make amendments to the Partnership
Agreement without the approval of any Limited Partner or assignee to reflect
(i) a change in the name of the Company, the location of the principal place
of business of the Company, the registered agent or the registered office of
the Company, (ii) admission, substitution, withdrawal or removal of partners
in accordance with the Partnership Agreement, (iii) a change that, in the
discretion of the General Partner, is necessary or advisable to qualify or
continue the qualification of the Company as a limited partnership or a
partnership in which the Limited Partners have limited liability under the
laws of any state or to ensure that neither the Company nor the Operating
Company will be treated as an association taxable as a corporation or
otherwise taxed as an entity for federal income tax purposes, (iv) an
amendment that is necessary, in the opinion of counsel to the Company, to
prevent the Company, or the General Partner or its directors, officers, agents
or trustees, from in any manner being subjected to the provisions of the
Investment Company Act of 1940, as amended, the Investment Advisors Act of
1940, as amended, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, as amended, whether or not
substantially similar to plan asset regulations currently applied or proposed,
(v) subject to the limitations on the issuance of additional Common Units or
other limited or general partner interests described above, an amendment that,
in the discretion of the General Partner, is necessary or advisable in
connection with the authorization of additional limited or general partner
interests, (vi) any amendment expressly permitted in the Partnership Agreement
to be made by the General Partner acting alone, (vii) an amendment effected,
necessitated or contemplated by a merger agreement that has been approved
pursuant to the terms of the Partnership Agreement, (viii) any amendment that,
in the discretion of the General Partner, is necessary or advisable in
connection with the formation by the Company of, or its investment in, any
corporation, partnership or other entity (other than the Operating Company) as
otherwise permitted by the Partnership Agreement, (ix) a change in the fiscal
year and/or taxable year of the Company and changes related thereto, and (x)
any other amendments substantially similar to any of the foregoing.
In addition to the General Partner's right to amend the Partnership
Agreement as described above, the General Partner may make amendments to the
Partnership Agreement without the approval of any Limited Partner or assignee
if such amendments, in the discretion of the General Partner, (i) do not
adversely affect the Limited Partners in any material respect, (ii) are
necessary or advisable to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation of any
federal or state agency or judicial authority or contained in any federal or
state statute, (iii) are necessary or advisable to facilitate the trading of
the Common Units (including the division of any class or classes of
outstanding Partnership Securities into different classes to facilitate
uniformity of tax consequences within such classes of Partnership Securities)
or to comply with any rule, regulation, guideline or requirement of any
securities exchange on which the Common Units are or will be listed for
trading, compliance with any of which the General Partner deems to be in the
best interests of the Company and the Limited Partners, (iv) are necessary or
advisable in connection with any action taken by the General Partner relating
to splits or combinations of Units pursuant to the provisions of the
Partnership Agreement or (v) are required to effect the intent expressed in
this Prospectus or the intent of the Partnership Agreement or contemplated by
the Partnership Agreement.
The General Partner will not be required to obtain an Opinion of Counsel (as
defined below) in the event of the amendments described in the two immediately
preceding paragraphs. No other amendments to the Partnership Agreement will
become effective without the approval of holders of at least 90% of the Units
unless the Company obtains an Opinion of Counsel to the effect that such
amendment will not affect the limited liability under applicable law of any
limited partner in the Company or any member of the Operating Company.
Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding Units in relation to other
classes of Units will require the approval of at least a majority of the
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type or class of Units so affected. Any amendment that reduces the voting
percentage required to take any action is required to be approved by the
affirmative vote of limited partners constituting not less than the voting
requirement sought to be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The General Partner is generally prohibited, without the prior approval of
holders of a Unit Majority, from causing the Company to, among other things,
sell, exchange or otherwise dispose of all or substantially all of its assets
in a single transaction or a series of related transactions (including by way
of merger, consolidation or other combination) or approving on behalf of the
Company the sale, exchange or other disposition of all or substantially all of
the assets of the Operating Company; provided that the General Partner may
mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the Company's assets without such approval. The General
Partner may also sell all or substantially all of the Company's assets
pursuant to a foreclosure or other realization upon the foregoing encumbrances
without such approval. Furthermore, provided that certain conditions are
satisfied, the General Partner may merge the Company or any member of the
Partnership Group into, or convey some or all of the Partnership Group's
assets to, a newly formed entity if the sole purpose of such merger or
conveyance is to effect a mere change in the legal form of the Company into
another limited liability entity. The Unitholders are not entitled to
dissenters' rights of appraisal under the Partnership Agreement or applicable
Delaware law in the event of a merger or consolidation of the Company, a sale
of substantially all of the Company's assets or any other transaction or
event.
TERMINATION AND DISSOLUTION
The Company will continue until December 31, 2087, unless sooner terminated
pursuant to the Partnership Agreement. The Company will be dissolved upon (i)
the election of the General Partner to dissolve the Company, if approved by
the holders of a Unit Majority, (ii) the sale, exchange or other disposition
of all or substantially all of the assets and properties of the Company and
the Operating Company, (iii) the entry of a decree of judicial dissolution of
the Company or (iv) the withdrawal or removal of the General Partner or any
other event that results in its ceasing to be the General Partner (other than
by reason of a transfer of its general partner interest in accordance with the
Partnership Agreement or withdrawal or removal following approval and
admission of a successor). Upon a dissolution pursuant to clause (iv), the
holders of a Unit Majority may also elect, within certain time limitations, to
reconstitute the Company and continue its business on the same terms and
conditions set forth in the Partnership Agreement by forming a new limited
partnership on terms identical to those set forth in the Partnership Agreement
and having as general partner an entity approved by the holders of a Unit
Majority subject to receipt by the Company of an opinion of counsel to the
effect that (x) such action would not result in the loss of limited liability
of any Limited Partner and (y) neither the Company, the reconstituted limited
partnership nor the Operating Company would be treated as an association
taxable as a corporation or otherwise be taxable as an entity for federal
income tax purposes upon the exercise of such right to continue (hereinafter,
an "Opinion of Counsel").
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Company, unless the Company is reconstituted and
continued as a new limited partnership, the person authorized to wind up the
affairs of the Company (the "Liquidator") will, acting with all of the powers
of the General Partner that such Liquidator deems necessary or desirable in
its good faith judgment in connection therewith, liquidate the Company's
assets and apply the proceeds of the liquidation as provided in "Cash
Distribution Policy--Distributions of Cash Upon Liquidation." Under certain
circumstances and subject to certain limitations, the Liquidator may defer
liquidation or distribution of the Company's assets for a reasonable period of
time or distribute assets to partners in kind if it determines that a sale
would be impractical or would cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
The General Partner has agreed not to withdraw voluntarily as a general
partner of the Company and the managing member of the Operating Company prior
to December 31, 2007 (with limited exceptions described
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below), without obtaining the approval of the holders of a Unit Majority and
furnishing an Opinion of Counsel. On or after December 31, 2007, the General
Partner may withdraw as the General Partner (without first obtaining approval
from any Unitholder) by giving 90 days' written notice, and such withdrawal
will not constitute a violation of the Partnership Agreement. Notwithstanding
the foregoing, the General Partner may withdraw without Unitholder approval
upon 90 days' notice to the Limited Partners if at least 50% of the
outstanding Common Units are held or controlled by one person and its
affiliates (other than the General Partner and its affiliates). In addition,
the Partnership Agreement permits the General Partner (in certain limited
instances) to sell or otherwise transfer all of its general partner interest
in the Company without the approval of the Unitholders. See "--Transfer of
General Partner's Interests and Incentive Distribution Rights."
Upon the withdrawal of the General Partner under any circumstances (other
than as a result of a transfer by the General Partner of all or a part of its
general partner interests in the Company), the holders of a Unit Majority may
select a successor to such withdrawing General Partner. If such a successor is
not elected, or is elected but an Opinion of Counsel cannot be obtained, the
Company will be dissolved, wound up and liquidated, unless within 180 days
after such withdrawal the holders of a Unit Majority agree in writing to
continue the business of the Company and to appoint a successor General
Partner. See "--Termination and Dissolution."
The General Partner may not be removed unless such removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding Units
(including Units held by the General Partner and its affiliates) and the
Company receives an Opinion of Counsel. The ownership of the Subordinated
Units by certain affiliates of the General Partner effectively gives the
General Partner the ability to prevent its removal. Any such removal is also
subject to the approval of a successor general partner by the vote of the
holders of not less than a Unit Majority. The Partnership Agreement also
provides that if the General Partner is removed as general partner of the
Company under circumstances where Cause does not exist and Units held by the
General Partner and its affiliates are not voted in favor of such removal (i)
the Subordination Period will end and all outstanding Subordinated Units will
immediately convert into Common Units on a one-for-one basis, (ii) any
existing Common Unit Arrearages will be extinguished and (iii) the General
Partner will have the right to convert its general partner interest (and all
the Incentive Distribution Rights) into Common Units or to receive cash in
exchange for such interests.
Withdrawal or removal of the General Partner as a general partner of the
Company also constitutes withdrawal or removal, as the case may be, of the
General Partner as the managing member of the Operating Company.
In the event of removal of the General Partner under circumstances where
Cause exists or withdrawal of the General Partner where such withdrawal
violates the Partnership Agreement, a successor general partner will have the
option to purchase the general partner interest, managing member interest and
Incentive Distribution Rights of the departing General Partner (the "Departing
Partner") in the Company and the Operating Company for a cash payment equal to
the fair market value of such interests. Under all other circumstances where
the General Partner withdraws or is removed by the Limited Partners, the
Departing Partner will have the option to require the successor general
partner to purchase such interests of the Departing Partner and its Incentive
Distribution Rights for such amount. In each case, such fair market value will
be determined by agreement between the Departing Partner and the successor
general partner, or if no agreement is reached, by an independent investment
banking firm or other independent expert selected by the Departing Partner and
the successor general partner (or if no expert can be agreed upon, by an
expert chosen by agreement of the experts selected by each of them). In
addition, the Company will be required to reimburse the Departing Partner for
all amounts due the Departing Partner, including, without limitation, all
employee-related liabilities, including severance liabilities, incurred in
connection with the termination of any employees employed by the Departing
Partner for the benefit of the Company.
If the above-described option is not exercised by either the Departing
Partner or the successor general partner, as applicable, the Departing
Partner's general partner interest in the Company and managing member interest
in the Operating Company and its Incentive Distribution Rights will
automatically convert into Common Units equal to the fair market value of such
interests as determined by an investment banking firm or other independent
expert selected in the manner described in the preceding paragraph.
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TRANSFER OF GENERAL PARTNER'S INTERESTS AND INCENTIVE DISTRIBUTION RIGHTS
Except for a transfer by the General Partner of all, but not less than all,
of its general partner interest in the Company and managing member interest in
the Operating Company to (a) an affiliate of the General Partner or (b)
another person in connection with the merger or consolidation of the General
Partner with or into another person or the transfer by such General Partner of
all or substantially all of its assets to another person, the General Partner
may not transfer all or any part of its general partner interest in the
Company and managing member interest in the Operating Company to another
person prior to December 31, 2007, without the approval of the holders of at
least a Unit Majority; provided that, in each case, such transferee assumes
the rights and duties of the General Partner to whose interest such transferee
has succeeded, agrees to be bound by the provisions of the Partnership
Agreement, furnishes an Opinion of Counsel and agrees to acquire all (or the
appropriate portion thereof, as applicable) of the General Partner's interest
in the Operating Company and agrees to be bound by the provisions of the
Operating Company Agreement. The General Partner and its affiliates shall have
the right at any time, however, to transfer their Subordinated Units to one or
more persons without Unitholder approval. At any time, the members of the
General Partner may sell or transfer all or part of their interest in the
General Partner to an affiliate or a third party without the approval of the
Unitholders. The General Partner or its affiliates or a subsequent holder may
transfer its Incentive Distribution Rights to another person in connection
with its merger or consolidation with or into, or sale of all or substantially
all of its assets to, such person without the prior approval of the
Unitholders. Holders of Incentive Distribution Rights may also transfer such
rights to its affiliates without the prior approval of the Unitholders. Prior
to December 31, 2007, other transfers of the Incentive Distribution Rights
will require the affirmative vote of holders of at least a Unit Majority. On
or after December 31, 2007, the Incentive Distribution Rights will be freely
transferable.
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are intended to
discourage a person or group from attempting to remove the General Partner as
general partner of the Company or otherwise change the management of the
Company. If any person or group other than the General Partner and its
affiliates acquires beneficial ownership of 20% or more of any class of Units,
such person or group loses voting rights with respect to all of its Units. The
Partnership Agreement also provides that if the General Partner is removed as
a general partner of the Company under circumstances where Cause does not
exist and Units held by the General Partner and its affiliates are not voted
in favor of such removal, (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be
extinguished and (iii) the General Partner will have the right to convert its
partner interests (and all of its Incentive Distribution Rights) into Common
Units or to receive cash in exchange for such interests.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by persons
other than the General Partner and its affiliates, the General Partner will
have the right, which it may assign in whole or in part to any of its
affiliates or to the Company, to acquire all, but not less than all, of the
remaining limited partner interests of such class held by such unaffiliated
persons as of a record date to be selected by the General Partner, on at least
10 but not more than 60 days' notice. The purchase price in the event of such
a purchase shall be the greater of (i) the highest price paid by the General
Partner or any of its affiliates for any limited partner interests of such
class purchased within the 90 days preceding the date on which the General
Partner first mails notice of its election to purchase such limited partner
interests, and (ii) the Current Market Price as of the date three days prior
to the date such notice is mailed. As a consequence of the General Partner's
right to purchase outstanding limited partner interests, a holder of limited
partner interests may have his limited partner interests purchased even though
he may not desire to sell them, or the price paid may be less than the amount
the holder would desire to receive upon the sale of his limited partner
interests. The tax consequences to a Unitholder of the exercise of this call
right are the same as a sale by such Unitholder of his Common Units in the
market. See "Tax Considerations--Disposition of Common Units."
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MEETINGS; VOTING
Except as described below with respect to a Person or group owning 20% or
more of all Units, Unitholders or assignees who are record holders of Units on
the record date set pursuant to the Partnership Agreement will be entitled to
notice of, and to vote at, meetings of limited partners of the Company and to
act with respect to matters as to which approvals may be solicited. With
respect to voting rights attributable to Common Units that are owned by an
assignee who is a record holder but who has not yet been admitted as a limited
partner, the General Partner shall be deemed to be the limited partner with
respect thereto and shall, in exercising the voting rights in respect of such
Common Units on any matter, vote such Common Units at the written direction of
such record holder. Absent such direction, such Common Units will not be voted
(except that, in the case of Common Units held by the General Partner on
behalf of Non-citizen Assignees (as defined below), the General Partner shall
distribute the votes in respect of such Common Units in the same ratios as the
votes of limited partners in respect of other Units are cast).
The General Partner does not anticipate that any meeting of Unitholders will
be called in the foreseeable future. Any action that is required or permitted
to be taken by the Unitholders may be taken either at a meeting of the
Unitholders or without a meeting if consents in writing setting forth the
action so taken are signed by holders of such number of Units as would be
necessary to authorize or take such action at a meeting of all of the
Unitholders. Meetings of the Unitholders of the Company may be called by the
General Partner or by Unitholders owning at least 20% of the outstanding Units
of the class for which a meeting is proposed. Unitholders may vote either in
person or by proxy at meetings. The holders of a majority of the outstanding
Units of the class or classes for which a meeting has been called represented
in person or by proxy shall constitute a quorum at a meeting of Unitholders of
such class or classes, unless any such action by the Unitholders requires
approval by holders of a greater percentage of such Units, in which case the
quorum shall be such greater percentage.
Each record holder of a Unit has a vote according to his percentage interest
in the Company, although additional limited partner interests having special
voting rights could be issued by the Company. See "--Issuance of Additional
Securities." However, if at any time any person or group (other than the
General Partner and its affiliates) acquires, in the aggregate, beneficial
ownership of 20% or more of any class of Units then outstanding, such person
or group will lose voting rights with respect to all of its Units and such
Units may not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of Unitholders, calculating
required votes, determining the presence of a quorum or for other similar
Company purposes. The Partnership Agreement provides that Common Units held in
nominee or street name account will be voted by the broker (or other nominee)
pursuant to the instruction of the beneficial owner unless the arrangement
between the beneficial owner and his nominee provides otherwise. Except as
otherwise provided in the Partnership Agreement, Subordinated Units will vote
together with Common Units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of Common Units (whether or not such
record holder has been admitted as a limited partner) under the terms of the
Partnership Agreement will be delivered to the record holder by the Company or
by the Transfer Agent at the request of the Company.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "--Limited Liability," the Common Units will
be fully paid, and Unitholders will not be required to make additional
contributions to the Company.
An assignee of a Common Unit, subsequent to executing and delivering a
Transfer Application, but pending its admission as a substituted Limited
Partner in the Company, is entitled to an interest in the Company equivalent
to that of a Limited Partner with respect to the right to share in allocations
and distributions from the Company, including liquidating distributions. The
General Partner will vote and exercise other powers attributable to Common
Units owned by an assignee who has not become a substitute Limited Partner at
the written direction of such assignee. See "--Meetings; Voting." Transferees
who do not execute and deliver a
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Transfer Application will be treated neither as assignees nor as record
holders of Common Units, and will not receive cash distributions, federal
income tax allocations or reports furnished to record holders of Common Units.
See "Description of the Common Units--Transfer of Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Company is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the General Partner,
create a substantial risk of cancellation or forfeiture of any property in
which the Company has an interest because of the nationality, citizenship or
other related status of any Limited Partner or assignee, the Company may
redeem the Units held by such Limited Partner or assignee at their Current
Market Price (as defined in the Glossary). In order to avoid any such
cancellation or forfeiture, the General Partner may require each Limited
Partner or assignee to furnish information about his nationality, citizenship
or related status. If a Limited Partner or assignee fails to furnish
information about such nationality, citizenship or other related status within
30 days after a request for such information or the General Partner determines
after receipt of such information that the Limited Partner or assignee is not
an eligible citizen, such Limited Partner or assignee may be treated as a non-
citizen assignee ("Non-citizen Assignee"). In addition to other limitations on
the rights of an assignee who is not a substituted Limited Partner, a Non-
citizen Assignee does not have the right to direct the voting of his Units and
may not receive distributions in kind upon liquidation of the Company.
INDEMNIFICATION
The Partnership Agreement provides that the Company will indemnify the
General Partner, any Departing Partner, any Person who is or was an affiliate
of a General Partner or any Departing Partner, any Person who is or was a
member, partner, officer, director, employee, agent or trustee of a General
Partner or any Departing Partner or any affiliate of a General Partner or any
Departing Partner, or any Person who is or was serving at the request of a
General Partner or any Departing Partner or any affiliate of any such person,
any affiliate of a General Partner or any Departing Partner as an officer,
director, employee, member, partner, agent, fiduciary or trustee of another
Person ("Indemnitees"), to the fullest extent permitted by law, from and
against any and all losses, claims, damages, liabilities (joint or several),
expenses (including, without limitation, legal fees and expenses), judgments,
fines, penalties, interest, settlements and other amounts arising from any and
all claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or
is threatened to be involved, as a party or otherwise, by reason of its status
as an Indemnitee; provided that in each case the Indemnitee acted in good
faith and in a manner that such Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
proceeding, had no reasonable cause to believe its conduct was unlawful. Any
indemnification under these provisions will be only out of the assets of the
Company, and the General Partner shall not be personally liable for, or have
any obligation to contribute or loan funds or assets to the Company to enable
it to effectuate, such indemnification. The Company is authorized to purchase
(or to reimburse the General Partner or its affiliates for the cost of)
insurance against liabilities asserted against and expenses incurred by such
persons in connection with the Company's activities, regardless of whether the
Company would have the power to indemnify such person against such liabilities
under the provisions described above.
BOOKS AND REPORTS
The General Partner is required to keep appropriate books of the business of
the Company at the principal offices of the Company. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
For tax purposes, the fiscal year of the Company is the calendar year. For
financial reporting purposes, however, the fiscal year of the Company is a
fiscal year ending on December 31.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the General Partner will furnish or make available to
each record holder of Units (as of a record date selected by the General
Partner) an annual report containing audited financial statements of the
Company for the past fiscal year, prepared in accordance with generally
accepted accounting principles. As soon as practicable, but in no event later
than
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90 days after the close of each quarter (except the last quarter of each
fiscal year), the General Partner will furnish or make available to each
record holder of Units (as of a record date selected by the General Partner) a
report containing unaudited financial statements of the Company with respect
to such quarter and such other information as may be required by law.
The Company will furnish each record holder of a Unit information reasonably
required for tax reporting purposes within 90 days after the close of each
calendar year. Such information is expected to be furnished in summary form so
that certain complex calculations normally required of partners can be
avoided. The Company's ability to furnish such summary information to
Unitholders will depend on the cooperation of such Unitholders in supplying
certain information to the Company. Every Unitholder (without regard to
whether he supplies such information to the Company) will receive information
to assist him in determining his federal and state tax liability and filing
his federal and state income tax returns.
RIGHT TO INSPECT COMPANY BOOKS AND RECORDS
The Partnership Agreement provides that a Limited Partner can for a purpose
reasonably related to such Limited Partner's interest as a limited partner,
upon reasonable demand and at his own expense, have furnished to him (i) a
current list of the name and last known address of each partner, (ii) a copy
of the Company's tax returns, (iii) information as to the amount of cash, and
a description and statement of the agreed value of any other property or
services, contributed or to be contributed by each partner and the date on
which each became a partner, (iv) copies of the Partnership Agreement, the
certificate of limited partnership of the Company, amendments thereto and
powers of attorney pursuant to which the same have been executed, (v)
information regarding the status of the Company's business and financial
condition, and (vi) such other information regarding the affairs of the
Company as is just and reasonable. The Company may, and intends to, keep
confidential from the Limited Partners trade secrets or other information the
disclosure of which the Company believes in good faith is not in the best
interests of the Company or which the Company is required by law or by
agreements with third parties to keep confidential.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Company has agreed to register for resale
under the Securities Act and applicable state securities laws any Common Units
or other securities of the Company (including Subordinated Units) proposed to
be sold by the General Partner or any of its affiliates if an exemption from
such registration requirements is not otherwise available for such proposed
transaction. The Company is obligated to pay all expenses incidental to such
registration, excluding underwriting discounts and commissions. See "Units
Eligible for Future Sale."
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the Common Units offered hereby, affiliates of the General
Partner will hold 4,407,404 Subordinated Units (all of which will convert into
Common Units at the end of the Subordination Period and some of which may
convert earlier). The sale of these Units could have an adverse impact on the
price of the Common Units or on any trading market that may develop. For a
discussion of the transactions whereby the General Partner's affiliates
acquired the Subordinated Units in connection with the organization of the
Company, see "The Transactions."
The Common Units sold in this offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any Common Units owned by an "affiliate" of the Company (as that term is
defined in the rules and regulations under the Securities Act) may not be
resold publicly except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom under Rule 144 thereunder
("Rule 144") or otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer in a public offering to be sold into the market in an
amount that does not exceed, during any three-month period, the greater of (i)
1% of the total number of such securities outstanding or (ii) the average
weekly reported trading volume of the Common Units for the four calendar weeks
prior to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. A person who is not deemed to have been an
affiliate of the Company at any time during the three months preceding a sale,
and who has beneficially owned his Common Units for at least one year would be
entitled to sell such Common Units under Rule 144 without regard to the public
information requirements, volume limitations, manner of sale provisions or
notice requirements of Rule 144.
Prior to the end of the Subordination Period, the Company may not issue
equity securities of the Company ranking prior or senior to the Common Units
or an aggregate of more than 7,458,684 additional Common Units (excluding
Common Units issued upon exercise of the Underwriters' over-allotment option,
upon conversion of Subordinated Units, in connection with the repayment of
certain indebtedness, or pursuant to employee benefit plans and subject to
adjustment in the event of a combination or subdivision of the Common Units),
or an equivalent amount of securities ranking on a parity with the Common
Units, without the approval of the holders of at least a Unit Majority. The
Partnership Agreement provides that, after the Subordination Period, the
Company may issue an unlimited number of limited partner interests of any type
without a vote of the Unitholders. The Partnership Agreement does not impose
any restriction on the Company's ability to issue equity securities ranking
junior to the Common Units at any time. Any issuance of additional Common
Units or certain other equity securities would result in a corresponding
decrease in the proportionate ownership interest in the Company represented
by, and could adversely affect the cash distributions to and market price of,
Common Units then outstanding. See "The Partnership Agreement--Issuance of
Additional Securities."
Pursuant to the Partnership Agreement, the General Partner and its
affiliates will have the right, upon the terms and subject to the conditions
therein, to cause the Company to register under the Securities Act and state
laws the offer and sale of any Units or other Partnership Securities that they
hold. Subject to the terms and conditions of the Partnership Agreement, such
registration rights allow the General Partner and its affiliates or its
assignees holding any Units to require registration of any such Units and to
include any such Units in a registration by the Company of other Units,
including Units offered by the Company or by any Unitholder. Such registration
rights will continue in effect for two years following any withdrawal or
removal of the General Partner as a general partner of the Company. In
connection with any such registration, the Company will indemnify each
Unitholder participating in such registration and its officers, directors and
controlling persons from and against any liabilities under the Securities Act
or any state securities laws arising from the registration statement or
prospectus. The Company will bear all costs and expenses of any such
registration. In addition, the General Partner and its affiliates may sell its
Units in private transactions at any time, subject to compliance with
applicable laws.
The Company, the General Partner, the officers and directors of the General
Partner and their respective affiliates have agreed not to (i) offer, sell,
contract to sell or otherwise dispose of any Common Units or
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Subordinated Units, any securities that are convertible into, or exercisable
or exchangeable for, or that represent the right to receive, Common Units or
Subordinated Units or any securities that are senior to or pari passu with
Common Units, or (ii) grant any options or warrants to purchase Common Units
or Subordinated Units (other than the grant of options to purchase Common
Units pursuant to the Long-Term Incentive Plan), for a period of 180 days
after the date of this Prospectus without the prior written consent of Smith
Barney Inc., except for the issuance and transfer of Common Units and
Subordinated Units to occur upon the closing of this offering as described in
this Prospectus.
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TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be
relevant to prospective Unitholders and, to the extent set forth below under
"--Legal Opinions and Advice," expresses the opinion of Andrews & Kurth
L.L.P., special counsel to the General Partner and the Company ("Counsel"),
insofar as it relates to matters of law and legal conclusions. This section is
based upon current provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed regulations thereunder and current
administrative rulings and court decisions, all of which are subject to
change. Subsequent changes in such authorities may cause the tax consequences
to vary substantially from the consequences described below. Unless the
context otherwise requires, references in this section to the Company are
references to both the Company and the Operating Company.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting the Company or the Unitholders. Moreover,
the discussion focuses on Unitholders who are individual citizens or residents
of the United States and has only limited application to corporations,
estates, trusts, non-resident aliens or other Unitholders subject to
specialized tax treatment (such as tax-exempt institutions, foreign persons,
individual retirement accounts, REITs or mutual funds). Accordingly, each
prospective Unitholder should consult, and should depend on, his own tax
advisor in analyzing the federal, state, local and foreign tax consequences
peculiar to him of the ownership or disposition of Common Units.
LEGAL OPINIONS AND ADVICE
Counsel is of the opinion that, based on the accuracy of the representations
and subject to the qualifications set forth in the detailed discussion that
follows, for federal income tax purposes (i) the Company and the Operating
Company will each be treated as a partnership, and (ii) owners of Common Units
(with certain exceptions, as described in "--Limited Partner Status" below)
will be treated as partners of the Company (but not the Operating Company). In
addition, all statements as to matters of law and legal conclusions contained
in this section, unless otherwise noted, reflect the opinion of Counsel.
No ruling has been or will be requested from the Internal Revenue Service
(the "IRS") with respect to classification of the Company as a partnership for
federal income tax purposes, whether the Company's timber operations generate
"qualifying income" under Section 7704 of the Code or any other matter
affecting the Company or prospective Unitholders. An opinion of counsel
represents only that counsel's best legal judgment and does not bind the IRS
or the courts. Thus, no assurance can be provided that the opinions and
statements set forth herein would be sustained by a court if contested by the
IRS. Any such contest with the IRS may materially and adversely impact the
market for the Common Units and the prices at which Common Units trade. In
addition, the costs of any contest with the IRS will be borne directly or
indirectly by the Unitholders and the General Partner. Furthermore, no
assurance can be given that the treatment of the Company or an investment
therein will not be significantly modified by future legislative or
administrative changes or court decisions. Any such modification may or may
not be retroactively applied.
For the reasons hereinafter described, Counsel has not rendered an opinion
with respect to the following specific federal income tax issues: (i) the
treatment of a Unitholder whose Common Units are loaned to a short seller to
cover a short sale of Common Units (see "--Tax Treatment of Operations--
Treatment of Short Sales"), (ii) whether a Unitholder acquiring Common Units
in separate transactions must maintain a single aggregate adjusted tax basis
in his Common Units (see "--Disposition of Common Units--Recognition of Gain
or Loss"), (iii) whether the Company's monthly convention for allocating
taxable income and losses is permitted by existing Treasury Regulations (see
"--Disposition of Common Units--Allocations Between Transferors and
Transferees"), and (iv) whether the Company's method for depreciating Section
743 adjustments is sustainable (see "--Tax Treatment of Operations--Section
754 Election").
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TAX RATES AND CHANGES IN FEDERAL INCOME TAX LAWS
The top marginal income tax rate for individuals for 1997 is 36% subject to
a 10% surtax on individuals with taxable income in excess of $271,050 per
year. The surtax is computed by applying a 39.6% rate to taxable income in
excess of the threshold. The TRA of 1997 reduced the maximum capital gains
rate for investments held at least one year to 20% (from 28%) effective May 7,
1997. Effective July 29, 1997, the holding period necessary to qualify for the
new capital gains rate increased from one year to 18 months. For Units sold
after July 28, 1997, with a holding period between one year and 18 months, the
maximum rate remains at 28%.
The TRA of 1997 alters the tax reporting system and the deficiency
collection system applicable to large partnerships that elect to have the
provisions apply and makes certain additional changes to the treatment of
large partnerships, such as the Company. Certain of the proposed changes are
discussed later in this section. The legislation contained in the TRA of 1997
is generally intended to simplify the administration of the tax rules
governing large partnerships such as the Company. It is not expected that the
Company will elect to have these provisions apply because of the cost of their
application.
The TRA of 1997 affects the taxation of certain financial products and
securities, including partnership interests by treating a taxpayer as having
sold an "appreciated" partnership interest (one in which gain would be
recognized if it were sold, assigned or otherwise terminated at its fair
market value) if the taxpayer or related persons enter into a short sale of,
enter into an offsetting notional principal contract with respect to, enter
into a futures or forward contract to deliver, or in the case of an
appreciated financial position that is a short sale or offsetting notional
principal or futures or forward contract, acquire, the same or substantially
identical property. The Secretary of Treasury is also authorized to issue
regulations that treat a taxpayer that enters in transactions or positions
that have substantially the same effect as the preceding transactions as
having constructively sold the financial position.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his
allocable share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of
whether cash distributions are made. Distributions by a partnership to a
partner are generally not taxable unless the amount of any cash distributed is
in excess of the partner's adjusted basis in his partnership interest.
No ruling has been or will be sought from the IRS as to the status of the
Company or the Operating Company as a partnership for federal income tax
purposes. Instead the Company has relied on the opinion of Counsel that, based
upon the Code, the regulations thereunder, published revenue rulings and court
decisions, the Company and the Operating Company will each be classified as a
partnership for federal income tax purposes.
In rendering its opinion, Counsel has relied on certain factual
representations made by the Company and the General Partner. Such factual
matters are as follows:
(a) Neither the Company nor the Operating Company will elect to be
treated as an association or corporation;
(b) The Company will be operated in accordance with (i) all applicable
partnership statutes, (ii) the Partnership Agreement, and (iii) the
description thereof in this Prospectus;
(c) The Operating Company will be operated in accordance with (i) all
applicable limited liability company statutes, (ii) the Operating Company
Agreement, and (iii) the description thereof in this Prospectus;
(d) For each taxable year, more than 90% of the gross income of the
Company will be (i) derived from the exploration, development, production,
processing, refining, transportation or marketing of any
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mineral or natural resource, including timber, or (ii) other items of
"qualifying income" within the meaning of Section 7704(d) of the Code; and
(e) The General Partner will at all times act independently of the
limited partners.
Section 7704 of the Code provides that publicly-traded partnerships will, as
a general rule, be taxed as corporations. However, an exception (the
"Qualifying Income Exception") exists with respect to publicly-traded
partnerships of which 90% or more of the gross income for every taxable year
consists of "qualifying income." Qualifying income includes interest (from
other than a financial business), dividends and income and gains from the
processing, transportation and marketing of timber. Based upon the
representations of the Company and the General Partner and a review of the
applicable legal authorities, Counsel is of the opinion that at least 90% of
the Company's gross income will constitute qualifying income. The Company
estimates that less than one percent of its gross income for each taxable year
will not constitute qualifying income.
If the Company fails to meet the Qualifying Income Exception (other than a
failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery), the Company will be treated as if
it had transferred all of its assets (subject to liabilities) to a newly
formed corporation (on the first day of the year in which it fails to meet the
Qualifying Income Exception) in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their interests in
the Company. This contribution and liquidation should be tax-free to
Unitholders and the Company, so long as the Company, at that time, does not
have liabilities in excess of the tax basis of its assets. Thereafter, the
Company would be treated as a corporation for federal income tax purposes.
If the Company or the Operating Company were treated as an association
taxable as a corporation in any taxable year, either as a result of a failure
to meet the Qualifying Income Exception or otherwise, its items of income,
gain, loss and deduction would be reflected only on its tax return rather than
being passed through to the Unitholders, and its net income would be taxed to
the Company or the Operating Company at corporate rates. In addition, any
distribution made to a Unitholder would be treated as either taxable dividend
income (to the extent of the Company's current or accumulated earnings and
profits) or (in the absence of earnings and profits) a nontaxable return of
capital (to the extent of the Unitholder's tax basis in his Common Units) or
taxable capital gain (after the Unitholder's tax basis in the Common Units is
reduced to zero). Accordingly, treatment of either the Company or the
Operating Company as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
The discussion below is based on the assumption that the Company will be
classified as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of the Company will be treated
as partners of the Company for federal income tax purposes. Counsel is also of
the opinion that (a) assignees who have executed and delivered Transfer
Applications, and are awaiting admission as limited partners and (b)
Unitholders whose Common Units are held in street name or by a nominee and who
have the right to direct the nominee in the exercise of all substantive rights
attendant to the ownership of their Common Units will be treated as partners
of the Company for federal income tax purposes. As there is no direct
authority addressing assignees of Common Units who are entitled to execute and
deliver Transfer Applications and thereby become entitled to direct the
exercise of attendant rights, but who fail to execute and deliver Transfer
Applications, Counsel's opinion does not extend to these persons. Income,
gain, deductions or losses would not appear to be reportable by a Unitholder
who is not a partner for federal income tax purposes, and any cash
distributions received by such a Unitholder would therefore be fully taxable
as ordinary income. These holders should consult their own tax advisors with
respect to their status as partners in the Company for federal income tax
purposes. Furthermore, a purchaser or
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other transferee of Common Units who does not execute and deliver a Transfer
Application may not receive certain federal income tax information or reports
furnished to record holders of Common Units unless the Common Units are held
in a nominee or street name account and the nominee or broker has executed and
delivered a Transfer Application with respect to such Common Units.
A beneficial owner of Common Units whose Common Units have been transferred
to a short seller to complete a short sale would appear to lose his status as
a partner with respect to such Common Units for federal income tax purposes.
See "--Tax Treatment of Operations--Treatment of Short Sales."
TAX CONSEQUENCES OF UNIT OWNERSHIP
Flow-through of Taxable Income
No federal income tax will be paid by the Company. Instead, each Unitholder
will be required to report on his income tax return his allocable share of the
income, gains, losses and deductions of the Company without regard to whether
corresponding cash distributions are received by such Unitholder.
Consequently, a Unitholder may be allocated income from the Company even if he
has not received a cash distribution. Each Unitholder will be required to
include in income his allocable share of Company income, gain, loss and
deduction for the taxable year of the Company ending with or within the
taxable year of the Unitholder.
Treatment of Company Distributions
Distributions by the Company to a Unitholder generally will not be taxable
to the Unitholder for federal income tax purposes to the extent of his tax
basis in his Common Units immediately before the distribution. Cash
distributions in excess of a Unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the Common Units, taxable
in accordance with the rules described under "--Disposition of Common Units"
below. Any reduction in a Unitholder's share of the Company's liabilities for
which no partner, including the General Partner, bears the economic risk of
loss ("nonrecourse liabilities") will be treated as a distribution of cash to
that Unitholder. To the extent that Company distributions cause a Unitholder's
"at risk" amount to be less than zero at the end of any taxable year, he must
recapture any losses deducted in previous years. See "--Limitations on
Deductibility of Company Losses."
A decrease in a Unitholder's percentage interest in the Company because of
the issuance by the Company of additional Common Units will decrease such
Unitholder's share of nonrecourse liabilities of the Company, and thus will
result in a corresponding deemed distribution of cash. A non-pro rata
distribution of money or property may result in ordinary income to a
Unitholder, regardless of his tax basis in his Common Units, if such
distribution reduces the Unitholder's share of the Company's "unrealized
receivables" (including depreciation recapture) and/or substantially
appreciated "inventory items" (both as defined in Section 751 of the Code)
(collectively, "Section 751 Assets"). To that extent, the Unitholder will be
treated as having been distributed his proportionate share of the Section 751
Assets and having exchanged such assets with the Company in return for the
non-pro rata portion of the actual distribution made to him. This latter
deemed exchange will generally result in the Unitholder's realization of
ordinary income under Section 751(b) of the Code. Such income will equal the
excess of (1) the non-pro rata portion of such distribution over (2) the
Unitholder's tax basis for the share of such Section 751 Assets deemed
relinquished in the exchange.
Ratio of Taxable Income to Distributions
The Company estimates that a purchaser of Common Units in this offering who
holds such Common Units from the date of the closing of this offering through
December 31, 2000, will be allocated, on a cumulative basis, an amount of
federal taxable income for such period that will be less than 30% of the cash
distributed with respect to that period. A majority of such taxable income may
be treated as capital gains (depending upon a Common Unitholders particular
tax circumstances) as a result of an election to be made pursuant to Section
631(a) of the Code and as a result of timber transactions qualifying for
treatment under Section 631(b) of the
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Code. See "--Tax Treatment of Operations--Sales of Timberlands." The Company
further estimates that for taxable years after the taxable year ending
December 31, 2000, the taxable income allocable to the Unitholders will
constitute a significantly higher percentage of cash distributed to
Unitholders. The foregoing estimates are based upon the assumption that gross
income from operations will approximate the amount required to make the
Minimum Quarterly Distribution with respect to all Units and other assumptions
with respect to capital expenditures, cash flow and anticipated cash
distributions. These estimates and assumptions are subject to, among other
things, numerous business, economic, regulatory, competitive and political
uncertainties beyond the control of the Company. Further, the estimates are
based on current tax law and certain tax reporting positions that the Company
intends to adopt and with which the IRS could disagree. Accordingly, no
assurance can be given that the estimates will prove to be correct. The actual
percentage could be higher or lower, and any such differences could be
material and could materially affect the value of the Common Units.
Basis of Common Units
A Unitholder's initial tax basis for his Common Units will be the amount he
paid for the Common Units plus his share of the Company's nonrecourse
liabilities. That basis will be increased by his share of Company income and
by any increases in his share of Company nonrecourse liabilities. That basis
will be decreased (but not below zero) by distributions from the Company, by
the Unitholder's share of Company losses, by any decrease in his share of
Company nonrecourse liabilities and by his share of expenditures of the
Company that are not deductible in computing its taxable income and are not
required to be capitalized. A limited partner will have no share of Company
debt which is recourse to the General Partner, but will have a share,
generally based on his share of profits, of Company debt which is not recourse
to any partner. See "--Disposition of Common Units--Recognition of Gain or
Loss."
Limitations on Deductibility of Company Losses
The deduction by a Unitholder of his share of Company losses will be limited
to the tax basis in his Units and, in the case of an individual Unitholder or
a corporate Unitholder (if more than 50% of the value of its stock is owned
directly or indirectly by five or fewer individuals or certain tax-exempt
organizations), to the amount for which the Unitholder is considered to be "at
risk" with respect to the Company's activities, if that is less than the
Unitholder's tax basis. A Unitholder must recapture losses deducted in
previous years to the extent that Company distributions cause the Unitholder's
at risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a Unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that the Unitholder's tax
basis or at risk amount (whichever is the limiting factor) is subsequently
increased. Upon the taxable disposition of a Unit, any gain recognized by a
Unitholder can be offset by losses that were previously suspended by the at
risk limitation but may not be offset by losses suspended by the basis
limitation. Any excess loss (above such gain) previously suspended by the at
risk or basis limitations is no longer utilizable.
In general, a Unitholder will be at risk to the extent of the tax basis of
his Units, excluding any portion of that basis attributable to his share of
Company nonrecourse liabilities, reduced by any amount of money the Unitholder
borrows to acquire or hold his Units if the lender of such borrowed funds owns
an interest in the Company, is related to such a person or can look only to
Units for repayment. A Unitholder's at risk amount will increase or decrease
as the tax basis of the Unitholder's Units increases or decreases (other than
tax basis increases or decreases attributable to increases or decreases in his
share of Company nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by the Company will only be available to offset
future income generated by the Company and will not be available to offset
income from other passive activities or investments (including other publicly-
traded partnerships) or salary or active business income. Passive losses which
are not
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deductible because they exceed a Unitholder's income generated by the Company
may be deducted in full when he disposes of his entire investment in the
Company in a fully taxable transaction to an unrelated party. The passive
activity loss rules are applied after other applicable limitations on
deductions such as the at risk rules and the basis limitation.
A Unitholder's share of net income from the Company may be offset by any
suspended passive losses from the Company, but it may not be offset by any
other current or carryover losses from other passive activities, including
those attributable to other publicly-traded partnerships. The IRS has
announced that Treasury Regulations will be issued which characterize net
passive income from a publicly-traded partnership as investment income for
purposes of the limitations on the deductibility of investment interest.
Limitations on Interest Deductions
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a Unitholder's net passive income from the Company will be
treated as investment income for this purpose. In addition, the Unitholder's
share of the Company's portfolio income will be treated as investment income.
Investment interest expense includes (i) interest on indebtedness properly
allocable to property held for investment, (ii) the Company's interest expense
attributed to portfolio income, and (iii) the portion of interest expense
incurred to purchase or carry an interest in a passive activity to the extent
attributable to portfolio income. The computation of a Unitholder's investment
interest expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or carry a Unit. Net investment
income includes gross income from property held for investment and amounts
treated as portfolio income pursuant to the passive loss rules less deductible
expenses (other than interest) directly connected with the production of
investment income, but generally does not include gains attributable to the
disposition of property held for investment.
ALLOCATION OF COMPANY INCOME, GAIN, LOSS AND DEDUCTION
In general, if the Company has a net profit, items of income, gain, loss and
deduction will be allocated among the General Partner and the Unitholders in
accordance with their respective percentage interests in the Company. At any
time that distributions are made to the Common Units and not to the
Subordinated Units, or that Incentive Distributions are made to the General
Partner, gross income will be allocated to the recipients to the extent of
such distribution. If the Company has a net loss, items of income, gain, loss
and deduction will generally be allocated first, to the General Partner and
the Unitholders in accordance with their respective Percentage Interests to
the extent of their positive capital accounts (as maintained under the
Partnership Agreement) and, second, to the General Partner.
As required by Section 704(c) of the Code and as permitted by Regulations
thereunder, certain items of Company income, deduction, gain and loss will be
allocated to account for the difference between the tax basis and fair market
value of property contributed to the Company by the General Partner and
Holdings ("Contributed Property"). The effect of these allocations to a
Unitholder will be essentially the same as if the tax basis of the Contributed
Property were equal to their fair market value at the time of contribution. In
addition, certain items of recapture income will be allocated to the extent
possible to the partner allocated the deduction or curative allocation giving
rise to the treatment of such gain as recapture income in order to minimize
the recognition of ordinary income by some Unitholders. Finally, although the
Company does not expect that its operations will result in the creation of
negative capital accounts, if negative capital accounts nevertheless result,
items of Company income and gain will be allocated in an amount and manner
sufficient to eliminate the negative balance as quickly as possible.
Regulations provide that an allocation of items of partnership income, gain,
loss or deduction, other than an allocation required by Section 704(c) of the
Code to eliminate the difference between a partner's "book" capital account
(credited with the fair market value of Contributed Property) and "tax"
capital account (credited with the tax basis of Contributed Property) (the
"Book-Tax Disparity"), will generally be given effect for federal
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income tax purposes in determining a partner's distributive share of an item
of income, gain, loss or deduction only if the allocation has substantial
economic effect. In any other case, a partner's distributive share of an item
will be determined on the basis of the partner's interest in the partnership,
which will be determined by taking into account all the facts and
circumstances, including the partner's relative contributions to the
partnership, the interests of the partners in economic profits and losses, the
interest of the partners in cash flow and other nonliquidating distributions
and rights of the partners to distributions of capital upon liquidation.
Counsel is of the opinion that allocations under the Partnership Agreement
will be given effect for federal income tax purposes in determining a
partner's distributive share of an item of income, gain, loss or deduction.
Tax Treatment of Operations
Accounting Method and Taxable Year
The Company will use the year ending December 31 as its taxable year and
will adopt the accrual method of accounting for federal income tax purposes.
Each Unitholder will be required to include in income his allocable share of
Company income, gain, loss and deduction for the taxable year of the Company
ending within or with the taxable year of the Unitholder. In addition, a
Unitholder who has a taxable year ending on a date other than December 31 and
who disposes of all of his Units following the close of the Company's taxable
year but before the close of his taxable year must include his allocable share
of Company income, gain, loss and deduction in income for his taxable year
with the result that he will be required to report in income for his taxable
year his distributive share of more than one year of Partnership income, gain,
loss and deduction. See "--Disposition of Common Units--Allocations Between
Transferors and Transferees."
Initial Tax Basis, Depreciation and Amortization
The tax basis of the various assets of the Company will be used for purposes
of computing depletion with respect to timber properties, depreciation and
cost recovery deductions and, ultimately, gain or loss on the disposition of
such assets. The Company assets will initially have an aggregate tax basis
equal to the tax basis of the assets in the possession of USTK and Old
Services immediately prior to the formation of the Company. The federal income
tax burden associated with the difference between the fair market value of
property held by USTK and the tax basis established for such property will be
borne by the Company and Holdings. See "--Allocation of Company Income, Gain,
Loss and Deduction."
To the extent allowable, the Company may elect to use the depletion,
depreciation and cost recovery methods that will result in the largest
depreciation deductions in the early years of the Company. The Company will
not be entitled to any amortization deductions with respect to any goodwill
conveyed to the Company on formation. Property subsequently acquired or
constructed by the Company may be depreciated using accelerated methods
permitted by the Code.
If the Company disposes of depreciable property by sale, foreclosure, or
otherwise, all or a portion of any gain (determined by reference to the amount
of depreciation previously deducted and the nature of the property) may be
subject to the recapture rules and taxed as ordinary income rather than
capital gain. Similarly, a partner who has taken cost recovery or depreciation
deductions with respect to property owned by the Company may be required to
recapture such deductions as ordinary income upon a sale of his interest in
the Company. See "--Allocation of Company Income, Gain, Loss and Deduction"
and "--Disposition of Common Units--Recognition of Gain or Loss."
Costs incurred in organizing the Company may be amortized over any period
selected by the Company not shorter than 60 months. The costs incurred in
promoting the issuance of Units (i.e. syndication expenses) must be
capitalized and cannot be deducted currently, ratably or upon termination of
the Company. There are uncertainties regarding the classification of costs as
organization expenses, which may be amortized, and as syndication expenses,
which may not be amortized. Under recently adopted regulations, the
underwriting discounts and commissions would be treated as a syndication cost.
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Timber Income
Under Section 631 of the Code, a substantial part of the gain or loss
realized by the Company from the sale of timber will qualify as Section 1231
gain or loss. A Unitholder's distributive share of the Company Section 1231
gain or loss aggregated each year with any of his other Section 1231 gains and
losses (generally gains and losses from the sale of property used in a trade
or business held for at least one year and from involuntary conversions). If a
net gain results, all such gains and losses are capital gains and losses; if a
net loss results, all such gains and losses are ordinary income and losses.
Moreover, a Unitholder's net Section 1231 gain is treated as ordinary income
to the extent of his prior net Section 1231 losses for the five most recent
prior taxable years to the extent such losses have not previously been offset
against Section 1231 gains. Losses are deemed recaptured in the chronological
order in which they arose.
The special treatment provided by Section 631 for Unitholders applies only
to timber that the Company has either owned or had a contract right to cut for
a period 12 months or more before being cut. If the timber is cut by the
Company, Section 631(a) permits the Company to elect, and it intends to elect,
to treat the cutting of the timber as a sale of a Section 1231 asset for an
amount equal to the fair market value of the timber as of the beginning of the
taxable year in which it is cut. In such event, the cut timber has a basis
equal to that value in determining ordinary income or loss on a subsequent
sale of the cut timber. If the timber is cut by another person pursuant to a
contract in which the Company retains an economic interest in the timber, the
amount received by the Company under that contract is also treated under
Section 631(b) as the amount realized from the sale of a Section 1231 asset
(generally, the date the gain is deemed realized is the date when, in the
ordinary course of business, the quantity of the timber cut is first
definitely determined). In either case, the Section 1231 gain or loss is the
difference between the amount realized and the cost depletion allowed with
respect to the cut timber. See "--Timber Depletion."
Income from the sale of timber that does not qualify under Section 631 will
be taxable as ordinary income in the year of sale.
Timber Depletion
Timber is subject to cost depletion and is not subject to accelerated cost
recovery, depreciation or percentage depletion. Timber depletion is determined
with respect to each separate timber account (containing timber located in a
timber "block") and is equal to the product obtained by multiplying the units
of timber cut by a fraction, the numerator of which is the aggregate adjusted
basis of all timber included in such account and the denominator of which is
the total number of timber units in such timber account. The depletion
allowance so calculated represents the adjusted tax basis of such timber for
purposes or determining gain or loss on disposition. The tax basis of timber
in each timber account is reduced by the depletion allowance for such account.
If a Section 631(a) election is in effect, the taxpayer will be entitled to
a depletion allowance as discussed above under "Timber Income." Thereafter,
the taxpayer's adjusted basis with respect to such timber will be the fair
market value of the timber as of the first day of the taxable year in which
the timber is cut. As the cut timber is sold, the taxpayer's adjusted basis
will be taken into account for purposes of determining gain or loss on the
sale. In the case of an outright sale of timber or a disposition of timber
treated as a sale under Section 631(b) of the Code, the amount realized for
the timber is reduced by the adjusted basis in such timber. A taxpayer
disposing of timber with a retained economic interest in a transaction which
fails to qualify under Section 631(b) also reduces the amount realized from
such disposition by the adjusted basis in the timber.
Sales of Timberlands
If any tract of timberland is sold or otherwise disposed of in a taxable
transaction, the Company will recognize gain or loss measured by the
difference between the amount realized (including the amount of any
indebtedness assumed by the purchaser upon such disposition or to which such
property is subject) and the adjusted tax basis of such property. Generally,
the character of any gain or loss recognized upon that disposition
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will depend upon whether the tract of timberland (i) is held for sale to
customers in the ordinary course of business (i.e., the Company is a "dealer"
with respect to such property), (ii) is held for "use in a trade or business"
within the meaning of Section 1231 of the Code or (iii) is held by the Company
as a "capital asset" within the meaning of Section 1221 of the Code. In
determining dealer status with respect to Forestlands and other types of real
estate, the courts have identified a number of factors for distinguishing
between a particular property held for sale in the ordinary course of business
and one held for investment. Any determination must be based on all the facts
and circumstances surrounding the particular property and sale in question.
The Company will hold its Timberlands for the purposes of generating cash
flow from the periodic harvesting and sale of timber and achieving long-term
capital appreciation. Although the General Partner may consider strategic
sales of Timberlands consistent with achieving long-term capital appreciation,
the General Partner does not anticipate frequent sales, nor significant
marketing, improvement or subdivision activity in connection with any
strategic sale of timberland. Thus, the General Partner does not believe the
Company will be viewed as a dealer. However, in light of the factual nature of
this question, there is no assurance that the Company will not be viewed by
the IRS as a "dealer" in Timberlands.
In addition, were the IRS successfully to contend that any of the Company's
predecessors was a dealer with respect to any tracts of timberland distributed
to the Company, gains from sales of these tracts within a five-year period
from the date this offering is consummated would be taxable as ordinary
income. The General Partner, however, believes that none of the Company's
predecessors was a dealer with respect to any of its timberland holdings.
If the Company is not a dealer with respect to a particular tract of
timberland and the Company and its predecessor has held the timberland for a
one-year period primarily for use in its trade or business, the character of
any gain or loss realized from the disposition of such timberland will be
determined under Section 1231 of the Code. See "--Timber Income." If the
Company and its predecessor has not held a timberland tract for more than one
year at the time of sale, gain or loss from the sale thereof will be ordinary.
If the Company is not a dealer with respect to a particular tract of
timberland, and the timberland is not used in a trade or business, that tract
will be a "capital asset" within the meaning of Section 1221 of the Code. Gain
or loss recognized from the disposition of that timberland will be taxable as
capital gain or loss, and the character of such capital gain or loss as long-
term or short-term will be based upon the Company's holding period in such
property at the time of its sale.
Since amounts realized upon the sale, exchange or other disposition of a
tract of timberland by the Company may be used to reduce any liability to
which the tract of timberland is subject, it is possible (although not
anticipated), that the Company's gain on the sale of such a tract would exceed
the distributive proceeds of the sale, and the income taxes payable on the
sale of the Unitholders could exceed their distributive share of any such
proceeds.
Section 754 Election
The Company intends to make the election permitted by Section 754 of the
Code. That election is irrevocable without the consent of the IRS. The
election will generally permit the Company to adjust a Common Unit purchaser's
(other than a Common Unit purchaser that purchases Common Units from the
Company) tax basis in the Company's assets ("inside basis") pursuant to
Section 743(b) of the Code to reflect his purchase price. The Section 743(b)
adjustment belongs to the purchaser and not to other partners. (For purposes
of this discussion, a partner's inside basis in the Company's assets will be
considered to have two components: (1) his share of the Company's tax basis in
such assets ("common basis") and (2) his Section 743(b) adjustment to that
basis.)
Proposed Treasury Regulation Section 1.168-2(n) generally requires the
Section 743(b) adjustment attributable to recovery property to be depreciated
as if the total amount of such adjustment were attributable to newly-acquired
recovery property placed in service when the purchaser acquires the Unit.
Similarly, the proposed
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regulations under Section 197 indicate that the Section 743(b) adjustment
attributable to an amortizable Section 197 intangible should be treated as a
newly-acquired asset placed in service in the month when the purchaser
acquires the Unit. Under Treasury Regulation Section 1.167(c)-1(a)(6), a
Section 743(b) adjustment attributable to property subject to depreciation
under Section 167 of the Code rather than cost recovery deductions under
Section 168 is generally required to be depreciated using either the straight-
line method or the 150% declining balance method. The depreciation and
amortization methods and useful lives associated with the Section 743(b)
adjustment, therefore, may differ from the methods and useful lives generally
used to depreciate the common basis in such properties. Pursuant to the
Partnership Agreement, the Company is authorized to adopt a convention to
preserve the uniformity of Units even if such convention is not consistent
with Treasury Regulation Sections 1.167(c)-1(a)(6), Proposed Treasury
Regulation Section 1.168-2(n) or Proposed Treasury Regulation 1.197-2(g)(3).
See "--Uniformity of Units."
Although Counsel is unable to opine as to the validity of such an approach,
the Company intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property
(to the extent of any unamortized Book-Tax Disparity) using a rate of
depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the common basis of such property, or treat
that portion as non-amortizable to the extent attributable to property the
common basis of which is not amortizable, despite its inconsistency with
Proposed Treasury Regulation Section 1.168-2(n), Treasury Regulation Section
1.167(c)-1(a)(6) (neither of which is expected to directly apply to a material
portion of the Company's assets) or Proposed Treasury Regulation 1.197-
2(g)(3). To the extent such Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized Book-Tax Disparity, the
Company will apply the rules described in the Regulations and legislative
history. If the Company determines that such position cannot reasonably be
taken, the Company may adopt a depreciation or amortization convention under
which all purchasers acquiring Units in the same month would receive
depreciation or amortization, whether attributable to common basis or Section
743(b) adjustment, based upon the same applicable rate as if they had
purchased a direct interest in the Company's assets. Such an aggregate
approach may result in lower annual depreciation or amortization deductions
than would otherwise be allowable to certain Unitholders. See "--Uniformity of
Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS may seek to reallocate some or all of any Section
743(b) adjustment not so allocated by the Company to goodwill which, as an
intangible asset, would be amortizable over a longer period of time than the
Company's tangible assets.
A Section 754 election is advantageous if the transferee's tax basis in his
Units is higher than such Units' share of the aggregate tax basis to the
Company of the Company's assets immediately prior to the transfer. In such a
case, as a result of the election, the transferee would have a higher tax
basis in his share of the Company's assets for purposes of calculating, among
other items, his depreciation and depletion deductions and his share of any
gain or loss on a sale of the Company's assets. Conversely, a Section 754
election is disadvantageous if the transferee's tax basis in such Units is
lower than such Unit's share of the aggregate tax basis of the Company's
assets immediately prior to the transfer. Thus, the fair market value of the
Units may be affected either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and will
be made by the Company on the basis of certain assumptions as to the value of
Company assets and other matters. There is no assurance that the
determinations made by the Company will not be successfully challenged by the
IRS and that the deductions resulting from them will not be reduced or
disallowed altogether. Should the IRS require a different basis adjustment to
be made, and should, in the Company's opinion, the expense of compliance
exceed the benefit of the election, the Company may seek permission from the
IRS to revoke the Section 754 election for the Company. If such permission is
granted, a subsequent purchaser of Units may be allocated more income than he
would have been allocated had the election not been revoked.
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Alternative Minimum Tax
Although it is not expected that the Company will generate significant tax
preference items or adjustments, each Unitholder will be required to take into
account his distributive share of any items of Company income, gain, deduction
or loss for purposes of the alternative minimum tax. The minimum tax rate for
noncorporate taxpayers is 26% on the first $175,000 of alternative minimum
taxable income in excess of the exemption amount and 28% on any additional
alternative minimum taxable income. Prospective Unitholders should consult
with their tax advisors as to the impact of an investment in Units on their
liability for the alternative minimum tax.
Valuation of Company Property and Basis of Properties
The federal income tax consequences of the ownership and disposition of
Units will depend in part on estimates by the Company of the relative fair
market values, and determinations of the initial tax bases, of the assets of
the Company. Although the Company may from time to time consult with
professional appraisers with respect to valuation matters, many of the
relative fair market value estimates will be made by the Company. These
estimates and determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis are subsequently found to be incorrect, the character
and amount of items of income, gain, loss or deductions previously reported by
Unitholders might change, and Unitholders might be required to adjust their
tax liability for prior years.
Treatment of Short Sales
A Unitholder whose Units are loaned to a "short seller" to cover a short
sale of Units may be considered as having disposed of ownership of those
Units. If so, he would no longer be a partner with respect to those Units
during the period of the loan and may recognize gain or loss from the
disposition. As a result, during this period, any Company income, gain,
deduction or loss with respect to those Units would not be reportable by the
Unitholder, any cash distributions received by the Unitholder with respect to
those Units would be fully taxable and all of such distributions would appear
to be treated as ordinary income. Unitholders desiring to assure their status
as partners and avoid the risk of gain recognition should modify any
applicable brokerage account agreements to prohibit their brokers from
borrowing their Units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of Company interests.
Also, the 1997 Proposed Legislation contains provisions which would adversely
affect certain short sales. See "--Tax Rates and Changes in Federal Income Tax
Laws."
DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss
Gain or loss will be recognized on a sale of Units equal to the difference
between the amount realized and the Unitholder's tax basis for the Units sold.
A Unitholder's amount realized will be measured by the sum of the cash or the
fair market value of other property received plus his share of Company
nonrecourse liabilities. Because the amount realized includes a Unitholder's
share of Company nonrecourse liabilities, the gain recognized on the sale of
Units could result in a tax liability in excess of any cash received from such
sale.
Prior Company distributions in excess of cumulative net taxable income in
respect of a Common Unit which decreased a Unitholder's tax basis in such
Common Unit will, in effect, become taxable income if the Common Unit is sold
at a price greater than the Unitholder's tax basis in such Common Unit, even
if the price is less than his original cost.
Should the IRS successfully contest the convention used by the Company to
amortize only a portion of the Section 743(b) adjustment (described under "--
Tax Treatment of Operations--Section 754 Election") attributable to an
amortizable Section 197 intangible after a sale by the General Partner of
Units, a Unitholder could realize additional gain from the sale of Units than
had such convention been respected. In that case, the Unitholder may have been
entitled to additional deductions against income in prior years but may be
unable to
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claim them, with the result to him of greater overall taxable income than
appropriate. Counsel is unable to opine as to the validity of the convention
but believes such a contest by the IRS to be unlikely because a successful
contest could result in substantial additional deductions to other
Unitholders.
Gain or loss recognized by a Unitholder (other than a "dealer" in Units) on
the sale or exchange of a Unit will generally be taxable as capital gain or
loss. Capital gain recognized on the sale of Units held for more than 18
months will generally be taxed at a maximum rate of 20%. A portion of this
gain or loss (which could be substantial), however, will be separately
computed and taxed as ordinary income or loss under Section 751 of the Code to
the extent attributable to assets giving rise to depreciation recapture or
other "unrealized receivables" or to "inventory items" owned by the Company.
The term "unrealized receivables" includes potential recapture items,
including depreciation recapture. Ordinary income attributable to unrealized
receivables, inventory items and depreciation recapture may exceed net taxable
gain realized upon the sale of the Unit and may be recognized even if there is
a net taxable loss realized on the sale of the Unit. Thus, a Unitholder may
recognize both ordinary income and a capital loss upon a disposition of Units.
Net capital loss may offset no more than $3,000 of ordinary income in the case
of individuals and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a Company in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If
this ruling is applicable to the holders of Common Units, a Common Unitholder
will be unable to select high or low basis Common Units to sell as would be
the case with corporate stock. It is not clear whether the ruling applies to
the Company because, similar to corporate stock, interests in the Company are
evidenced by separate certificates. Accordingly, Counsel is unable to opine as
to the effect such ruling will have on the Unitholders. A Unitholder
considering the purchase of additional Common Units or a sale of Common Units
purchased in separate transactions should consult his tax advisor as to the
possible consequences of such ruling.
Allocations Between Transferors and Transferees
In general, the Company's taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be subsequently
apportioned among the Unitholders in proportion to the number of Units owned
by each of them as of the opening of the principal national securities
exchange on which the Common Units are then traded on the first business day
of the month (the "Allocation Date"). However, gain or loss realized on a sale
or other disposition of Company assets other than in the ordinary course of
business will be allocated among the Unitholders on the Allocation Date in the
month in which that gain or loss is recognized. As a result, a Unitholder
transferring Common Units in the open market may be allocated income, gain,
loss and deduction accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of Units. If this method is not allowed under the Treasury
Regulations (or only applies to transfers of less than all of the Unitholder's
interest), taxable income or losses of the Company might be reallocated among
the Unitholders. The Company is authorized to revise its method of allocation
between transferors and transferees (as well as among partners whose interests
otherwise vary during a taxable period) to conform to a method permitted under
future Treasury Regulations.
A Unitholder who owns Units at any time during a quarter and who disposes of
such Units prior to the record date set for a cash distribution with respect
to such quarter will be allocated items of Company income, gain, loss and
deductions attributable to such quarter but will not be entitled to receive
that cash distribution.
Notification Requirements
A Unitholder who sells or exchanges Units is required to notify the Company
in writing of that sale or exchange within 30 days after the sale or exchange
and in any event by no later than January 15 of the year
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following the calendar year in which the sale or exchange occurred. The
Company is required to notify the IRS of that transaction and to furnish
certain information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Additionally, a transferee of a Unit will be required to furnish a
statement to the IRS, filed with its income tax return for the taxable year in
which the sale or exchange occurred, that sets forth the amount of the
consideration paid for the Unit. Failure to satisfy these reporting
obligations may lead to the imposition of substantial penalties.
Constructive Termination
The Company and the Operating Company will be considered to have been
terminated if there is a sale or exchange of 50% or more of the total
interests in Company capital and profits within a 12-month period. A
termination of the Company will cause a termination of the Operating Company.
A termination of the Company will result in the closing of the Company's
taxable year for all Unitholders. In the case of a Unitholder reporting on a
taxable year other than a fiscal year ending December 31, the closing of the
Company's taxable year may result in more than 12 months' taxable income or
loss of the Company being includable in his taxable income for the year of
termination. New tax elections required to be made by the Company, including a
new election under Section 754 of the Code, must be made subsequent to a
termination, and a termination could result in a deferral of Company
deductions for depreciation. A termination could also result in penalties if
the Company were unable to determine that the termination had occurred.
Moreover, a termination might either accelerate the application of, or subject
the Company to, any tax legislation enacted prior to the termination.
Under regulations, a termination of the Company would result in a deemed
transfer by the Company of its assets to a new partnership in exchange for an
interest in the new partnership followed by a deemed distribution of interests
in the new partnership to the Unitholders in liquidation of the Company.
Entity-Level Collections
If the Company is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any Unitholder or any General
Partner or any former Unitholder, the Company is authorized to pay those taxes
from Company funds. Such payment, if made, will be treated as a distribution
of cash to the partner on whose behalf the payment was made. If the payment is
made on behalf of a person whose identity cannot be determined, the Company is
authorized to treat the payment as a distribution to current Unitholders. The
Company is authorized to amend the Partnership Agreement in the manner
necessary to maintain uniformity of intrinsic tax characteristics of Units and
to adjust subsequent distributions, so that after giving effect to such
distributions, the priority and characterization of distributions otherwise
applicable under the Partnership Agreement is maintained as nearly as is
practicable. Payments by the Company as described above could give rise to an
overpayment of tax on behalf of an individual partner in which event the
partner could file a claim for credit or refund.
UNIFORMITY OF UNITS
Because the Company cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of such Units must be maintained. In the absence of uniformity, compliance
with a number of federal income tax requirements, both statutory and
regulatory, could be substantially diminished. A lack of uniformity can result
from a literal application of Proposed Treasury Regulation Section 1.168-2(n),
Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation
1.197-2(g)(3). Any non-uniformity could have a negative impact on the value of
the Units. See "--Tax Treatment of Operations--Section 754 Election."
The Company intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of contributed property
or adjusted property (to the extent of any unamortized Book-Tax Disparity)
using a rate of depreciation or amortization derived from the depreciation or
amortization method and
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useful life applied to the Common Basis of such property, or treat that
portion as nonamortizable, to the extent attributable to property the Common
Basis of which is not amortizable, despite its inconsistency with Proposed
Treasury Regulation Section 1.168-2(n), Treasury Regulation Section 1.167(c)-
1(a)(6) (neither of which is expected to directly apply to a material portion
of the Company's assets) and Proposed Treasury Regulation 1.197-2(g)(3). See
"--Tax Treatment of Operations--Section 754 Election." To the extent such
Section 743(b) adjustment is attributable to appreciation in value in excess
of the unamortized Book-Tax Disparity, the Company will apply the rules
described in the Regulations. If the Company determines that such a position
cannot reasonably be taken, the Company may adopt a depreciation and
amortization convention under which all purchasers acquiring Units in the same
month would receive depreciation and amortization deductions, whether
attributable to Common Basis or Section 743(b) basis, based upon the same
applicable rate as if they had purchased a direct interest in the Company's
property. If such an aggregate approach is adopted, it may result in lower
annual depreciation and amortization deductions than would otherwise be
allowable to certain Unitholders and risk the loss of depreciation and
amortization deductions not taken in the year that such deductions are
otherwise allowable. This convention will not be adopted if the Company
determines that the loss of depreciation and amortization deductions will have
a material adverse effect on the Unitholders. If the Company chooses not to
utilize this aggregate method, the Company may use any other reasonable
depreciation and amortization convention to preserve the uniformity of the
intrinsic tax characteristics of any Units that would not have a material
adverse effect on the Unitholders. The IRS may challenge any method of
depreciating the Section 743(b) adjustment described in this paragraph. If
such a challenge were sustained, the uniformity of Units might be affected,
and the gain from the sale of Units might be increased without the benefit of
additional deductions. See "--Disposition of Common Units--Recognition of Gain
or Loss."
Tax-Exempt Organizations and Certain Other Investors
Ownership of Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and,
as described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax
(including individual retirement accounts ("IRAs") and other retirement plans)
are subject to federal income tax on unrelated business taxable income. Much
of the taxable income derived by such an organization from the ownership of a
Unit will be unrelated business taxable income and thus will be taxable to
such a Unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of the Company's gross income will
include that type of income.
Non-resident aliens and foreign corporations, trusts or estates which hold
Units will be considered to be engaged in business in the United States on
account of ownership of Units. As a consequence they will be required to file
federal tax returns in respect of their share of Company income, gain, loss or
deduction and pay federal income tax at regular rates on any net income or
gain. Generally, a partnership is required to pay a withholding tax on the
portion of the partnership's income which is effectively connected with the
conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been
made to such partners. However, under rules applicable to publicly-traded
partnerships, the Company will withhold (currently at the rate of 39.6%) on
actual cash distributions made quarterly to foreign Unitholders. Each foreign
Unitholder must obtain a taxpayer identification number from the IRS and
submit that number to the Transfer Agent of the Company on a Form W-8 in order
to obtain credit for the taxes withheld. A change in applicable law may
require the Company to change these procedures.
Because a foreign corporation which owns Units will be treated as engaged in
a United States trade or business, such a corporation may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Company's income and gain (as
adjusted for changes in the foreign corporation's "U.S. net equity") which are
effectively connected with the conduct of a United States trade or business.
That tax may be reduced or eliminated by an income tax treaty between the
United States and
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the country with respect to which the foreign corporate Unitholder is a
"qualified resident." In addition, such a Unitholder is subject to special
information reporting requirements under Section 6038C of the Code.
Under a ruling of the IRS a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on
the disposition of such Unit to the extent that such gain is effectively
connected with a United States trade or business of the foreign Unitholder.
Apart from the ruling, a foreign Unitholder will not be taxed upon the
disposition of a Unit if that foreign Unitholder has held less than 5% in
value of the Units during the five-year period ending on the date of the
disposition and if the Units are regularly traded on an established securities
market at the time of the disposition.
ADMINISTRATIVE MATTERS
Company Information Returns and Audit Procedures
The Company intends to furnish to each Unitholder, within 90 days after the
close of each calendar year, certain tax information, including a Schedule K-
1, which sets forth each Unitholder's share of the Company's income, gain,
loss and deduction for the preceding Company taxable year. In preparing this
information, which will generally not be reviewed by counsel, the Company will
use various accounting and reporting conventions, some of which have been
mentioned in the previous discussion, to determine the Unitholder's share of
income, gain, loss and deduction. There is no assurance that any of those
conventions will yield a result which conforms to the requirements of the
Code, regulations or administrative interpretations of the IRS. The Company
cannot assure prospective Unitholders that the IRS will not successfully
contend in court that such accounting and reporting conventions are
impermissible. Any such challenge by the IRS could negatively affect the value
of the Units.
The federal income tax information returns filed by the Company may be
audited by the IRS. Adjustments resulting from any such audit may require each
Unitholder to adjust a prior year's tax liability, and possibly may result in
an audit of the Unitholder's own return. Any audit of a Unitholder's return
could result in adjustments of non-Company as well as Company items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined in a partnership proceeding
rather than in separate proceedings with the partners. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
The Partnership Agreement appoints the General Partner as the Tax Matters
Partner of the Company.
The Tax Matters Partner will make certain elections on behalf of the Company
and Unitholders and can extend the statute of limitations for assessment of
tax deficiencies against Unitholders with respect to Company items. The Tax
Matters Partner may bind a Unitholder with less than a 1% profits interest in
the Company to a settlement with the IRS unless that Unitholder elects, by
filing a statement with the IRS, not to give such authority to the Tax Matters
Partner. The Tax Matters Partner may seek judicial review (by which all the
Unitholders are bound) of a final partnership administrative adjustment and,
if the Tax Matters Partner fails to seek judicial review, such review may be
sought by any Unitholder having at least a 1% interest in the profits of the
Company and by the Unitholders having in the aggregate at least a 5% profits
interest. However, only one action for judicial review will go forward, and
each Unitholder with an interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on the Company's return. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to
substantial penalties. Under the 1997 Proposed Legislation, partners in
electing large partnerships would be required to treat all Company items in a
manner consistent with the Company return.
Under the reporting provisions of the TRA of 1997, each partner of an
electing large partnership takes into account separately his share of the
following items, determined at the partnership level: (1) taxable income or
loss from passive loss limitation activities; (2) taxable income or loss from
other activities (such as portfolio
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income or loss); (3) net capital gains to the extent allocable to passive loss
limitation activities and other activities; (4) tax exempt interest; (5) a net
alternative minimum tax adjustment separately computed for passive loss
limitation activities and other activities; (6) general credits; (7) low-
income housing credit; (8) rehabilitation credit; (9) foreign income taxes;
(10) credit for producing fuel from a nonconventional source; and (11) any
other items the Secretary of Treasury deems appropriate.
The TRA of 1997 also made a number of changes to the tax compliance and
administrative rules relating to electing partnerships. One provision would
require that each partner in a large partnership, such as the Company, take
into account his share of any adjustments to partnership items in the year
such adjustments are made. Under prior law, adjustments relating to
partnership items for a previous taxable year are taken into account by those
persons who were partners in the previous taxable year. Alternatively, under
the TRA of 1997, a partnership could elect to or, in some circumstances, could
be required to directly pay the tax resulting from any such adjustments. In
either case, therefore, Unitholders could bear significant economic burdens
associated with tax adjustments relating to periods predating their
acquisition of Units. It is not expected that the Company will elect to have
these provisions apply because of the cost of their application.
Nominee Reporting
Persons who hold an interest in the Company as a nominee for another person
are required to furnish to the Company (a) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (b) whether the
beneficial owner is (i) a person that is not a United States person, (ii) a
foreign government, an international organization or any wholly-owned agency
or instrumentality of either of the foregoing, or (iii) a tax-exempt entity;
(c) the amount and description of Units held, acquired or transferred for the
beneficial owner; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and
acquisition cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and certain
information on Units they acquire, hold or transfer for their own account. A
penalty of $50 per failure (up to a maximum of $100,000 per calendar year) is
imposed by the Code for failure to report such information to the Company. The
nominee is required to supply the beneficial owner of the Units with the
information furnished to the Company.
Registration as a Tax Shelter
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that
the Company is not subject to the registration requirement on the basis that
it will not constitute a tax shelter. However, the General Partner, as a
principal organizer of the Company, will register the Company as a tax shelter
with the Secretary of the Treasury in the absence of assurance that the
Company will not be subject to tax shelter registration and in light of the
substantial penalties which might be imposed if registration is required and
not undertaken. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN
INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED,
EXAMINED OR APPROVED BY THE IRS. The Company must furnish the registration
number to the Unitholders, and a Unitholder who sells or otherwise transfers a
Unit in a subsequent transaction must furnish the registration number to the
transferee. The penalty for failure of the transferor of a Unit to furnish the
registration number to the transferee is $100 for each such failure. The
Unitholders must disclose the tax shelter registration number of the Company
on Form 8271 to be attached to the tax return on which any deduction, loss or
other benefit generated by the Company is claimed or income of the Company is
included. A Unitholder who fails to disclose the tax shelter registration
number on his return, without reasonable cause for that failure, will be
subject to a $250 penalty for each failure. Any penalties discussed herein are
not deductible for federal income tax purposes. Registration as a tax shelter
may increase the risk of an audit.
Accuracy-Related Penalties
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more of certain listed
causes, including negligence or disregard of rules or regulations, substantial
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understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, with respect to any
portion of an underpayment if it is shown that there was a reasonable cause
for that portion and that the taxpayer acted in good faith with respect to
that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally
is reduced if any portion is attributable to a position adopted on the return
(i) with respect to which there is, or was, "substantial authority" or (ii) as
to which there is a reasonable basis and the pertinent facts of such position
are disclosed on the return. Certain more stringent rules apply to "tax
shelters," a term that in this context does not appear to include the Company.
If any Company item of income, gain, loss or deduction included in the
distributive shares of Unitholders might result in such an "understatement" of
income for which no "substantial authority" exists, the Company must disclose
the pertinent facts on its return. In addition, the Company will make a
reasonable effort to furnish sufficient information for Unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes,
and estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the Company does business or owns property. Although an
analysis of those various taxes is not presented here, each prospective
Unitholder should consider their potential impact on his investment in the
Company. The Company will initially own property and conduct business in
Oregon, which imposes a personal income tax. A Unitholder will be required to
file state income tax returns and to pay state income taxes in some or all of
the states in which the Company does business or owns property and may be
subject to penalties for failure to comply with those requirements. In certain
states, tax losses may not produce a tax benefit in the year incurred (if, for
example, the Company has no income from sources within that state) and also
may not be available to offset income in subsequent taxable years. Some of the
states may require the Company, or the Company may elect, to withhold a
percentage of income from amounts to be distributed to a Unitholder who is not
a resident of the state. Withholding, the amount of which may be greater or
less than a particular Unitholder's income tax liability to the state,
generally does not relieve the non-resident Unitholder from the obligation to
file an income tax return. Amounts withheld may be treated as if distributed
to Unitholders for purposes of determining the amounts distributed by the
Company. See "--Disposition of Common Units--Entity-Level Collections." Based
on current law and its estimate of future Company operations, the General
Partner anticipates that any amounts required to be withheld will not be
material.
It is the responsibility of each Unitholder to investigate the legal and tax
consequences, under the laws of pertinent states and localities of his
investment in the Company. Accordingly, each prospective Unitholder should
consult, and must depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each Unitholder
to file all state and local, as well as U.S. federal, tax returns that may be
required of such Unitholder. Counsel has not rendered an opinion on the state
or local tax consequences of an investment in the Company.
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INVESTMENT IN THE COMPANY BY EMPLOYEE BENEFIT PLANS
An investment in the Company by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and restrictions imposed by Section 4975 of the Code. As used herein, the term
"employee benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or IRAs established or maintained by an
employer or employee organization. Among other things, consideration should be
given to (a) whether such investment is prudent under Section 404(a)(1)(B) of
ERISA; (b) whether in making such investment, such plan will satisfy the
diversification requirement of Section 404(a)(1)(C) of ERISA; and (c) whether
such investment will result in recognition of unrelated business taxable
income by such plan and, if so, the potential after-tax investment return. See
"Tax Considerations--Uniformity of Units--Tax-Exempt Organizations and Certain
Other Investors." The person with investment discretion with respect to the
assets of an employee benefit plan (a "fiduciary") should determine whether an
investment in the Company is authorized by the appropriate governing
instrument and is a proper investment for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
IRAs that are not considered part of an employee benefit plan) prohibit an
employee benefit plan from engaging in certain transactions involving "plan
assets" with parties that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the plan.
In addition to considering whether the purchase of Common Units is a
prohibited transaction, a fiduciary of an employee benefit plan should
consider whether such plan will, by investing in the Company, be deemed to own
an undivided interest in the assets of the Company, with the result that the
General Partner also would be a fiduciary of such plan and the operations of
the Company would be subject to the regulatory restrictions of ERISA,
including its prohibited transaction rules, as well as the prohibited
transaction rules of the Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under certain circumstances. Pursuant
to these regulations, an entity's assets would not be considered to be "plan
assets" if, among other things, (a) the equity interest acquired by employee
benefit plans are publicly offered securities--i.e., the equity interests are
widely held by 100 or more investors independent of the issuer and each other,
freely transferable and registered pursuant to certain provisions of the
federal securities laws, (b) the entity is an "operating company"--i.e., it is
primarily engaged in the production or sale of a product or service other than
the investment of capital either directly or through a majority owned
subsidiary or subsidiaries, or (c) there is no significant investment by
benefit plan investors, which is defined to mean that less than 25% of the
value of each class of equity interest (disregarding certain interests held by
the General Partner, its affiliates, and certain other persons) is held by the
employee benefit plans referred to above, IRAs and other employee benefit
plans not subject to ERISA (such as governmental plans). The Company's assets
should not be considered "plan assets" under these regulations because it is
expected that the investment will satisfy the requirements in (a) and (b)
above and may also satisfy the requirements in (c).
Plan fiduciaries contemplating a purchase of Common Units should consult
with their own counsel regarding the consequences under ERISA and the Code in
light of the serious penalties imposed on persons who engage in prohibited
transactions or other violations.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Company
has agreed to sell to each of the Underwriters named below, and each of the
Underwriters has severally agreed to purchase from the Company, the respective
number of Common Units set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER COMMON UNITS
----------- ------------
<S> <C>
Smith Barney Inc. .............................................
Deutsche Morgan Grenfell Inc. .................................
A.G. Edwards & Sons, Inc. .....................................
PaineWebber Incorporated.......................................
Prudential Securities Incorporated.............................
---------
Total........................................................ 7,458,684
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Units offered hereby
are subject to approval of certain legal matters by their counsel and to
certain other conditions. The Underwriters are obligated to take and pay for
all Common Units offered hereby (other than those covered by the Underwriters'
over-allotment option described below) if any such Common Units are taken.
The Underwriters, for whom Smith Barney Inc. ("Smith Barney"), Deutsche
Morgan Grenfell Inc. ("DMG"), A.G. Edwards & Sons, Inc., PaineWebber
Incorporated and Prudential Securities Incorporated are acting as
Representatives (the "Representatives"), propose to offer part of the Common
Units directly to the public at the offering price set forth on the cover page
of this Prospectus and part of such Common Units to certain dealers at such
price less a concession not in excess of $ per Common Unit. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per Common Unit to other Underwriters or to certain other
dealers. After the initial offering of the Common Units to the public, the
offering price and other selling terms may from time to time be varied by the
Representatives. The Representatives have informed the Company that the
Underwriters do not expect to confirm sales to accounts over which they
exercise discretionary authority without the prior written approval of the
transaction by the customer.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 1,118,803 additional
Common Units at the Price to Public set forth on the cover page of this
Prospectus, minus the underwriting discounts and commissions. The Underwriters
may exercise such option solely for the purpose of covering over-allotments,
if any, made in connection with the offering of the Common Units offered
hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional Common Units as the number of Common Units set
forth opposite such Underwriter's name in the preceding table bears to the
total number of Common Units listed in such table.
In connection with this offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Common Units than the total amount
shown on the list of Underwriters that appears above) and may effect
transactions that stabilize, maintain or otherwise affect the market price of
the Common Units at levels above those that might otherwise prevail in the
open market. Such transactions may include placing bids for the Common Units
or effecting purchases of the Common Units for the purposes of pegging, fixing
or maintaining the price of the Common Units or for the purpose of reducing a
syndicate short position created in connection
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with the offering. In addition, the contractual arrangements among the
Underwriters include a provision whereby, if the Representatives purchase
Common Units in the open market for the account of the underwriting syndicate
and the Common Units purchased can be traced to a particular Underwriter or
member of the selling group, the underwriting syndicate may impose a "penalty
bid" whereby it may require the Underwriter or selling group member in
question to purchase the Common Units in question at the cost price to the
syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question the selling concession applicable to the
Common Units in question. The Underwriters are not required to engage in any
of these activities and any such activities, if commenced, may be discontinued
at any time.
The Company, the General Partner, the officers and directors of the General
Partner and their respective affiliates have agreed not to (i) offer, sell,
contract to sell or otherwise dispose of any Common Units or Subordinated
Units, any securities that are convertible into, or exercisable or
exchangeable for, or that represent the right to receive, Common Units or
Subordinated Units or any securities that are senior to or pari passu with
Common Units, or (ii) grant any options or warrants to purchase Common Units
or Subordinated Units (other than the grant of options to purchase Common
Units pursuant to the Long-Term Incentive Plan), for a period of 180 days
after the date of this Prospectus without the prior written consent of Smith
Barney Inc., except for the issuance and transfer of Common and Subordinated
Units to occur upon the closing of this offering as described in this
Prospectus.
Prior to this offering, there has been no public market for the Common Units
of the Company. Consequently, the initial public offering price has been
determined by negotiations between the General Partner and the
Representatives. Among the factors considered in determining the initial
public offering price were the history of and prospects for the Company's
business and the industry in which it competes, an assessment of the Company's
management and the present state of the Company's development, the past and
present revenues, earnings and cash flows of the Company, the prospects for
growth of the Company's revenues, earnings and cash flows, the current state
of the economy in the United States and the current level of economic activity
in the industry in which the Company competes and in related or comparable
industries, and currently prevailing conditions in the securities markets,
including current market valuations of publicly traded companies which are
comparable to the Company.
The Common Units have been approved for listing on the Nasdaq, under the
symbol "TIMBZ."
Because the National Association of Securities Dealers, Inc. ("NASD") views
the Common Units offered hereby as interests in a direct participation
program, the offering is being made in compliance with Rule 2810 of the NASD's
Conduct Rules. Investor suitability with respect to the Common Units should be
judged similarly to the suitability with respect to other securities that are
listed for trading on a national securities exchange.
Smith Barney and DMG will act as underwriters in the Public Note Offering.
DMG has performed financial advisory services in the past for the Company, for
which it is entitled to customary compensation. Smith Barney and USTK have
entered into an engagement letter pursuant to which Smith Barney will perform
certain financial advisory services in exchange for customary compensation.
In August 1997, an affiliate of Smith Barney made a loan to John M. Rudey
and one of his affiliates. The loan bears interest at such Smith Barney
affiliate's base rate plus 0.25%. On the earlier to occur of November 30, 1997
and 30 days after the closing of this offering, a substantial portion of the
loan becomes payable. The remaining principal amount is payable on March 31,
1998. The loan is secured by Mr. Rudey's 99% interest in Rudey Timber Company,
LLC.
The Company and the General Partner have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under
the Securities Act.
124
<PAGE>
VALIDITY OF THE COMMON UNITS
The validity of the Common Units will be passed upon for the Company by
Andrews & Kurth L.L.P., New York, New York. Certain legal matters in
connection with the Common Units offered hereby are being passed upon for the
Underwriters by Baker & Botts, L.L.P., Houston, Texas.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.
Information relating to the Company's timber inventory and acreage, and the
age, growth rate, size and species of the Company's timber included herein has
been reviewed by Mason, Bruce & Girard, Inc., an independent forest resource
consulting firm, and are included herein in reliance upon the authority of
such firm as an expert in timber inventory and appraisals.
AVAILABLE INFORMATION
The Company has not previously been subject to the informational
requirements of the Exchange Act. The Company has filed with the Securities
and Exchange Commission (the "Commission") a Registration Statement on Form S-
1 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Common Units offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain items of which are contained in exhibits and schedules to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Units offered hereby, reference is made to the Registration Statement,
including the exhibits and schedules thereto. Statements made in this
Prospectus concerning the contents of any contract, agreement or other
document are not necessarily complete; with respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement is qualified in its entirety by such
reference. The Registration Statement and the exhibits and schedules thereto
filed with the Commission by the Company may be inspected and copied at the
public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048 and 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can also be obtained upon written request from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates or from the Commission's Web site
on the Internet at http://www.sec.gov.
125
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
U.S. Timberlands Company, L.P. Pro Forma Consolidated Financial Statements
(Unaudited):
Pro Forma Consolidated Balance Sheet--June 30, 1997..................... F-2
Pro Forma Consolidated Statement of Operations--Year Ended December 31,
1996................................................................... F-4
Pro Forma Consolidated Statement of Operations--Six Months Ended June
30, 1997............................................................... F-5
Notes to Pro Forma Consolidated Financial Statements.................... F-6
U.S. Timberlands Combined Financial Statements:
Report of Independent Public Accountants................................ F-12
Combined Balance Sheets--December 31, 1995 and 1996 and June 30, 1997... F-13
Combined Statements of Operations--Years Ended December 31, 1994 and
1995, Period from January 1, 1996 through August 29, 1996 and Period
from August 30, 1996 through December 31, 1996......................... F-14
Combined Statements of Changes in Weyerhaeuser Investment and Advances
and Members' Deficit--Years Ended December 31, 1994 and 1995, Period
from January 1, 1996 through August 29, 1996 and Period from August 30,
1996 through December 31, 1996......................................... F-15
Combined Statements of Cash Flows--Years Ended December 31, 1994 and
1995, Period from January 1, 1996 through August 29, 1996 and Period
from August 30, 1996 through December 31, 1996......................... F-16
Notes to Combined Financial Statements.................................. F-17
Combined Statements of Operations--Six Months Ended June 30, 1996
(unaudited) and 1997................................................... F-25
Combined Statement of Changes in Members' Deficit--Six Months Ended June
30, 1997............................................................... F-26
Combined Statements of Cash Flows--Six Months Ended June 30, 1996
(unaudited) and 1997................................................... F-27
U.S. Timberlands Company, L.P. Financial Statements:
Report of Independent Public Accountants................................ F-28
Balance Sheet--July 29, 1997............................................ F-29
Note to Balance Sheet................................................... F-30
New Services, L.L.C. Financial Statements:
Report of Independent Public Accountants................................ F-31
Balance Sheet--July 29, 1997............................................ F-32
Note to Balance Sheet................................................... F-33
</TABLE>
F-1
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
AS OF JUNE 30, 1997
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
COMBINED CONSOLIDATED
ASSETS AS OF ASSETS AS OF
JUNE 30, 1997 ADJUSTMENTS JUNE 30, 1997
------------- ----------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........ $ 30,387 $ (430)(A) $
(4,988)(A)
143,455 (B)
217,750 (C)
(418,575)(D)
(6,813)(D)
41,714 (D)
(1,000)(E) 1,500
Accounts receivable.............. 2,387 -- 2,387
Other receivables................ 1,310 -- 1,310
Prepaid expenses................. 1,021 -- 1,021
-------- --------- --------
Total current assets........... 35,105 (28,887) 6,218
TIMBER, TIMBERLANDS AND LOGGING
ROADS, net........................ 270,630 110,430 (A) 381,060
SEED ORCHARD AND NURSERY STOCK..... 1,655 -- 1,655
PROPERTY, PLANT AND EQUIPMENT, at
cost:
Equipment........................ 918 -- 918
Buildings and land improvements.. 843 -- 843
Less- Accumulated depreciation... (164) -- (164)
-------- --------- --------
Total property, plant and
equipment..................... 1,597 -- 1,597
LONG-TERM RECEIVABLE............... 1,171 -- 1,171
DEFERRED FINANCING FEES............ 3,479 4,988 (A)
(3,479)(A)
7,250 (C)
(4,988)(D) 7,250
-------- --------- --------
Total assets....................... $313,637 $ 85,314 $398,951
======== ========= ========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
balance sheet.
F-2
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
AS OF JUNE 30, 1997
LIABILITIES AND PARTNERS' AND MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
COMBINED CONSOLIDATED
LIABILITIES AND LIABILITIES
MEMBERS' DEFICIT AND PARTNERS'
AS OF EQUITY AS OF
JUNE 30, 1997 ADJUSTMENTS JUNE 30, 1997
---------------- ----------- -------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable................ $ 1,583 $ -- $ 1,583
Accrued liabilities............. 12,986 (2,750)(D)
(6,813)(D) 3,423
Deferred revenue................ 969 -- 969
Payable to affiliate............ 3,000 -- 3,000
Current portion of long-term
debt........................... 10,000 (10,000)(D) --
-------- -------- --------
Total current liabilities..... 28,538 (19,563) 8,975
ACQUISITION FACILITY.............. -- 41,714 (D) 41,714
BORROWINGS UNDER REVOLVING CREDIT
FACILITIES....................... 90,000 (90,000)(A)
85,000 (A)
(85,000)(D) --
LONG-TERM DEBT.................... 205,000 (85,000)(A)
200,000 (A)
(120,000)(D)
(200,000)(D) --
NOTES............................. -- 225,000 (C) 225,000
MINORITY INTEREST................. -- 1,233 (F) 1,233
MEMBERS' DEFICIT.................. (9,901) (3,479)(A)
(825)(D)
(4,988)(D)
(1,000)(E)
20,193 (F) --
PARTNERS' EQUITY:
Common Units (7,459 units)...... -- 143,455 (B) --
(22,659)(F) 120,796
Subordinated Units (4,407
units)......................... -- -- --
General partner interests (242
units)......................... -- 1,233 (F) 1,233
-------- -------- --------
Total partners' and members'
equity (deficit)............. (9,901) 131,930 122,029
-------- -------- --------
Total liabilities and
partners' and members' equity
(deficit).................... $313,637 $ 85,314 $398,951
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
balance sheet.
F-3
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PREDECESSOR U.S. TIMBERLANDS
HISTORICAL HISTORICAL COMBINED
STATEMENT OF STATEMENT OF PRO FORMA
OPERATIONS FOR OPERATIONS FOR THE CONSOLIDATED
THE PERIOD FROM PERIOD FROM STATEMENT OF
JANUARY 1, 1996 AUGUST 30, 1996 WEYERHAEUSER OPERATIONS FOR THE
THROUGH THROUGH ACQUISITION TRANSACTION YEAR ENDED
AUGUST 29, 1996 DECEMBER 31, 1996 ADJUSTMENTS ADJUSTMENTS DECEMBER 31, 1996
--------------- ------------------- ------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Logs.................. $14,077 $ 13,590 $ -- $ -- $ 27,667
By-products and
other................ 1,501 429 -- -- 1,930
------- -------- -------- ------ --------
Total revenues...... 15,578 14,019 -- -- 29,597
OPERATING COSTS:
Cost of products
sold................. 9,225 6,179 -- -- 15,404
Depreciation,
depletion and road
amortization......... 927 3,323 4,126 (i) -- 8,376
Selling, general and
administrative
expenses............. 2,730 9,284 (4,935)(ii) -- 7,079
------- -------- -------- ------ --------
Operating income
(loss)............. 2,696 (4,767) 809 -- (1,262)
INTEREST EXPENSE........ -- 7,316 13,664 (iii) 3,319 (G) 24,299
AMORTIZATION OF DEFERRED
FINANCING FEES AND DEBT
GUARANTEE FEES......... -- 1,326 2,649 (iv) (3,250)(H) 725
INTEREST INCOME......... -- (409) (409)
OTHER EXPENSE, net...... 1 36 -- -- 37
------- -------- -------- ------ --------
NET INCOME (LOSS) BEFORE
MINORITY INTEREST...... 2,695 (13,036) (15,504) (69) (25,914)
MINORITY INTEREST....... -- -- -- 259 (I) 259
------- -------- -------- ------ --------
Net income (loss)... $ 2,695 $(13,036) $(15,504) $ 190 (25,655)
======= ======== ======== ======
GENERAL PARTNERS'
INTERESTS IN NET LOSS.. 259
--------
LIMITED PARTNERS'
INTERESTS IN NET LOSS.. $(25,396)
========
LOSS PER UNIT........... $ (2.14)
========
WEIGHTED AVERAGE LIMITED
PARTNERS' UNITS
OUTSTANDING (J)........ 11,866
========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
financial statement.
F-4
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
HISTORICAL COMBINED PRO FORMA CONSOLIDATED
STATEMENT OF STATEMENT OF
OPERATIONS FOR THE OPERATIONS FOR THE
SIX MONTHS TRANSACTION SIX MONTHS
ENDED JUNE 30, 1997 ADJUSTMENTS ENDED JUNE 30, 1997
------------------- ----------- ----------------------
<S> <C> <C> <C>
REVENUES:
Logs.................. $19,813 $ -- $19,813
Timber and property
sales................ 3,494 -- 3,494
By-products and
other................ 489 -- 489
------- ------ -------
Total revenues...... 23,796 -- 23,796
OPERATING COSTS:
Cost of products
sold................. 7,811 -- 7,811
Cost of timber and
property sales....... 1,191 -- 1,191
Depreciation,
depletion and road
amortization......... 5,395 -- 5,395
Selling, general and
administrative
expenses............. 2,892 -- 2,892
------- ------ -------
Operating income.... 6,507 -- 6,507
INTEREST EXPENSE........ 10,877 1,273 (G) 12,150
AMORTIZATION OF DEFERRED
FINANCING FEES AND DEBT
GUARANTEE FEES......... 2,198 (1,836)(H) 362
INTEREST INCOME......... (774) -- (774)
OTHER EXPENSE, net...... (20) -- (20)
------- ------ -------
NET INCOME (LOSS) BEFORE
MINORITY INTEREST...... (5,774) 563 (5,211)
MINORITY INTEREST....... -- 52 (I) 52
------- ------ -------
Net income (loss)... $(5,774) 615 (5,159)
======= ======
GENERAL PARTNERS'
INTERESTS IN NET LOSS.. 52
-------
LIMITED PARTNERS'
INTERESTS IN NET LOSS.. $(5,107)
=======
LOSS PER UNIT........... $ (.43)
=======
WEIGHTED AVERAGE LIMITED
PARTNERS' UNITS
OUTSTANDING (K)........ 11,866
=======
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
financial statement.
F-5
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND JUNE 30, 1997
(ALL AMOUNTS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
The pro forma consolidated financial statements are based upon the
historical financial position and results of operations of the U.S.
Timberlands entities that will be combined into U.S. Timberlands Company, L.P.
(the "Company"), a newly formed master limited partnership. The Company will
include all of the assets and liabilities of the entities currently included
in the U.S. Timberlands historical combined financial statements, which are
U.S. Timberlands Klamath Falls, L.L.C. ("USTK" or the "Operating Company") and
U.S. Timberlands Services Company, L.L.C. ("Old Services"). The Company also
includes long-term debt obligations and related interest and debt guarantee
costs of U.S. Timberlands Holdings, L.L.C. ("Holdings"), the parent company of
USTK, that will be assumed by the Company concurrent with the closing of the
Common Units Offering discussed below.
The pro forma consolidated financial statements reflect the following
transactions (the "Transactions"), in addition to the Weyerhaeuser and Ochoco
acquisition adjustments discussed below, to occur at the closing (the
"Closing") of the public offering of Common Units: (i) the public offering by
the Company of 7,459 Common Units at an assumed initial public offering price
of $21.00 per Common Unit resulting in aggregate gross proceeds to the Company
of $156,632 (the "Common Units Offering"), (ii) the issuance by the Company of
4,407 Subordinated Units to the General Partner and its affiliates, (iii) the
public offering by the Company (the "Public Note Offering") of $225,000 of
senior, unsecured notes (the "Notes"), (iv) the entering into by the Operating
Company of a $25,000 Working Capital Facility and a $75,000 Acquisition
Facility and a drawdown under the Acquisition Facility of $41,714, (v) the
repayment of all existing indebtedness of the Company and the Operating
Company, including indebtedness to be assumed at the Closing, accrued interest
thereon and certain loan guarantee and deferred financing fees and (vi) the
payment of underwriting discounts and commissions and other fees and expenses
associated with the Transactions. The pro forma consolidated financial
statements assume no exercise of the Underwriters' over-allotment option.
In connection with the Company's Common Units Offering and related formation
of the General Partner, the General Partner intends to issue income interests
in the General Partner to certain officers and directors of the General
Partner at no cost. Such income interests will participate pro rata in cash
distributions from USTK and the Company. In addition, under certain
circumstances, if these officers or directors terminate their employment, the
General Partner is required to repurchase their income interests at fair
market value as determined by independent appraisal. The fair value of these
income interests will be recorded as compensation expense in the Company's
post-Common Units Offering financial statements with a corresponding increase
to contributed capital.
Upon completion of the Company's Common Units Offering, the Company
anticipates incurring incremental general and administrative costs (e.g.,
costs of tax return preparation and quarterly reports to unitholders, investor
relations and registrar and transfer agent fees) at an annual rate of
approximately $1,500. The pro forma consolidated financial statements do not
reflect any adjustments for these estimated incremental costs.
Concurrent with the retirement of debt discussed in footnote (D), the
Company expects to pay estimated accrued interest of $12,700, of which $6,813
is accrued at June 30, 1997. The balance of $5,887 is the estimated amount of
additional interest expense expected to be incurred but not paid from July 1,
1997 through the expected debt retirement date (November 15, 1997). The pro
forma consolidated financial statements do not reflect any adjustments for
these additional costs to be incurred.
As discussed in Note 7 to the footnotes to the historical combined financial
statements, U.S. Timberlands paid an affiliate $2,800 in 1996 for management
services. The Company does not intend to provide such
F-6
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
management fees subsequent to completion of the Common Units Offering. The pro
forma consolidated financial statements do not reflect any adjustments for the
elimination of these costs.
All of the financial statements provided herein (including the financial
statements pertaining to the Predecessor) were prepared by, and are solely the
responsibility of, the Company.
WEYERHAEUSER ACQUISITION ADJUSTMENTS
In July and August 1996, respectively, Old Services and USTK were formed and
subsequently entered into an agreement with Weyerhaeuser Company on August 30,
1996 to purchase approximately 600,000 acres of timber and timberlands and
certain other assets (the "Weyerhaeuser Acquisition"). The following pro forma
Weyerhaeuser Acquisition Adjustments were recorded to give effect to the
Weyerhaeuser Acquisition as if the acquisition occurred on January 1, 1996.
The acquisition was accounted for as a purchase.
OCHOCO ACQUISITION ADJUSTMENTS AND RELATED REFINANCING
The Company acquired certain timber and timberlands from Ochoco Lumber Co.
(the "Ochoco Timberlands") on July 15, 1997. In conjunction with the
acquisition, the Company refinanced certain of its existing indebtedness. The
pro forma effects of these transactions on the combined balance sheet as of
June 30, 1997, are reflected in footnote (A).
The Company believes that presenting the pro forma results of operations of
the Ochoco Timberlands would not be meaningful considering differences between
the past and intended future use of the Ochoco Timberlands. The prospective
accounting related to the Ochoco Timberlands, including the recording of
depletion, will be consistent with the Company's existing accounting policies
as set forth in the Notes to the Combined Financial Statements.
TRANSACTION ADJUSTMENTS
The pro forma transaction adjustments have been prepared as if the
Transactions had taken place on June 30, 1997, in the case of the pro forma
consolidated balance sheet, or as of January 1, 1996, in the case of the pro
forma consolidated statements of operations for the year ended December 31,
1996 and the six month period ended June 30, 1997. The adjustments are based
upon currently available information and certain estimates and assumptions,
and therefore, the actual adjustments may differ from the pro forma
adjustments. However, management believes that the assumptions provide a
reasonable basis for presenting the significant effects of the transactions as
contemplated and that the pro forma adjustments give appropriate effect to
those assumptions and are properly applied in the pro forma consolidated
financial statements.
I. WEYERHAEUSER ACQUISITION ADJUSTMENTS
(i) Reflects the increase in depletion based on higher post-acquisition
depletion rates as a result of the increase in cost of timber, timberlands and
logging roads from the Weyerhaeuser Acquisition.
(ii) As discussed in Note 7 to the footnotes to the historical combined
financial statements, U.S. Timberlands provided certain affiliates with one-
time payments for advisory services, in connection with the Weyerhaeuser
Acquisition. Accordingly, the amount of these fees paid in 1996, $4,935, is
shown as a pro forma reduction of selling, general and administrative
expenses.
F-7
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(iii) Reflects the increase in interest expense related to the debt incurred
for the Weyerhaeuser Acquisition. This amount is computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Pro Forma Interest Expense
Interest related to $305,000 aggregate principal balance at
weighted average interest rate of 6.88%......................... $20,980
Historical Interest Expense
Interest expense for period from August 30, through December 31,
1996............................................................. 7,316
-------
Pro forma increase in interest expense........................... $13,664
=======
</TABLE>
(iv) Reflects the incremental amortization expense related to deferred
financing and debt guarantee fees associated with the acquisition. The
adjustment is computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Pro Forma Amortization of Deferred Financing Fees and Debt
Guarantee Fees
Annual amortization based on deferred financing fees at
borrowing date of $4,053, amortized over 6 years, plus
accretion of debt guarantee fee for the 12 months ended
December 31, 1996 of $3,300.................................... $3,975
Historical Amortization of Deferred Financing Fees and Debt
Guarantee Fees
Amortization expense related to deferred financing fees and debt
guarantee fees for period from August 30, through December 31,
1996........................................................... 1,326
------
Pro forma increase in amortization of deferred financing and
debt guarantee fees............................................ $2,649
======
</TABLE>
II. ADJUSTMENT FOR OCHOCO ACQUISITION AND RELATED REFINANCING
(A) Reflects the Company's acquisition of the Ochoco Timberlands (the
"Ochoco Acquisition") on July 15, 1997. The acquisition price totaled $110,430
and was funded through $430 of cash on hand, with the balance financed through
new borrowings, as described below.
In connection with the Ochoco Acquisition, the Company refinanced all of its
existing indebtedness, except the $130,000 term loan held by Holdings. A
summary of sources and uses related to this acquisition and refinancing is as
follows:
<TABLE>
<CAPTION>
SOURCES
-------
<S> <C>
New Financing:
Revolving Credit Facility...................................... $ 85,000
Term Loan...................................................... 200,000
--------
$285,000
========
</TABLE>
F-8
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
USES
----
<S> <C>
Retirement of Existing Debt:
Revolving Credit Facility...................................... $ 90,000
USTK Term Loan................................................. 85,000
Ochoco Acquisition............................................... 110,000
--------
$285,000
========
</TABLE>
The retirement on July 14, 1997 of the existing indebtedness resulted in an
extraordinary loss on extinguishment of debt of approximately $3,400 ($3,479
as of June 30, 1997), due to the writeoff of unamortized deferred financing
fees. The extraordinary loss is a nonrecurring item and is therefore not
reflected in the pro forma consolidated Statement of Operations. In connection
with the refinancing, USTK incurred $4,988 in deferred financing costs, paid
concurrent with the completion of the refinancing. These costs will be
established as an asset and amortized over the terms of the related debt.
III. TRANSACTION ADJUSTMENTS
The following adjustments were made to record the pro forma effect of the
Transactions on the consolidated balance sheet and statements of operations.
TRANSACTION ADJUSTMENTS--BALANCE SHEET
(B) Reflects the net proceeds to the Company of $143,455 from the issuance
and sale of 7,459 Common Units at $21.00 per Unit in the Common Units
Offering, net of the underwriters' discounts and commissions of approximately
$10,377 and offering expenses of approximately $2,800.
(C) Reflects the net proceeds to the Company of $217,750 from the issuance
by the Company of $225,000 of the Notes at 9.5% concurrent with the Common
Units Offering and the incurrence of $7,250 of financing costs.
(D) The Company intends to use the net proceeds from the Common Units
Offering, the Public Note Offering, and a $41,714 drawdown under the
Acquisition Facility, as well as cash on hand, to repay all indebtedness of
the Company, as shown in the table below. After the completion of the
Transactions, the Company will have a cash balance of $1,500.
The indebtedness to be retired at the Closing consists of the following:
<TABLE>
<CAPTION>
AMOUNT TO BE
DEBT FACILITY RETIRED
------------- ------------
<S> <C>
Holdings Term Loan............................................ $130,000
Revolving Credit Facility (A)................................. 85,000
Term Loan (A)................................................. 200,000
--------
Total indebtedness refinanced............................... 415,000
Holdings term loan guarantee fee.............................. 3,575
--------
Total debt retirement payment............................... $418,575
========
</TABLE>
F-9
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Holdings term loan guarantee fee is payable to Weyerhaeuser Company upon
retirement of the Holdings term loan. As of June 30, 1997, $2,750 of such loan
guarantee fees had been accrued. An additional $825 will be accreted between
July 1, 1997 and November 15, 1997 (the estimated date of the Holdings debt
extinguishment) on the debt guarantee fee. As of June 30, 1997, $6,813 of
interest was accrued on the Holdings term loan.
Deferred financing costs of $4,988 incurred in connection with the Ochoco
Acquisition and related debt refinancing will be written off as an
extraordinary loss on the extinguishment of debt. The extraordinary loss is a
non-recurring item and is therefore not reflected in the pro forma statement
of operations.
(E) Reflects the anticipated distribution of proceeds from the offering to
Old Services for the redemption of John J. Stephens' ownership interests in
Old Services. The redemption price totals $1,000 which will be distributed in
cash in January 1998 and 95,238 Subordinated Units to be issued concurrent
with the Common Units Offering. In addition, George R. Hornig's interest in
Old Services will be redeemed for 50,040 Subordinated Units concurrent with
the Common Units Offering.
(F) Reflects the allocation of partnership equity resulting from the
completion of the Transactions. The allocations are summarized as follows:
<TABLE>
<S> <C>
Net proceeds from the Common Units Offering (B)................ $143,455
Write-off of existing deferred financing fees (A).............. (3,479)
Accretion of debt guarantee fees (D)........................... (825)
Write-off of deferred financing fees--Ochoco Acquisition and
related debt refinancing (D).................................. (4,988)
Redemption of John J. Stephens' interest (E)................... (1,000)
Assumption of members' deficit................................. (9,901)
--------
123,262
Pro forma allocation to 1% minority interest in USTK........... 1,233
Pro forma allocation to 1% general partner interest in the
Company....................................................... 1,233
--------
Pro forma allocation to new investors.......................... $120,796
========
</TABLE>
F-10
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TRANSACTION ADJUSTMENTS--STATEMENTS OF OPERATIONS
(G) Reflects the effect on interest expense for the year ended December 31,
1996 and the six months ended June 30, 1997 as if the Notes were issued on
January 1, 1996 and borrowings under the Acquisition Facility took place on
January 1, 1996. The pro forma effect on interest expense applicable to the
Company is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
Pro Forma Interest Expense
Notes ($225,000 principal balance), at an annual
interest rate of 9.5%............................... $21,375 $10,688
Acquisition Facility ($41,714 principal balance), at
an annual interest rate of 7.0%..................... 2,924 1,462
Historical Interest Expense
Interest expense included in historical financial
statements for the period (plus pro forma interest
expense related to the period from January 1, 1996
through August 29, 1996 (see (iii))................. 20,980 10,877
------- -------
Pro forma increase in interest expense............... $ 3,319 $ 1,273
======= =======
</TABLE>
(H) Reflects the effect on amortization of deferred financing and debt
guarantee fees for the year ended December 31, 1996 and the six months ended
June 30, 1997 as if the Notes were issued on January 1, 1996. The pro forma
effect on amortization of deferred financing and debt guarantee fees
applicable to the Company is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
Pro Forma Amortization Expense
Amortization of $7,250 deferred financing fees over
10 year term (C).................................... $ 725 $ 362
Historical Amortization Expense
Amortization of deferred financing and debt guarantee
fees included in historical financial statements
(plus pro forma amortization of deferred financing
and debt guarantee fees related to the period from
January 1, 1996 through August 29, 1996 (see (iv)).. 3,975 2,198
------- -------
Pro forma decrease in amortization of deferred
financing and debt guarantee fees................... $(3,250) $(1,836)
======= =======
</TABLE>
(I) Reflects the General Partner's 1% minority interest in USTK's pro forma
net income (loss).
(J) The weighted average limited partners' Units outstanding used in the
loss per Unit calculation includes the limited partners' Common and
Subordinated Units and excludes the general partner's interests.
F-11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Members of
U.S. Timberlands:
We have audited the accompanying combined balance sheets of U.S.
Timberlands, as described in Note 1, as of December 31, 1996 and June 30,
1997, and the related combined statements of operations, changes in members'
deficit, and cash flows for the period from inception (August 30, 1996)
through December 31, 1996 and the six month period ended June 30, 1997. We
have also audited the accompanying balance sheet of the Predecessor, as
described in Note 1, as of December 31, 1995, and the related statements of
operations, changes in Weyerhaeuser investment and advances and cash flows for
each of the two years in the period ended December 31, 1995 and the period
from January 1, 1996 through August 29, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U.S. Timberlands as of
December 31, 1996 and June 30, 1997, and the results of its operations and its
cash flows for the period from inception (August 30, 1996) through December
31, 1996 and the six month period ended June 30, 1997, and the financial
position of the Predecessor as of December 31, 1995, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1995 and the period from January 1, 1996 through August 29, 1996
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Portland, Oregon,
August 22, 1997
F-12
<PAGE>
U.S. TIMBERLANDS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR U.S. TIMBERLANDS (a)
------------ ---------------------
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................ $ 1 $ 16,613 $ 30,387
Accounts receivable...................... 741 1,563 2,387
Other receivables........................ 75 131 1,310
Receivable from affiliate................ -- 10,121 --
Inventories.............................. 1,846 78 --
Prepaid expenses......................... 433 680 1,021
Logging equipment held for resale........ -- 400 --
-------- -------- --------
Total current assets................... 3,096 29,586 35,105
-------- -------- --------
TIMBER, TIMBERLANDS AND LOGGING ROADS,
net....................................... 20,822 273,457 270,630
SEED ORCHARD AND NURSERY STOCK............. 2,443 1,901 1,655
PROPERTY, PLANT AND EQUIPMENT, at cost:
Equipment................................ 13,712 801 918
Buildings and land improvements.......... 2,774 677 843
Less--Accumulated depreciation........... (11,900) (58) (164)
-------- -------- --------
Total property, plant and equipment.... 4,586 1,420 1,597
-------- -------- --------
LONG-TERM RECEIVABLE....................... -- -- 1,171
DEFERRED FINANCING FEES.................... -- 3,827 3,479
-------- -------- --------
Total assets........................... $ 30,947 $310,191 $313,637
======== ======== ========
LIABILITIES AND WEYERHAEUSER INVESTMENT AND ADVANCES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable......................... $ 561 $ 889 $ 1,583
Accrued liabilities...................... 1,231 7,238 12,986
Deferred revenue ........................ -- -- 969
Payable to affiliate..................... -- -- 3,000
Current portion of long-term debt........ -- -- 10,000
-------- -------- --------
Total current liabilities.............. 1,792 8,127 28,538
BORROWINGS UNDER REVOLVING CREDIT FACILI-
TY........................................ -- 90,000 90,000
LONG-TERM DEBT............................. -- 215,000 205,000
WEYERHAEUSER INVESTMENT AND ADVANCES AND
MEMBERS' DEFICIT:
Weyerhaeuser investment and advances..... 29,155 -- --
USTK--Member's deficit................... -- (1,809) (5,227)
Services/Members' deficit................ -- (1,127) (4,674)
-------- -------- --------
29,155 (2,936) (9,901)
-------- -------- --------
Total liabilities and Weyerhaeuser
investment and advances and members'
deficit............................... $ 30,947 $310,191 $313,637
======== ======== ========
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
balance sheets as of December 31, 1996 and June 30, 1997 are not comparable
to the balance sheet of the Predecessor. See the accompanying notes for
additional information.
The accompanying notes are an integral part of these combined balance sheets.
F-13
<PAGE>
U.S. TIMBERLANDS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR U.S. TIMBERLANDS
-------------------------------- ----------------
JANUARY 1, 1996 AUGUST 30, 1996
DECEMBER 31, THROUGH THROUGH
--------------- AUGUST 29, DECEMBER 31,
1994 1995 1996 1996
------- ------- --------------- ----------------
(a)
<S> <C> <C> <C> <C>
REVENUES:
Logs...................................................................... $29,102 $29,110 $14,077 $ 13,590
By-products and other..................................................... 3,240 2,623 1,501 429
------- ------- ------- --------
Total revenues.......................................................... 32,342 31,733 15,578 14,019
OPERATING COSTS:
Cost of products sold..................................................... 16,351 14,951 9,225 6,179
Depreciation, depletion and road amortization............................. 1,455 1,486 927 3,323
Selling, general and administrative expenses.............................. 4,454 4,235 2,730 9,284
------- ------- ------- --------
Operating income (loss)................................................. 10,082 11,061 2,696 (4,767)
INTEREST EXPENSE............................................................ -- -- -- 7,316
AMORTIZATION OF DEFERRED FINANCING FEES AND DEBT GUARANTEE FEES............. -- -- -- 1,326
INTEREST INCOME............................................................. -- -- -- (409)
OTHER (INCOME) EXPENSE, net................................................. 140 (555) 1 36
------- ------- ------- --------
NET INCOME (LOSS)........................................................... $ 9,942 $11,616 $ 2,695 $(13,036)
- --------------------------------------------------
======= ======= ======= ========
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
statement of operations for the period from August 30, 1996 through
December 31, 1996 is not comparable to the statements of operations of the
Predecessor. See the accompanying notes for additional information.
The accompanying notes are an integral part of these combined statements.
F-14
<PAGE>
U.S. TIMBERLANDS
COMBINED STATEMENTS OF CHANGES IN
WEYERHAEUSER INVESTMENT AND ADVANCES AND MEMBERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. U.S.
TIMBERLANDS TIMBERLANDS
KLAMATH SERVICES U.S.
FALLS, COMPANY, TIMBERLANDS
PREDECESSOR L.L.C. L.L.C. (COMBINED)
------------ ----------- ----------- -----------
(a) (a) (a)
WEYERHAEUSER TOTAL
INVESTMENT MEMBERS' MEMBERS' MEMBERS'
AND ADVANCES DEFICIT DEFICIT DEFICIT
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993.................................................. $ 29,643 $ -- $ -- $ --
Net income................................................................ 9,942 -- -- --
Net distributions to Weyerhaeuser Company................................. (11,160) -- -- --
Net asset transfers to Weyerhaeuser Company............................... (680) -- -- --
-------- -------- ------- --------
BALANCE, December 31, 1994.................................................. 27,745 -- -- --
Net income................................................................ 11,616 -- -- --
Net distributions to Weyerhaeuser Company................................. (9,951) -- -- --
Net asset transfers to Weyerhaeuser Company............................... (255) -- -- --
-------- -------- ------- --------
BALANCE, December 31, 1995.................................................. 29,155 -- -- --
Net income................................................................ 2,695 -- -- --
Net distributions to Weyerhaeuser Company................................. (5,054) -- -- --
Net asset transfers from Weyerhaeuser Company............................. 1,043 -- -- --
-------- -------- ------- --------
BALANCE, August 29, 1996.................................................... $ 27,839 -- -- --
========
Members' contributions.................................................... 10,000 100 10,100
Net loss.................................................................. (11,809) (1,227) (13,036)
======== ======= ========
BALANCE, December 31, 1996.................................................. $ (1,809) $(1,127) $ (2,936)
======== ======= ========
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
statement of changes in members' deficit for the period from August 30,
1996 through December 31, 1996 is not comparable to the combined
statements of changes in Weyerhaeuser investment and advances of the
Predecessor. See the accompanying notes for additional information.
The accompanying notes are an integral part of these combined statements.
F-15
<PAGE>
U.S. TIMBERLANDS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S.
PREDECESSOR TIMBERLANDS
------------------------------- ------------
JANUARY 1, AUGUST 30,
DECEMBER 31, 1996 THROUGH 1996 THROUGH
----------------- AUGUST 29, DECEMBER 31,
1994 1995 1996 1996
-------- ------- ------------ ------------
(a)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)............... $ 9,942 $11,616 $ 2,695 $ (13,036)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities--
Depreciation, depletion and
amortization................. 1,455 1,486 927 3,549
(Gain) loss on sale of
property, plant and
equipment.................... (81) (200) 6 51
Changes in operating accounts--
Accounts receivable............. 1,580 1,057 699 (1,694)
Inventories..................... 493 (1,535) 1,348 921
Prepaid expenses................ 336 (308) 371 (680)
Accounts payable................ (449) (272) (292) 889
Accrued interest and debt guar-
antee fees..................... -- -- -- 6,354
Other accrued liabilities....... (103) (34) (242) 783
Interest receivable from affili-
ate............................ -- -- -- (121)
-------- ------- ------- ---------
Net cash provided by (used in)
operating activities......... 13,173 11,810 5,512 (2,984)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Weyerhaeuser Acquisition........ -- -- -- (283,464)
Receivable from affiliate....... -- -- -- (10,000)
Purchase of property, plant and
equipment...................... (1,431) (1,124) (6) (212)
Proceeds from sales of property,
plant and equipment............ 85 223 -- 2,374
Timber and road additions....... (39) (224) (26) --
Capitalized seed orchard and
nursery costs.................. (628) (734) (427) (148)
-------- ------- ------- ---------
Net cash used in investing ac-
tivities..................... (2,013) (1,859) (459) (291,450)
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Long-term borrowings............ -- -- -- 305,000
Deferred financing fees......... -- -- -- (4,053)
Weyerhaeuser investment and ad-
vances, net.................... (11,160) (9,951) (5,054) --
Members' contributions.......... -- -- -- 10,100
-------- ------- ------- ---------
Net cash provided by (used in)
financing activities......... (11,160) (9,951) (5,054) 311,047
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS............. -- -- (1) 16,613
CASH AND CASH EQUIVALENTS, begin-
ning of period................... 1 1 1 --
-------- ------- ------- ---------
CASH AND CASH EQUIVALENTS, end of
period........................... $ 1 $ 1 $ -- $ 16,613
======== ======= ======= =========
SUPPLEMENTAL CASH FLOW INFORMA-
TION:
Cash paid for interest.......... $ -- $ -- $ -- $ 2,062
NONCASH ACTIVITIES:
Net asset transfers (to) from
Weyerhaeuser Company,
principally property, plant and
equipment...................... $ (680) $ (255) $ 1,043 $ --
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
statement of cash flows for the period from August 30, 1996 through
December 31, 1996 is not comparable to statements of cash flows of the
Predecessor. See the accompanying notes for additional information.
The accompanying notes are an integral part of these combined statements.
F-16
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE NOTED)
1. SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION:
Nature of Operations
The primary activity of U.S. Timberlands (the Company) is the growing of
trees and the sale of logs and standing timber to third-party wood processors.
The logs are sold principally to wood processing companies generally within a
200-mile radius of Klamath Falls, Oregon. These logs are ultimately processed
by third-party wood processors for sale as lumber, plywood and other wood
products, primarily for use in new residential home construction, home
remodeling and repair and general industrial applications.
Basis of Presentation--U.S. Timberlands
The accompanying combined financial statements for U.S. Timberlands
represent the combined financial position, results of operations, equity and
cash flows of U.S. Timberlands Klamath Falls, L.L.C. (USTK--a Delaware limited
liability company) and U.S. Timberlands Services Company, L.L.C. (Services--a
Delaware limited liability company). The long-term debt obligations, related
interest costs and debt guarantee fees of U.S. Timberlands Holdings, L.L.C.
(Holdings), the parent entity of USTK, have been reflected in the accompanying
combined financial statements as such debt will be assumed by USTK concurrent
with the planned master limited partnership (MLP) offering discussed in Note
9.
In July and August 1996, USTK and Services were formed and subsequently
entered into an agreement with Weyerhaeuser Company on August 30, 1996 to
purchase approximately 600,000 acres of timber and timberlands and certain
other assets (the Weyerhaeuser Acquisition) as discussed further in Note 3.
Because of common ownership and management of USTK and Services, the financial
statements have been presented on a combined basis. All intercompany
transactions between USTK and Services have been eliminated in the
accompanying combined financial statements.
Basis of Presentation--Predecessor
As a result of the Weyerhaeuser Acquisition, USTK acquired the Klamath Falls
Timberlands and certain related assets of Weyerhaeuser Company (as used
herein, the acquired timberlands and related assets are referred to as the
Predecessor). All of the financial statements provided herein (including the
financial statements pertaining to the Predecessor) were prepared by, and are
solely the responsibility of, U.S. Timberlands Company, L.P. The Weyerhaeuser
Acquisition was accounted for as a purchase and, therefore, the accompanying
financial statements as of and for the periods ended prior to the date of the
Weyerhaeuser Acquisition are accounted for under the pre-Weyerhaeuser
Acquisition basis of accounting. Because the Predecessor did not operate or
legally exist as a stand-alone entity, there are no separate meaningful equity
accounts of the Predecessor prior to the Weyerhaeuser Acquisition. Significant
changes could have occurred in the funding and operations of the Predecessor
were it to have operated as an independent stand-alone entity. As a result,
the financial information included herein is not necessarily indicative of the
financial position and results of operations of the Predecessor which may have
occurred if it were an independent, stand-alone company during the periods
presented.
Revenues for the Predecessor principally represent logs harvested for sale
to Weyerhaeuser's Klamath Falls wood conversion facilities at prices
determined in accordance with Weyerhaeuser's transfer pricing policy. These
transfer prices are not necessarily indicative of the prices the Predecessor
would have achieved if the logs had been sold to unaffiliated wood processors.
Revenues to Weyerhaeuser wood conversion facilities and unaffiliated wood
processors are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1, 1996
--------------- THROUGH
SOURCE OF REVENUES 1994 1995 AUGUST 29, 1996
------------------ ------- ------- ---------------
<S> <C> <C> <C>
Weyerhaeuser Company......................... $16,693 $20,065 $10,157
Unaffiliated wood processors................. 15,649 11,668 5,421
------- ------- -------
Total...................................... $32,342 $31,733 $15,578
======= ======= =======
</TABLE>
F-17
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Concurrent with the Weyerhaeuser Acquisition, Collins Products L.L.C.
(Collins), an unaffiliated party, acquired Weyerhaeuser's Klamath Falls wood
conversion facilities. U.S. Timberlands has entered into a 10-year log supply
agreement with Collins providing for the delivery by U.S. Timberlands to
Collins of 34 million board feet of merchantable timber each year at market
prices as discussed in Note 8.
The Predecessor participated in Weyerhaeuser Company's centralized cash
management system and, as such, its operating and capital expenditure needs
were met by Weyerhaeuser Company. The net advances from and distributions to
Weyerhaeuser Company are presented in the accompanying combined balance sheets
as a component of Weyerhaeuser investment and advances prior to the
Weyerhaeuser Acquisition. The Weyerhaeuser investment and advances account is
noninterest bearing.
Certain costs incurred by Weyerhaeuser Company for financial services,
information systems and other indirect costs have been allocated to the
Predecessor on a revenue and volume harvested basis. The resulting charge to
the Predecessor was $738 in 1994, $622 in 1995 and $445 in the period from
January 1, 1996 through August 29, 1996, and is included in selling, general
and administrative expenses in the accompanying combined statements of
operations. Management of the Company believes the allocation methods used
provide the Predecessor with a reasonable share of such expenses.
Interim Financial Statements
The interim financial statements as of and for the six month period ended
June 30, 1996 included herein have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the management of the
Company believes that the disclosures are adequate to make the information
presented not misleading. Interim financial statements are by necessity
somewhat tentative; judgments are used to estimate interim amounts for items
that are normally determinable only on an annual basis.
The accompanying combined statements of operations and cash flows for the six
months ended June 30, 1996, have been prepared on the same basis as the audited
combined financial statements for the years ended December 31, 1994 and 1995
and the period from January 1, 1996 through August 29, 1996. The interim
financial statements include all adjustments which are, in the opinion of
management of the Company, necessary to present fairly the results of
operations and cash flows for the six months ended June 30, 1996. Operating
results for the six months ended June 30, 1996 are not necessarily indicative
of the results to be expected for the entire year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies summarized below include both those of
U.S. Timberlands and the Predecessor, unless otherwise noted.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
F-18
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Revenue on delivered log sales are recognized upon delivery to the customer.
Revenue from timber sold on a stumpage basis (i.e., the customer arranges to
harvest and deliver the logs) is recognized when the timber is harvested.
Revenue on timber deeds and timberland and property sales are generally
recognized upon closing.
Concentration of Credit Risk
As of December 31, 1996, the Company had accounts receivable from three
individual customers that represented 60%, 19% and 10% of total accounts
receivable, respectively. As of June 30, 1997, the Company had accounts
receivable from four individual customers that represented 38%, 21%, 14% and
12% of total accounts receivable, respectively.
The majority of the Predecessor's sales were to Weyerhaeuser Company.
Receivables from Weyerhaeuser Company are reflected in Weyerhaeuser investment
and advances in the accompanying balance sheet. The Predecessor's accounts
receivable in the accompanying balance sheet represent receivables from
unaffiliated customers. As of December 31, 1995, the Predecessor has accounts
receivable from three individual customers that represented 27%, 17% and 13%
of total accounts receivable, respectively.
The Company had sales to individual customers that were greater than 10% of
total sales for the respective periods as follows:
<TABLE>
<CAPTION>
PREDECESSOR U.S. TIMBERLANDS
------------------------- ----------------------------
SIX MONTHS
JANUARY 1, 1996 AUGUST 30, 1996 ENDED
THROUGH THROUGH JUNE 30,
1994 1995 AUGUST 29, 1996 DECEMBER 31, 1996 1997
---- ---- --------------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Weyerhaeuser Company.... 52% 63% 65% -- --
Unaffiliated customer... 12% 14% 14% 54% 27%
Unaffiliated customer... -- -- 10% 14% 20%
Unaffiliated customer... -- -- -- 11% 16%
Unaffiliated customer... -- -- -- -- 13%
</TABLE>
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
maturities at date of purchase of 90 days or less.
Inventories
The Company maintains a log inventory which is recorded at the lower of cost
or market determined on a first-in, first-out basis.
Logging Equipment Held For Resale
Logging equipment held by the Company as of December 31, 1996, is recorded
as logging equipment held for resale in the accompanying combined balance
sheet, as the Company changed to the use of outside contractors for all of its
logging operations concurrent with the Weyerhaeuser Acquisition.
Timber, Timberlands and Logging Roads
Timber, timberlands and logging roads are stated at cost less depletion and
amortization for timber previously harvested. The depletion rate is calculated
using a single composite pool by dividing the total cost of
F-19
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
merchantable timber by its estimated net merchantable volume. Depletion in any
given year represents the net merchantable volume harvested multiplied by the
depletion rate. These estimates are subject to change based on periodic
reevaluations of merchantable volume. Logging road costs for main and spur
roads are amortized based on the net merchantable volume harvested. Costs
incurred to resurface logging roads are generally capitalized and amortized
over a seven-year period on a straight-line basis.
Seed Orchard and Nursery Stock
The Company operates and maintains a seed orchard and nursery. Costs
incurred by the orchard and nursery to produce seed and seedlings utilized in
the reforestation of the Company's timberlands are capitalized to seed orchard
and nursery stock in the accompanying combined balance sheets. A certain
amount of seed and seedling stock is sold to unaffiliated customers and is
reflected as a component of by-products and other revenues in the accompanying
combined statements of operations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions and betterments
to buildings and equipment are capitalized as expended. Maintenance and
repairs are expensed as incurred. Depreciation is provided over the useful
lives of the assets on the straight-line method. Estimated useful lives for
buildings and land improvements is 40 years and equipment ranges from 3 to 5
years.
Deferred Financing Fees
Deferred financing fees consist of fees incurred in connection with
obtaining the related debt financing. The Company amortizes deferred financing
fees over the terms of the related debt which approximates the effective
interest method.
Income Taxes
USTK and Services are both limited liability companies (L.L.C.'s) and,
accordingly, are not liable for federal or state income taxes since the
L.L.C.'s income or loss is reported on the separate tax returns of the
members. Accordingly, no provision for current or deferred income taxes has
been reflected in the accompanying combined financial statements.
Interest Rate Collar Agreement
The Company entered into an interest rate collar agreement to reduce the
impact of changes in interest rates on its variable rate debt. The initial
cost of the interest rate collar agreement is recorded in deferred financing
fees in the accompanying combined balance sheets and is amortized over the
life of the agreement.
The Company does not utilize financial instruments for trading or other
speculative purposes. The counterparty to these contractual arrangements is a
major financial institution.
Fair Value of Financial Instruments
All of the Company's material financial instruments, except for the interest
rate collar agreement, are recognized in its combined balance sheets. The
carrying values generally approximate fair market value for these financial
assets and liabilities. Descriptions of the methods and assumptions used to
reach this conclusion are as follows:
Debt--The Company's debt includes interest rates that are tied to current
credit markets. Therefore, the recorded value for the debt approximates
fair value.
F-20
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Interest Rate Collar Agreement--The fair value of the interest rate
collar agreement is the estimated amount that the Company would receive or
pay upon termination of the agreement, taking into account the current
credit worthiness of the counterparty. As of December 31, 1996 and June 30,
1997, the Company estimates it would have paid $716 and $80 to terminate
the agreement.
3. WEYERHAEUSER ACQUISITION:
The total purchase price for the Weyerhaeuser Acquisition referred to in
Note 1 was $283,464, including direct costs of the acquisition. The
Weyerhaeuser Acquisition was accounted for as a purchase with the purchase
price allocated first to current assets acquired, principally inventory, and
the remaining balance being allocated to noncurrent assets acquired, primarily
timber, timberlands and logging roads based on the relative fair market values
of the noncurrent assets as determined by an appraisal. Concurrent with the
Weyerhaeuser Acquisition, the Company changed to the use of outside
contractors for all of its logging operations. Accordingly, logging equipment
acquired was recorded at its estimated resale value.
Pro forma results of operations for the period ended December 31, 1996 had
the Weyerhaeuser Acquisition occurred on January 1, 1996 are as follows:
<TABLE>
<CAPTION>
1996
-----------
(UNAUDITED)
<S> <C>
Revenues........................................ $ 29,597
Net loss........................................ (25,845)
</TABLE>
4. INVENTORIES:
The Company's inventories consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR U.S. TIMBERLANDS
----------------- -------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------- -------------
<S> <C> <C> <C>
Logs..................................................................... $1,703 $78 $ --
Other.................................................................... 143 -- --
------ --- ----
$1,846 $78 $ --
====== === ====
</TABLE>
5. ACCRUED LIABILITIES:
The Company's accrued liabilities consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR U.S. TIMBERLANDS
----------------- -------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------- -------------
<S> <C> <C> <C>
Interest................................................................. $ -- $5,254 $ 9,345
Debt guarantee fee....................................................... -- 1,100 2,750
Workers' compensation.................................................... 565 -- --
Severance and harvest tax................................................ 290 230 201
Employee compensation.................................................... 192 81 522
Other.................................................................... 184 573 168
------ ------ -------
$1,231 $7,238 $12,986
====== ====== =======
</TABLE>
F-21
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR U.S. TIMBERLANDS
----------------- -------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------- -------------
<S> <C> <C> <C>
Holdings--Term loan, due
September 1999.......... $ -- $130,000 $130,000
USTK--Borrowings under
revolving credit
facility................ -- 90,000 90,000
USTK--Term loan payable
quarterly, due August
2002.................... -- 85,000 85,000
----- -------- --------
$ -- $305,000 $305,000
===== ======== ========
</TABLE>
On August 29, 1996, Holdings entered into a $130,000 term loan with ABN-AMRO
Bank, N.V. and Deutsche Bank AG. The term loan's interest rate is variable and
fluctuates based on movements in the one-month LIBOR plus .50%. As of December
31, 1996, the term loan's interest rate equaled 6.11%. The term loan is
guaranteed by Weyerhaeuser Company. John M. Rudey, controlling shareholder of
the Company, and one of his affiliates have pledged their interests in
Holdings to Weyerhaeuser (the Pledge Agreement) for their obligations under
the guarantee if certain covenants and restrictions, as defined in the Pledge
Agreement, are not adhered to. As part of the Pledge Agreement, Holdings is
required to pay a guarantee fee to Weyerhaeuser based on a percentage of the
term loan balance outstanding. This fee increases from 1.74% to 2.75% if the
term loan is not fully repaid by August 31, 1997 and to 3.00% if not fully
repaid by February 28, 1998. This guarantee fee is being accreted as an
expense in the accompanying combined statements of operations based on an
estimated September 1997 refinancing date. Also, as part of the Pledge
Agreement, if the term loan accrues interest beyond December 30, 1997, the
Company must immediately begin acceleration of its timber harvest plans and
timberland sales. Such acceleration does not necessarily accelerate the
repayment of the Holdings' debt.
On October 18, 1996, the Company entered into an interest rate collar
agreement which effectively sets maximum and minimum interest rates on $87,500
of notional principal amount on the USTK borrowings ranging from a floor (the
rate the Company would pay even if rates fall below that level) to a maximum
during the three-year period ended October 18, 1999. The floor and maximum
rates were 7.3% and 9.0%, respectively, as of December 31, 1996 and June 30,
1997.
Debt Refinancing Subsequent to June 30, 1997
On July 14, 1997, USTK entered into a long-term financing arrangement (the
Credit Agreement) with certain banks to finance the Ochoco Acquisition
discussed in Note 9 and to refinance borrowings under the USTK revolving
credit facility and USTK term loan. The retirement of debt under existing
credit facilities will result in an extraordinary loss on extinguishment of
debt of approximately $3,400 due to the writeoff of existing unamortized
deferred financing fees. This writeoff will be recorded in the Company's third
quarter 1997 financial statements. There were no other gains or losses
incurred in connection with this refinancing.
The Credit Agreement provides the Company an $85,000 revolving credit
facility, of which $85,000 was drawn on July 15, 1997, as well as a term loan
of $200,000. Borrowings under the new revolving credit facility are generally
limited to 50% of the value of the Company's timber, as defined in the Credit
Agreement. The revolving credit facility and the term loan both have variable
interest rates. The interest rate is calculated based on USTK's performance
against certain established leverage ratios. At the date of the Credit
Agreement, the interest rates on both the revolving credit facility and the
term loan were equal to LIBOR plus 2.25% (7.9%). Each of the loans is
collateralized by substantially all of USTK's assets and Services' members'
interests. The revolving credit facility matures on September 15, 2004. The
term loan is subject to mandatory prepayment in the event that timber and
timberland dispositions, which are not reinvested in other timber and
timberlands,
F-22
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
exceed $30,000 in the aggregate subsequent to July 15, 1997. Based on the
Company's projected 1997 operating plan, management does not believe any
mandatory prepayments will be required in 1997.
The Credit Agreement requires USTK and Services, on a combined basis, to
maintain certain financial covenants, including the maintenance of minimum
quarterly cash flows, maximum leverage and debt to asset value ratios, and
minimum fixed charge coverage ratios, and certain other restrictions as
defined in the Credit Agreement.
In accordance with the Credit Agreement, debt is scheduled to mature as
follows:
<TABLE>
<S> <C>
1997............................................... $ --
1998............................................... 20,000
1999............................................... 25,000
2000............................................... 25,000
2001............................................... 30,000
Thereafter......................................... 205,000
--------
$305,000
========
</TABLE>
7. MEMBERS' DEFICIT AND RELATED PARTY TRANSACTIONS:
Members' Deficit
The liability of the individual members of USTK and Services is limited to
the balances of their respective members' accounts.
The members and their respective ownership percentages are as follows:
<TABLE>
<CAPTION>
USTK SERVICES
---- --------
<S> <C> <C>
Holdings (100% owned by Rudey Timber Company L.L.C. and
affiliates)................................................ 99% -- %
Rudey Timber Company L.L.C. (100% owned by John M. Rudey and
affiliates)................................................ 1 --
John M. Rudey, Chairman..................................... -- 82.5
John J. Stephens, CEO and President......................... -- 10.0
George R. Hornig............................................ -- 7.5
--- ----
100% 100%
=== ====
</TABLE>
Related Party Transactions
In connection with the Weyerhaeuser Acquisition, the Company paid a fee of
$4,135 to Timberlands Management Group (TMG), an entity 100% owned and
controlled by Rudey Timber Company L.L.C., and a fee of $400 each to John M.
Rudey and John J. Stephens. In addition, during the period from August 30,
1996 to December 31, 1996, the Company paid TMG management fees of $2,800.
These payments have been recorded in selling, general and administrative
expenses in the accompanying combined statement of operations.
Receivable from Affiliate
During the period from August 30, 1996 through December 31, 1996, the
Company paid $10,000 to TMG. The receivable and the related interest were
repaid in February 1997 and, accordingly, have been recorded as a current
asset in the accompanying combined balance sheet as of December 31, 1996.
Payable to Affiliate
During the six months ended June 30, 1997, Holdings advanced the Company
$3,000 to be used as a deposit on the purchase of the Ochoco Lumber Company
L.P. timber, timberlands and cutting rights. The advance was repaid subsequent
to June 30, 1997. As of June 30, 1997, this deposit has been reflected in
Timber, Timberlands and Logging Roads in the accompanying combined balanced
sheets. See Ochoco Acquisition in Note 9 for further discussion of the
acquisition of timber and timberlands and cutting rights.
F-23
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS:
On August 30, 1996, the Company entered into a wood supply agreement with
Collins to supply a volume of approximately 34 million board feet of
merchantable timber to the customer at market prices. The term of the
agreement is ten years and is renewable for two additional terms of five
years, each at the option of Collins.
9. SUBSEQUENT EVENTS:
Ochoco Acquisition
On July 15, 1997, USTK acquired approximately 42,000 acres of timber and
timberlands and approximately 3,000 acres of timber cutting rights from Ochoco
Lumber Company L.P. for $110,430 (the Ochoco Acquisition). Substantially all
of the purchase price will be allocated to timber, timberlands and logging
roads. The acquisition was principally financed through $110,000 of debt
financing. See Note 6 for further discussion of the terms of the debt.
Planned MLP Common Unit Offering
On July 26, 1997, the members of the Company formed a master limited
partnership (MLP) for the purpose of issuing Common Units representing limited
partner interests in a public offering (the Common Unit Offering). The
expected aggregate gross proceeds from the Common Unit Offering are
approximately $156,632. In addition, the Company intends that the MLP's
operating subsidiary, USTK (the Operating Company), issue $225,000 of senior
unsecured notes in a public offering (the Notes). The Company also intends
that the Operating Company will enter into a $25,000 working capital facility
and a $75,000 acquisition facility (the Acquisition Facility). The Company
intends to use the proceeds from the Common Unit Offering, the Notes, and a
drawdown of approximately $42,000 on the Acquisition Facility to repay
existing indebtedness of the Company including debt associated with the Ochoco
Acquisition and related debt financing discussed in Note 6. Also, pursuant to
an agreement dated July 29, 1997, in connection with the Common Units
Offering, John Stephens' interest in Old Services will be redeemed for $1.0
million, payable in January 1998, and 95,238 Subordinated Units. Similarly,
George Hornig's interest in Old Services will be redeemed for 50,040
Subordinated Units.
In connection with the Company's Common Unit Offering and related formation
of the General Partner, the General Partner intends to issue income interests
in the General Partner to certain officers and directors of the General
Partner at no cost. Such income interests will participate pro rata in cash
distributions from USTK and the MLP. In addition, under certain circumstances,
if these officers or directors terminate their employment, the General Partner
is required to repurchase their income interests at fair market value as
determined by independent appraisal. The fair value of these income interests
will be recorded as compensation expense in the Company's post Common Unit
Offering financial statements with a corresponding increase to contributed
capital.
F-24
<PAGE>
U.S. TIMBERLANDS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S.
PREDECESSOR TIMBERLANDS
----------- -----------
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1996 1997
----------- -----------
(a)
(UNAUDITED)
<S> <C> <C>
REVENUES:
Log and stumpage sales .............................................................................. $ 9,816 $19,813
Timber and property sales............................................................................ -- 3,494
By-products and other................................................................................ 1,174 489
------- -------
Total revenues..................................................................................... 10,990 23,796
OPERATING COSTS:
Cost of products sold................................................................................ 6,750 7,811
Cost of timber and property sales.................................................................... -- 1,191
Depreciation, depletion and road amortization........................................................ 707 5,395
Selling, general and administrative expenses......................................................... 2,028 2,892
------- -------
Operating income................................................................................... 1,505 6,507
INTEREST EXPENSE....................................................................................... -- 10,877
AMORTIZATION OF DEFERRED FINANCING FEES AND DEBT GUARANTEE FEES........................................ -- 2,198
INTEREST INCOME........................................................................................ -- (774)
OTHER EXPENSE (INCOME), net............................................................................ 31 (20)
------- -------
NET INCOME (LOSS)...................................................................................... $ 1,474 $(5,774)
======= =======
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
statement of operations for the six months ended June 30, 1997 is not
comparable to the statement of operations of the Predecessor. See the
accompanying notes for additional information.
The accompanying notes are an integral part of these combined statements.
F-25
<PAGE>
U.S. TIMBERLANDS
COMBINED STATEMENT OF CHANGES IN MEMBERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. TIMBERLANDS U.S. TIMBERLANDS
KLAMATH FALLS, SERVICES U.S. TIMBERLANDS
L.L.C. COMPANY, L.L.C. (COMBINED)
---------------- ---------------- ----------------
TOTAL MEMBERS'
MEMBER'S DEFICIT MEMBERS' DEFICIT DEFICIT
---------------- ---------------- ----------------
<S> <C> <C> <C>
BALANCE, December 31,
1996..................... $(1,809) $(1,127) $(2,936)
Member's distribution... -- (1,191) (1,191)
Net loss................ (3,418) (2,356) (5,774)
------- ------- -------
BALANCE, June 30, 1997.... $(5,227) $(4,674) $(9,901)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of this combined statement.
F-26
<PAGE>
U.S. TIMBERLANDS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S.
PREDECESSOR TIMBERLANDS
----------- -----------
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1996 1997
----------- -----------
(a)
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $1,474 $(5,774)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities--
Depreciation, depletion, amortization and cost of
timber and property sold.......................... 707 6,934
Changes in operating accounts--
Accounts receivable................................ (197) (3,174)
Inventories........................................ 204 78
Prepaid expenses................................... 348 527
Accounts payable................................... (141) 694
Accrued interest and debt guarantee fees........... -- 5,741
Other accrued liabilities.......................... (130) 7
Interest receivable from affiliate................. -- 121
Deferred revenue................................... -- 969
------ -------
Net cash provided by operating activities........ 2,265 6,123
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment of receivable from affiliate............... -- 10,000
Purchase of property, plant and equipment............ (6) (283)
Proceeds from sale of logging equipment.............. -- 400
Deposit on Ochoco Acquisition........................ -- (3,000)
Advance from affiliate............................... -- 3,000
Timber and road additions............................ (26) (326)
Capitalized seed orchard and nursery costs........... (266) (81)
------ -------
Net cash provided by (used in) investing
activities...................................... (298) 9,710
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to member............................... -- (1,191)
Deferred MLP Common Units offering costs............. -- (868)
Weyerhaeuser investment and advances, net............ (1,967) --
------ -------
Net cash used in financing activities............ (1,967) (2,059)
NET INCREASE IN CASH AND CASH EQUIVALENTS.............. -- 13,774
CASH AND CASH EQUIVALENTS, beginning of period......... 1 16,613
------ -------
CASH AND CASH EQUIVALENTS, end of period............... $ 1 $30,387
====== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............................... $ -- $ 6,786
NONCASH ACTIVITIES:
Net asset transfers to Weyerhaeuser Company,
principally property, plant and equipment........... $ (379) $ --
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
statement of cash flows for the six months ended June 30, 1997 is not
comparable to the statement of cash flows of the Predecessor. See the
accompanying notes for additional information.
The accompanying notes are an integral part of these combined statements.
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. Timberlands Company, L.P.:
We have audited the accompanying balance sheet of U.S. Timberlands Company,
L.P. (the MLP) as of July 29, 1997. This statement is the responsibility of
the MLP's management. Our responsibility is to express an opinion on this
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of U.S. Timberlands Company, L.P. as
of July 29, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Portland, Oregon,
July 29, 1997
F-28
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
BALANCE SHEET
JULY 29, 1997
<TABLE>
<CAPTION>
ASSET
-----
<S> <C>
CURRENT ASSET:
Cash................................................................... $1,000
======
<CAPTION>
PARTNERS' EQUITY
----------------
LIMITED PARTNER'S EQUITY................................................. $ 990
GENERAL PARTNER'S EQUITY................................................. 10
------
Total partners' equity............................................... $1,000
======
</TABLE>
The accompanying note is an integral part of this balance sheet.
F-29
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTE TO BALANCE SHEET
JULY 29, 1997
1. THE COMPANY:
U.S. Timberlands Company, L.P. (the MLP) is a Delaware limited partnership
that was formed on June 27, 1997 to acquire substantially all of the equity
interests in U.S. Timberlands Klamath Falls, L.L.C. (USTK) and to own and
operate the business and assets of U.S. Timberlands Services Company, L.L.C.
(Old Services), which are Delaware limited liability companies engaged in the
harvest and sale of timber to third-party wood processors. The MLP's general
partner is New Services, L.L.C., which will be renamed U.S. Timberlands
Services Company, L.L.C. upon the consummation of the initial public offering
of the MLP.
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New Services, L.L.C.:
We have audited the accompanying balance sheet of New Services, L.L.C. (the
Company) as of July 29, 1997. This statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Company, as of July 29, 1997
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Portland, Oregon,
July 29, 1997
F-31
<PAGE>
NEW SERVICES, L.L.C.
BALANCE SHEET
JULY 29, 1997
<TABLE>
<S> <C>
ASSETS
CASH.................................................................... $ 990
INVESTMENT IN U.S. TIMBERLANDS COMPANY, L.P............................. 10
------
$1,000
======
LIABILITIES AND MEMBERS' EQUITY
MEMBERS' EQUITY......................................................... $1,000
------
Total members' equity................................................. $1,000
======
</TABLE>
The accompanying note is an integral part of this balance sheet.
F-32
<PAGE>
NEW SERVICES, L.L.C.
NOTE TO BALANCE SHEET
JULY 29, 1997
1. NATURE OF OPERATIONS:
New Services, L.L.C. is a Delaware limited liability company that was formed
June 24, 1997 to become the general partner of U.S. Timberlands Company, L.P.
(MLP). The MLP is a limited partnership that was formed to acquire
substantially all of the equity interests in U.S. Timberlands Klamath Falls,
L.L.C. (USTK) and to acquire, own and operate the business and assets of U.S.
Timberlands Services Company, L.L.C. (Old Services), which are Delaware
limited liability companies engaged in the harvest and sale of timber to
third-party wood processors. Upon completion of the MLP acquisition of USTK
and Old Services, New Services, L.L.C. will be renamed U.S. Timberland
Services Company L.L.C., the successor entity to Old Services.
F-33
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
U.S. TIMBERLANDS COMPANY, L.P.
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
<TABLE>
<C> <S> <C>
Section 1.1 Definitions.............................................. A-1
Section 1.2 Construction............................................. A-17
ARTICLE II
ORGANIZATION
Section 2.1 Formation................................................ A-17
Section 2.2 Name..................................................... A-17
Registered Office; Registered Agent; Principal Office;
Section 2.3 Other Offices........................................... A-18
Section 2.4 Purpose and Business..................................... A-18
Section 2.5 Powers................................................... A-18
Section 2.6 Power of Attorney........................................ A-18
Section 2.7 Term..................................................... A-19
Section 2.8 Title to Partnership Assets.............................. A-19
ARTICLE III
RIGHTS OF LIMITED PARTNERS
Section 3.1 Limitation of Liability.................................. A-20
Section 3.2 Management of Business................................... A-20
Section 3.3 Outside Activities of the Limited Partners............... A-20
Section 3.4 Rights of Limited Partners............................... A-20
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
Section 4.1 Certificates............................................. A-21
Section 4.2 Mutilated, Destroyed, Lost or Stolen Certificates........ A-21
Section 4.3 Record Holders........................................... A-22
Section 4.4 Transfer Generally....................................... A-22
Section 4.5 Registration and Transfer of Limited Partner Interests... A-23
Section 4.6 Transfer of General Partner Interest..................... A-23
Section 4.7 Transfer of Incentive Distribution Rights................ A-24
Section 4.8 Restrictions on Transfers................................ A-24
Section 4.9 Citizenship Certificates; Non-citizen Assignees.......... A-25
Redemption of Partnership Interests of Non-citizen
Section 4.10 Assignees............................................... A-25
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1 Organizational Contributions............................. A-26
Section 5.2 Contributions by the General Partner and its Affiliates.. A-26
Section 5.3 Contributions by Initial Limited Partners................ A-27
Section 5.4 Interest and Withdrawal.................................. A-27
Section 5.5 Capital Accounts......................................... A-28
Section 5.6 Issuances of Additional Partnership Securities........... A-30
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
Limitations on Issuance of Additional Partnership
Section 5.7 Securities................................................ A-30
Section 5.8 Conversion of Subordinated Units........................... A-31
Section 5.9 Limited Preemptive Right................................... A-32
Section 5.10 Splits and Combination..................................... A-32
Fully Paid and Non-Assessable Nature of Limited Partner
Section 5.11 Interests................................................. A-33
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1 Allocations for Capital Account Purposes................... A-33
Section 6.2 Allocations for Tax Purposes............................... A-39
Requirement and Characterization of Distributions;
Section 6.3 Distributions to Record Holders........................... A-40
Section 6.4 Distributions of Available Cash from Operating Surplus..... A-41
Section 6.5 Distributions of Available Cash from Capital Surplus....... A-42
Adjustment of Minimum Quarterly Distribution and Target
Section 6.6 Distribution Levels....................................... A-42
Special Provisions Relating to the Holders of Subordinated
Section 6.7 Units..................................................... A-43
Special Provisions Relating to the Holders of Incentive
Section 6.8 Distribution Rights....................................... A-43
Section 6.9 Entity-Level Taxation...................................... A-43
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1 Management................................................. A-44
Section 7.2 Certificate of Limited Partnership......................... A-45
Section 7.3 Restrictions on General Partner's Authority................ A-45
Section 7.4 Reimbursement of the General Partner....................... A-46
Section 7.5 Outside Activities......................................... A-47
Section 7.6 Loans from the General Partner; Loans or Contributions from
the Partnership; Contracts with Affiliates; Certain
Restrictions on the General Partner....................... A-48
Section 7.7 Indemnification............................................ A-49
Section 7.8 Liability of Indemnitees................................... A-50
Section 7.9 Resolution of Conflicts of Interest........................ A-50
Section 7.10 Other Matters Concerning the General Partner............... A-52
Section 7.11 Purchase or Sale of Partnership Securities................. A-52
Registration Rights of the General Partner and its
Section 7.12 Affiliates................................................ A-52
Section 7.13 Reliance by Third Parties.................................. A-54
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting..................................... A-54
Section 8.2 Fiscal Year................................................ A-55
Section 8.3 Reports.................................................... A-55
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information................................ A-55
Section 9.2 Tax Elections.............................................. A-55
Section 9.3 Tax Controversies.......................................... A-56
Section 9.4 Withholding................................................ A-56
</TABLE>
ii
<PAGE>
ARTICLE X
ADMISSION OF PARTNERS
<TABLE>
<C> <S> <C>
Section 10.1 Admission of Initial Limited Partners...................... A-56
Section 10.2 Admission of Substituted Limited Partner................... A-56
Section 10.3 Admission of Successor General Partner..................... A-57
Section 10.4 Admission of Additional Limited Partners................... A-57
Amendment of Agreement and Certificate of Limited
Section 10.5 Partnership............................................... A-57
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 Withdrawal of the General Partner.......................... A-57
Section 11.2 Removal of the General Partner............................. A-59
Interest of Departing Partner and Successor General
Section 11.3 Partner................................................... A-59
Section 11.4 Termination of Subordination Period, Conversion of
Subordinated Units and Extinguishment of Cumulative Common
Unit Arrearages........................................... A-60
Section 11.5 Withdrawal of Limited Partners............................. A-60
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1 Dissolution................................................ A-60
Continuation of the Business of the Partnership After
Section 12.2 Dissolution............................................... A-61
Section 12.3 Liquidator................................................. A-61
Section 12.4 Liquidation................................................ A-62
Section 12.5 Cancellation of Certificate of Limited Partnership......... A-62
Section 12.6 Return of Contributions.................................... A-62
Section 12.7 Waiver of Partition........................................ A-63
Section 12.8 Capital Account Restoration................................ A-63
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1 Amendment to be Adopted Solely by the General Partner...... A-63
Section 13.2 Amendment Procedures....................................... A-64
Section 13.3 Amendment Requirements..................................... A-64
Section 13.4 Special Meetings........................................... A-65
Section 13.5 Notice of a Meeting........................................ A-65
Section 13.6 Record Date................................................ A-65
Section 13.7 Adjournment................................................ A-65
Waiver of Notice; Approval of Meeting; Approval of
Section 13.8 Minutes................................................... A-66
Section 13.9 Quorum..................................................... A-66
Section 13.10 Conduct of a Meeting....................................... A-66
Section 13.11 Action Without a Meeting................................... A-67
Section 13.12 Voting and Other Rights.................................... A-67
ARTICLE XIV
MERGER
Section 14.1 Authority.................................................. A-67
Section 14.2 Procedure for Merger or Consolidation...................... A-68
Section 14.3 Approval by Limited Partners of Merger or Consolidation.... A-68
Section 14.4 Certificate of Merger...................................... A-69
Section 14.5 Effect of Merger........................................... A-69
</TABLE>
iii
<PAGE>
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
<TABLE>
<C> <S> <C>
Section 15.1 Right to Acquire Limited Partner Interests................. A-70
ARTICLE XVI
GENERAL PROVISIONS
Section 16.1 Addresses and Notices...................................... A-71
Section 16.2 Further Action............................................. A-72
Section 16.3 Binding Effect............................................. A-72
Section 16.4 Integration................................................ A-72
Section 16.5 Creditors.................................................. A-72
Section 16.6 Waiver..................................................... A-72
Section 16.7 Counterparts............................................... A-72
Section 16.8 Applicable Law............................................. A-72
Section 16.9 Invalidity of Provisions................................... A-72
Section 16.10 Consent of Partners........................................ A-72
</TABLE>
iv
<PAGE>
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF U.S. TIMBERLANDS
COMPANY, L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF U.S.
TIMBERLANDS COMPANY, L.P. dated as of , 1997, is entered into by and
among U.S. Timberlands Services Company, L.L.C. (formerly known as New
Services, L.L.C.), a Delaware limited liability company, as the General
Partner, and John M. Rudey, as the Organizational Limited Partner, together
with any other Persons who become Partners in the Partnership or parties
hereto as provided herein. In consideration of the covenants, conditions and
agreements contained herein, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions.
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this
Agreement.
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or
business of another Person for the purpose of increasing the operating
capacity or revenues of the Partnership Group from the operating capacity or
revenues of the Partnership Group existing immediately prior to such
transaction.
"Additional Book Basis" means the portion of any remaining Carrying Value of
an Adjusted Property that is attributable to positive adjustments made to such
Carrying Value as a result of Book-Up Events. For purposes of determining the
extent that Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value of
such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
(ii) If Carrying Value that constitutes Additional Book Basis is reduced
as a result of a Book-Down Event and the Carrying Value of other property
is increased as a result of such Book-Down Event, an allocable portion of
any such increase in Carrying Value shall be treated as Additional Book
Basis; provided that the amount treated as Additional Book Basis pursuant
hereto as a result of such Book-Down Event shall not exceed the amount by
which the Aggregate Remaining Net Positive Adjustments after such Book-Down
Event exceeds the remaining Additional Book Basis attributable to all of
the Partnership's Adjusted Property after such Book-Down Event (determined
without regard to the application of this clause (ii) to such Book-Down
Event).
"Additional Book Basis Derivative Items" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's
Adjusted Property as of the beginning of any taxable period exceeds the
Aggregate Remaining Net Positive Adjustments as of the beginning of such
period (the "Excess Additional Book Basis"), the Additional Book Basis
Derivative Items for such period shall be reduced by the amount that bears the
same ratio to the amount of Additional Book Basis Derivative Items determined
without regard to this sentence as the Excess Additional Book Basis bears to
the Additional Book Basis as of the beginning of such period.
"Additional Limited Partner" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
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"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set
by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and
(b) decreased by (i) the amount of all losses and deductions that, as of the
end of such fiscal year, are reasonably expected to be allocated to such
Partner in subsequent years under Sections 704(e)(2) and 706(d) of the Code
and Treasury Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all
distributions that, as of the end of such fiscal year, are reasonably expected
to be made to such Partner in subsequent years in accordance with the terms of
this Agreement or otherwise to the extent they exceed offsetting increases to
such Partner's Capital Account that are reasonably expected to occur during
(or prior to) the year in which such distributions are reasonably expected to
be made (other than increases as a result of a minimum gain chargeback
pursuant to Section 6.1(d)(i) or 6.1(d)(ii)). The foregoing definition of
Adjusted Capital Account is intended to comply with the provisions of Treasury
Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently
therewith. The "Adjusted Capital Account" of a Partner in respect of a General
Partner Interest, a Common Unit, a Subordinated Unit or an Incentive
Distribution Right or any other specified interest in the Partnership shall be
the amount which such Adjusted Capital Account would be if such General
Partner Interest, Common Unit, Subordinated Unit, Incentive Distribution Right
or other interest in the Partnership were the only interest in the Partnership
held by a Partner from and after the date on which such General Partner
Interest, Common Unit, Subordinated Unit, Incentive Distribution Right or
other interest was first issued.
"Adjusted Operating Surplus" means, with respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in working
capital borrowings during such period and (ii) any net reduction in cash
reserves for Operating Expenditures during such period not relating to an
Operating Expenditure made during such period, and (b) plus (i) any net
decrease in working capital borrowings during such period and (ii) any net
increase in cash reserves for Operating Expenditures during such period
required by any debt instrument for the repayment of principal, interest or
premium. Adjusted Operating Surplus does not include that portion of Operating
Surplus included in clause (a)(i) of the definition of Operating Surplus.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii). Once an Adjusted
Property is deemed contributed to a new partnership in exchange for an
interest in the new partnership, followed by the deemed liquidation of the
Partnership for federal income tax purposes upon a termination of the
Partnership pursuant to Treasury Regulation Section 1.708-(b)(1)(iv), such
property shall thereafter constitute a Contributed Property until the Carrying
Value of such property is subsequently adjusted pursuant to Section 5.5(d)(i)
or 5.5(d)(ii).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"Aggregate Remaining Net Positive Adjustments" means, as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of
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valuation as it may adopt. The General Partner shall, in its discretion, use
such method as it deems reasonable and appropriate to allocate the aggregate
Agreed Value of Contributed Properties contributed to the Partnership in a
single or integrated transaction among each separate property on a basis
proportional to the fair market value of each Contributed Property.
"Agreement" means this Amended and Restated Agreement of Limited Partnership
of U.S. Timberlands Company, L.P., as it may be amended, supplemented or
restated from time to time.
"Assignee" means a Non-citizen Assignee or a Person to whom one or more
Limited Partner Interests have been transferred in a manner permitted under
this Agreement and who has executed and delivered a Transfer Application as
required by this Agreement, but who has not been admitted as a Substituted
Limited Partner.
"Associate" means, when used to indicate a relationship with any Person, (a)
any corporation or organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more of any class
of voting stock or other voting interest; (b) any trust or other estate in
which such Person has at least a 20% beneficial interest or as to which such
Person serves as trustee or in a similar fiduciary capacity; and (c) any
relative or spouse of such Person, or any relative of such spouse, who has the
same principal residence as such Person.
"Available Cash" means, with respect to any Quarter ending prior to the
Liquidation Date,
(a) the sum of (i) all cash and cash equivalents of the Partnership Group
on hand at the end of such Quarter, and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination
of Available Cash with respect to such Quarter resulting from borrowings
for working capital purposes made subsequent to the end of such Quarter,
less
(b) the amount of any cash reserves that is necessary or appropriate in
the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such Quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any Group Member is a
party or by which it is bound or its assets are subject or (iii) provide
funds for distributions under Section 6.4 or 6.5 in respect of any one or
more of the next four Quarters; provided, however, that the General Partner
may not establish cash reserves pursuant to (iii) above if the effect of
such reserves would be that the Partnership is unable to distribute the
Minimum Quarterly Distribution on all Common Units with respect to such
Quarter; and, provided further, that disbursements made by a Group Member
or cash reserves established, increased or reduced after the end of such
Quarter but on or before the date of determination of Available Cash with
respect to such Quarter shall be deemed to have been made, established,
increased or reduced, for purposes of determining Available Cash, within
such Quarter if the General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"Book Basis Derivative Items" means any item of income, deduction, gain or
loss included in the determination of Net Income or Net Loss that is computed
with reference to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, or gain or loss with respect to an Adjusted
Property).
"Book-Down Event" means an event which triggers a negative adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
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<PAGE>
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property
and the adjusted basis thereof for federal income tax purposes as of such
date. A Partner's share of the Partnership's Book-Tax Disparities in all of
its Contributed Property and Adjusted Property will be reflected by the
difference between such Partner's Capital Account balance as maintained
pursuant to Section 5.5 and the hypothetical balance of such Partner's Capital
Account computed as if it had been maintained strictly in accordance with
federal income tax accounting principles.
"Book-Up Event" means an event which triggers a positive adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"Business Day" means Monday through Friday of each week, except that a legal
holiday recognized as such by the government of the United States of America
or the states of New York or Oregon shall not be regarded as a Business Day.
"Capital Account" means the capital account maintained for a Partner
pursuant to Section 5.5. The "Capital Account" of a Partner in respect of a
General Partner Interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such General Partner Interest, Common Unit,
Subordinated Unit, Incentive Distribution Right, or other Partnership Interest
were the only interest in the Partnership held by a Partner from and after the
date on which such General Partner Interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to this Agreement.
"Capital Improvement" means any (a) addition or improvement to the capital
assets owned by any Group Member or (b) acquisition of existing, or the
construction of new, capital assets (including, without limitation,
timberlands, seed orchards, nurseries and timber processing and manufacturing
facilities and related assets), in each case made to increase the operating
capacity or revenues of the Partnership Group from the operating capacity or
revenues of the Partnership Group existing immediately prior to such addition,
improvement, acquisition or construction.
"Capital Surplus" has the meaning assigned to such term in Section 6.3(a).
"Carrying Value" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all
depreciation, amortization and cost recovery deductions charged to the
Partners' and Assignees' Capital Accounts in respect of such Contributed
Property, and (b) with respect to any other Partnership property, the adjusted
basis of such property for federal income tax purposes, all as of the time of
determination. The Carrying Value of any property shall be adjusted from time
to time in accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect
changes, additions or other adjustments to the Carrying Value for dispositions
and acquisitions of Partnership properties, as deemed appropriate by the
General Partner.
"Cause" means a court of competent jurisdiction has entered a final, non-
appealable judgment finding the General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as general partner
of the Partnership.
"Certificate" means a certificate, substantially in the form of Exhibit A to
this Agreement or in such other form as may be adopted by the General Partner
in its discretion, issued by the Partnership evidencing ownership of one or
more Common Units or a certificate, in such form as may be adopted by the
General Partner in its discretion, issued by the Partnership evidencing
ownership of one or more other Partnership Securities.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State
of Delaware as referenced in Section 2.1, as such Certificate of Limited
Partnership may be amended, supplemented or restated from time to time.
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<PAGE>
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other
Person) is an Eligible Citizen.
"Claim" has the meaning assigned to such term in Section 7.12(c).
"Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"Closing Price" has the meaning assigned to such term in Section 15.1(a).
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of
the Code shall be deemed to include a reference to any corresponding provision
of successor law.
"Combined Interest" has the meaning assigned to such term in Section
11.3(a).
"Commission" means the United States Securities and Exchange Commission.
"Common Unit" means a Partnership Security representing a fractional part of
the Partnership Interests of all Limited Partners and Assignees and of the
General Partner (exclusive of its interest as a holder of a General Partner
Interest and Incentive Distribution Rights) and having the rights and
obligations specified with respect to Common Units in this Agreement. The term
"Common Unit" does not refer to a Subordinated Unit prior to its conversion
into a Common Unit pursuant to the terms hereof.
"Common Unit Arrearage" means, with respect to any Common Unit, whenever
issued, as to any Quarter within the Subordination Period, the excess, if any,
of (a) the Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed
with respect to a Common Unit in respect of such Quarter pursuant to Section
6.4(a)(i).
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership (or deemed contributed to a new partnership on termination of the
Partnership pursuant to Section 708 of the Code). Once the Carrying Value of a
Contributed Property is adjusted pursuant to Section 5.5(d), such property
shall no longer constitute a Contributed Property, but shall be deemed an
Adjusted Property.
"Conflicts Committee" means a committee of the Board of Directors of the
General Partner composed entirely of two or more directors who are neither
members, officers nor employees of the General Partner nor members, officers,
directors or employees of any Affiliate of the General Partner.
"Consolidated Cash Flow Available for Fixed Charges" means, with respect to
the Partnership and its subsidiaries for any period, the sum of, without
duplication, the amounts for such period, taken as a single accounting period,
of (a) Consolidated Net Income, (b) Consolidated Non-cash Charges, (c)
Consolidated Interest Expense and (d) Consolidated Income Tax Expense.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to the
Partnership and its subsidiaries, the ratio of the aggregate amount of
Consolidated Cash Flow Available for Fixed Charges for the four full fiscal
quarters for which financial information in respect thereof is available
immediately preceding the date of the transaction (the "Transaction Date")
giving rise to the need to calculate the Consolidated Fixed Charge Coverage
Ratio (such four full fiscal quarter period being referred to herein as the
"Four Quarter Period") to the aggregate amount of Consolidated Fixed Charges
of such Person for the Four Quarter Period. In addition to and without
limitation of the foregoing, for purposes of this definition, "Consolidated
Cash Flow Available for Fixed Charges" and "Consolidated Fixed Charges" shall
be calculated after giving effect on a pro forma basis for the period of such
calculation to, without duplication, (a) the incurrence or repayment of any
indebtedness of
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the Partnership or any of its subsidiaries (and, in the case of any
incurrence, the application of the net proceeds thereof) during the period
commencing on the first day of the Four Quarter Period to and including the
Transaction Date (the "Reference Period"), including, without limitation, the
incurrence of the indebtedness giving rise to the need to make such
calculation (and the application of the net proceeds thereof), as if such
incurrence (and application) occurred on the first day of the Reference Period
(including any actual interest payments made with respect to indebtedness
under the Working Capital Facility), and (b) any asset sales or asset
acquisitions occurring during the Reference Period, as if such asset sale or
asset acquisition occurred on the first day of the Reference Period; provided,
however, that (i) Consolidated Fixed Charges shall be reduced by amounts
attributable to businesses or assets that are so disposed of or discontinued
only to the extent that the obligations giving rise to such Consolidated Fixed
Charges would no longer be obligations contributing to the Consolidated Fixed
Charges subsequent to the date of determination of the Consolidated Fixed
Charge Coverage Ratio and (ii) Consolidated Cash Flow Available for Fixed
Charges generated by an acquired business or asset shall be determined by (x)
in the case of an acquisition of timber or timberlands by the Partnership or a
subsidiary during such period, by using the projected net cash flow of the
timber or timberlands so acquired, based on the harvest plan prepared in the
ordinary course of business and in good faith by the General Partner, for the
first harvest year; provided that such harvest plan shall not assume the
harvesting or sale of more than 10% (or, in the case of an acquisition under a
cutting contract with a term of less than 10 years, such higher percentage as
shall be equal to the quotient of 100% divided by the term of such cutting
contract (expressed in years)) of the total merchantable timber so acquired;
provided further, in determining projected cash flow from acquired timber or
timberlands, prices shall be assumed to equal the average prices realized by
the Partnership for comparable timber sold during such period; and (y) in the
case of all other asset acquisitions, the actual gross profit (revenues minus
cost of goods sold) of such acquired business or asset during the immediately
preceding four full fiscal quarters in the Reference Period minus the pro
forma expenses that would have been incurred by the Partnership and its
subsidiaries in the operation of such acquired business or asset during such
period computed on the basis of personnel expenses for employees retained or
to be retained by the Partnership and its subsidiaries in the operation of the
acquired business or asset and non-personnel costs and expenses incurred by
the Partnership and its subsidiaries in the operation of the Partnership's
business at similarly situated facilities. If the applicable Reference Period
for any calculation of the Consolidated Fixed Charge Coverage Ratio shall
include a portion prior to the Closing Date, then such Consolidated Fixed
Charge Coverage Ratio shall be calculated based upon the Consolidated Cash
Flow Available for Fixed Charges and the Consolidated Fixed Charges of the
Partnership on a pro forma basis for such portion of the Reference Period
prior to the Closing Date, giving effect to the transactions occurring on the
Closing Date, and the Consolidated Cash Flow Available for Fixed Charges and
the Consolidated Fixed Charges for the remaining portion of the Reference
Period on and after the Closing Date, giving pro forma effect, as described in
the two foregoing sentences, to all applicable transactions occurring on the
Closing Date or otherwise. Furthermore, in calculating "Consolidated Fixed
Charges" for purposes of determining the "Consolidated Fixed Charge Coverage
Ratio," (i) interest on outstanding indebtedness (other than indebtedness
referred to in clause (ii) below) determined on a fluctuating basis as of the
last day of the Four Quarter Period and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per
annum equal to the rate of interest on such indebtedness in effect on such
date; (ii) only actual interest payments associated with indebtedness under
the Working Capital Facility, including any refinancings thereof, during the
Four Quarter Period shall be included in such calculation; and (iii) if
interest on any indebtedness actually incurred on such date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate,
a eurocurrency interbank offered rate, or other rates, then the interest rate
in effect on the last day of the Four Quarter Period will be deemed to have
been in effect during such period.
"Consolidated Fixed Charges" means, with respect to the Partnership and its
subsidiaries for any period, the sum of, without duplication, (a) the amounts
for such period of Consolidated Interest Expense and (b) the product of (i)
the aggregate amount of dividends and other distributions paid or accrued
during such period in respect of preferred stock and redeemable capital stock
of the Partnership and its subsidiaries on a consolidated basis and (ii) a
fraction, the numerator of which is one and the denominator of which is one
minus the then applicable current combined federal, state and local statutory
tax rate, expressed as a percentage.
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"Consolidated Income Tax Expense" means, with respect to the Partnership and
its subsidiaries for any period, the provision for federal, state, local and
foreign income taxes of the Partnership and its subsidiaries for such period
as determined on a consolidated basis in accordance with U.S. GAAP.
"Consolidated Interest Expense" means, with respect to the Partnership and
its subsidiaries for any period, without duplication, the sum of (a) the
interest expense of the Partnership and its subsidiaries for such period as
determined on a consolidated basis in accordance with U.S. GAAP, including,
without limitation, (i) any amortization of debt discount, (ii) the net cost
under interest rate agreements, (iii) the interest portion of any deferred
payment obligation, (iv) all commissions, discounts and other fees and charges
owed with respect to letters of credit and bankers' acceptance financing and
(v) all accrued interest and (b) the interest component of capital leases
paid, accrued or scheduled to be paid or accrued by the Partnership and its
subsidiaries during such period as determined on a consolidated basis in
accordance with U.S. GAAP.
"Consolidated Net Income" means the net income of the Partnership and its
subsidiaries, as determined on a consolidated basis in accordance with U.S.
GAAP and as adjusted to exclude (a) net after-tax extraordinary gains or
losses, (b) net after-tax gains or losses attributable to asset sales (other
than sales of inventory in the ordinary course of business and consistent with
past practice), (c) the net income or loss of any Person which is not a
subsidiary and which is accounted for by the equity method of accounting,
provided that Consolidated Net Income shall include the amount of dividends or
distributions actually paid to the Partnership or any subsidiary, (d) the net
income or loss prior to the date of acquisition of any Person combined with
the Partnership or any subsidiary in a pooling of interest, (e) the net income
of any subsidiary to the extent that dividends or distributions of such net
income are not at the date of determination permitted by the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule
or other regulation and (f) the cumulative effect of any changes in accounting
principles.
"Consolidated Non-cash Charges" means, with respect to the Partnership and
its subsidiaries for any period, the aggregate depreciation, depletion,
amortization and any other non-cash charges, in each case reducing
Consolidated Net Income of the Partnership and its subsidiaries for such
period, determined on a consolidated basis in accordance with U.S. GAAP.
"Contribution and Conveyance Agreement" means that certain Contribution,
Conveyance and Assumption Agreement, dated as of the Closing Date, among the
General Partner, the Partnership, the Operating Company and certain other
parties, together with the additional conveyance documents and instruments
contemplated or referenced thereunder.
"Cumulative Common Unit Arrearage" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to an
Initial Common Unit for each of the Quarters within the Subordination Period
ending on or before the last day of such Quarter over (b) the sum of any
distributions theretofore made pursuant to Section 6.4(a)(ii) and the second
sentence of Section 6.5 with respect to an Initial Common Unit (including any
distributions to be made in respect of the last of such Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
"Current Market Price" has the meaning assigned to such term in Section
15.1(a).
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act, 6
Del C. (S)17-101, et seq., as amended, supplemented or restated from time to
time, and any successor to such statute.
"Departing Partner" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2.
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
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"Eligible Citizen" means a Person qualified to own interests in real property
in jurisdictions in which any Group Member does business or proposes to do
business from time to time, and whose status as a Limited Partner or Assignee
does not or would not subject such Group Member to a significant risk of
cancellation or forfeiture of any of its properties or any interest therein.
"Event of Withdrawal" has the meaning assigned to such term in Section
11.1(a).
"Final Subordinated Units" has the meaning assigned to such term in Section
6.1(d)(x).
"First Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(D).
"First Target Distribution" means $0.550 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
1998, it means the product of $0.550 multiplied by the sum of (x) 1.00 and (y)
a fraction of which the numerator is the number of days in the period
commencing on the Closing Date and ending on December 31, 1997, and of which
the denominator is 92), subject to adjustment in accordance with Sections 6.6
and 6.9.
"General Partner" means U.S. Timberlands Services Company, L.L.C. and its
predecessors, successors and permitted assigns as general partner of the
Partnership.
"General Partner Interest" means the ownership interest of the General
Partner in the Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it) which may be evidenced by
Partnership Securities or a combination thereof or interest therein, and
includes any and all benefits to which the General Partner is entitled as
provided in this Agreement, together with all obligations of the General
Partner to comply with the terms and provisions of this Agreement.
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation
made to 10 or more Persons) or disposing of any Partnership Securities with any
other Person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, Partnership Securities.
"Group Member" means a member of the Partnership Group.
"Holder" as used in Section 7.12, has the meaning assigned to such term in
Section 7.12(a).
"Holdings" means U.S. Timberlands Holdings, L.L.C., a Delaware limited
liability company.
"Incentive Distribution Right" means a Limited Partner Interest issued to the
General Partner in connection with the transfer of substantially all of its
member interest in the Operating Company to the Partnership pursuant to Section
5.2, which Partnership Interest shall confer upon the holder thereof only the
rights and obligations specifically provided in this Agreement with respect to
Incentive Distribution Rights (and no other rights otherwise available to or
other obligations of holders of a Partnership Interest). Notwithstanding
anything in this Agreement to the contrary, the holder of an Incentive
Distribution Right shall not be entitled to vote such Incentive Distribution
Right on any Partnership matter except as may otherwise be required by law.
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"Incentive Distributions" means any amount of cash distributed to the holders
of the Incentive Distribution Rights pursuant to Sections 6.4(a)(v), (vi) and
(vii) and 6.4(b)(iii), (iv) and (v).
"Indemnified Persons" has the meaning assigned to such term in Section
7.12(c).
"Indemnitee" means (a) the General Partner, any Departing Partner and any
Person who is or was an Affiliate of the General Partner or any Departing
Partner, (b) any Person who is or was a member, director, officer, employee,
agent or trustee of a Group Member, (c) any Person who is or was an officer,
member, partner, director, employee, agent or trustee of the General Partner or
any Departing Partner or any Affiliate of the General Partner or any Departing
Partner, or any Affiliate of any such Person and (d) any Person who is or was
serving at the request of the General Partner or any Departing Partner or any
such Affiliate as a director, officer, employee, member, partner, agent,
fiduciary or trustee of another Person; provided, that a Person shall not be an
Indemnitee by reason of providing, on a fee-for-services basis, trustee,
fiduciary or custodial services.
"Initial Common Units" means the Common Units sold in the Initial Offering.
"Initial Limited Partners" means the General Partner and Holdings (with
respect to the Subordinated Units and the Incentive Distribution Rights
received by them pursuant to Section 5.2) and the Underwriters, in each case
upon being admitted to the Partnership in accordance with Section 10.1.
"Initial Offering" means the initial offering and sale of Common Units to the
public, as described in the Registration Statement.
"Initial Unit Price" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth
on the cover page of the prospectus included as part of the Registration
Statement and first issued at or after the time the Registration Statement
first became effective or (b) with respect to any other class or series of
Units, the price per Unit at which such class or series of Units is initially
sold by the Partnership, as determined by the General Partner, in each case
adjusted as the General Partner determines to be appropriate to give effect to
any distribution, subdivision or combination of Units.
"Interim Capital Transactions" means the following transactions if they occur
prior to the Liquidation Date: (a) borrowings, refinancings or refundings of
indebtedness and sales of debt securities (other than for working capital
purposes and other than for items purchased on open account in the ordinary
course of business) by any Group Member; (b) sales of equity interests by any
Group Member (other than Common Units sold to the underwriters pursuant to the
exercise of the Over-Allotment Option); and (c) sales or other voluntary or
involuntary dispositions of any assets of any Group Member (other than (x)
sales or other dispositions of inventory, accounts receivable and other assets
in the ordinary course of business, including the exchange of timber or real
property for other timber or real property to the extent that the timber or
real property received in exchange is of equal or greater value, or the sale of
timber or real property, to the extent the proceeds are invested within 270
days in other timber or real property, and (y) sales or other dispositions of
assets as part of normal retirements or replacements), in each case prior to
the Liquidation Date. Notwithstanding anything herein to the contrary, Interim
Capital Transactions shall not include (A) the first $50.0 million in real
property (and related timber) sales made by the Partnership Group subsequent to
the Closing Date and (B) stumpage, timber deed and other bulk timber sales
(which, in the case of (A) and (B) would otherwise be deemed Interim Capital
Transactions) generally of the type described in the Partnership's strategic
plan approved by the Board of Directors of the General Partner prior to the
Closing Date.
"Issue Price" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.
"Limited Partner" means, unless the context otherwise requires, (a) the
Organizational Limited Partner, each Initial Limited Partner, each Substituted
Limited Partner, each Additional Limited Partner and any Partner
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upon the change of its status from General Partner to Limited Partner pursuant
to Section 11.3 or (b) solely for purposes of Articles V, VI, VII and IX and
Sections 12.3 and 12.4, each Assignee; provided, however, that when the term
Limited Partner is used herein in the context of any vote or other approval,
including without limitation Articles XIII and XIV, such term shall not,
solely for such purpose, include any holder of an Incentive Distribution Right
except as may otherwise be required by law.
"Limited Partner Interest" means the ownership interest of a Limited Partner
or Assignee in the Partnership, which may be evidenced by Common Units,
Subordinated Units, Incentive Distribution Rights or other Partnership
Securities or a combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner or Assignee is entitled as provided
in this Agreement, together with all obligations of such Limited Partner or
Assignee to comply with the terms and provisions of this Agreement; provided,
however, that when the term Limited Partner Interest is used herein in the
context of any vote or other approval, including without limitation Articles
XIII and XIV, such term shall not, solely for such purpose, include any
Incentive Distribution Rights except as may otherwise be required by law.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time
period during which the holders of Outstanding Units have the right to elect
to reconstitute the Partnership and continue its business has expired without
such an election being made, and (b) in the case of any other event giving
rise to the dissolution of the Partnership, the date on which such event
occurs.
"Liquidator" means one or more Persons selected by the General Partner to
perform the functions described in Section 12.3 as liquidating trustee of the
Partnership within the meaning of the Delaware Act.
"Merger Agreement" has the meaning assigned to such term in Section 14.1.
"Minimum Quarterly Distribution" means $0.50 per Unit per Quarter (or with
respect to the period commencing on the Closing Date and ending on March 31,
1998, it means the product of $0.50 multiplied by the sum of (x) 1.00 and (y)
a fraction of which the numerator is the number of days in the period
commencing on the Closing Date and ending on December 31, 1997, and of which
the denominator is 92), subject to adjustment in accordance with Sections 6.6
and 6.9.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the
time of distribution, in either case, as determined under Section 752 of the
Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss)
for such taxable year over the Partnership's items of loss and deduction
(other than those items taken into account in the computation of Net
Termination Gain or Net Termination Loss) for such taxable year. The items
included in the calculation of Net Income shall be determined in accordance
with Section 5.5(b) and shall not include any items specially allocated under
Section 6.1(d); provided that the determination of the items that have been
specially allocated under Section 6.1(d) shall be made as if Section
6.1(d)(xii) were not in this Agreement.
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"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or
Net Termination Loss) for such taxable year. The items included in the
calculation of Net Loss shall be determined in accordance with Section 5.5(b)
and shall not include any items specially allocated under Section 6.1(d);
provided that the determination of the items that have been specially allocated
under Section 6.1(d) shall be made as if Section 6.1(d)(xii) were not in this
Agreement.
"Net Positive Adjustments" means, with respect to any Partner, the excess, if
any, of the total positive adjustments over the total negative adjustments made
to the Capital Account of such Partner pursuant to Book-Up Events and Book-Down
Events.
"Net Termination Gain" means, for any taxable year, the sum, if positive, of
all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Gain shall be determined in accordance with Section 5.5(b) and
shall not include any items of income, gain or loss specially allocated under
Section 6.1(d).
"Net Termination Loss" means, for any taxable year, the sum, if negative, of
all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Loss shall be determined in accordance with Section 5.5(b) and
shall not include any items of income, gain or loss specially allocated under
Section 6.1(d).
"Non-citizen Assignee" means a Person whom the General Partner has determined
in its discretion does not constitute an Eligible Citizen and as to whose
Partnership Interest the General Partner has become the Substituted Limited
Partner, pursuant to Section 4.9.
"Nonrecourse Built-in Gain" means with respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage or pledge securing a
Nonrecourse Liability, the amount of any taxable gain that would be allocated
to the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and
6.2(b)(iii) if such properties were disposed of in a taxable transaction in
full satisfaction of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in
accordance with the principles of Treasury Regulation Section 1.704-2(b), are
attributable to a Nonrecourse Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"Notice of Election to Purchase" has the meaning assigned to such term in
Section 15.1(b) hereof.
"Operating Company" means U.S. Timberlands Klamath Falls, L.L.C., a Delaware
limited liability company, and any successors thereto.
"Operating Company Agreement" means the Amended and Restated Operating
Agreement of the Operating Company, as it may be amended, supplemented or
restated from time to time.
"Operating Expenditures" means all Partnership Group expenditures, including,
but not limited to, taxes, reimbursements of the General Partner, debt service
payments, and capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness shall not be an Operating Expenditure if the payment is (i)
required in connection with the sale or other disposition of assets or (ii)
made in connection with the refinancing or refunding of indebtedness with
the proceeds from new indebtedness or from the sale of equity interests.
For purposes of the foregoing, at the election and in the reasonable
discretion of the General Partner, any payment of principal or premium
shall be deemed to be refunded or refinanced by any indebtedness incurred
or to be incurred by the Partnership Group within 180 days before or after
such payment to the extent of the principal amount of such indebtedness.
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(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or (iii)
distributions to Partners. Where capital expenditures are made in part for
Acquisitions or for Capital Improvements and in part for other purposes,
the General Partner's good faith allocation between the amounts paid for
each shall be conclusive.
"Operating Surplus," means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of (i) $15.0 million plus all cash and cash equivalents of
the Partnership Group on hand as of the close of business on the Closing
Date, (ii) all cash receipts of the Partnership Group for the period
beginning on the Closing Date and ending with the last day of such period,
other than cash receipts from Interim Capital Transactions (except to the
extent specified in Section 6.5) and (iii) all cash receipts of the
Partnership Group after the end of such period but on or before the date of
determination of Operating Surplus with respect to such period resulting
from borrowings for working capital purposes, less
(b) the sum of (i) Operating Expenditures for the period beginning on the
Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures, provided, however, that disbursements made (including
contributions to a Group Member or disbursements on behalf of a Group
Member) or cash reserves established, increased or reduced after the end of
such period but on or before the date of determination of Available Cash
with respect to such period shall be deemed to have been made, established,
increased or reduced, for purposes of determining Operating Surplus, within
such period if the General Partner so determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
"Option Closing Date" has the meaning assigned to such term in the
Underwriting Agreement.
"Organizational Limited Partner" means John M. Rudey in his capacity as the
organizational limited partner of the Partnership pursuant to this Agreement.
"Outstanding" means, with respect to Partnership Securities, all Partnership
Securities that are issued by the Partnership and reflected as outstanding on
the Partnership's books and records as of the date of determination; provided,
however, that if at any time any Person or Group (other than the General
Partner or its Affiliates) beneficially owns 20% or more of any Outstanding
Partnership Securities of any class then Outstanding, all Partnership
Securities owned by such Person or Group shall not be voted on any matter and
shall not be considered to be Outstanding when sending notices of a meeting of
Limited Partners to vote on any matter (unless otherwise required by law),
calculating required votes, determining the presence of a quorum or for other
similar purposes under this Agreement, except that Common Units so owned shall
be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such
Common Units shall not, however, be treated as a separate class of Partnership
Securities for purposes of this Agreement).
"Over-Allotment Option" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Units having rights to
distributions or in liquidation ranking on a parity with the Common Units.
"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
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"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in Treasury
Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner, the Limited Partners and the holders of
Common Units, Subordinated Units and Incentive Distribution Rights.
"Partnership" means U.S. Timberlands Company, L.P., a Delaware limited
partnership, and any successors thereto.
"Partnership Group" means the Partnership, the Operating Company and any
Subsidiary of either such entity, treated as a single consolidated entity.
"Partnership Interest" means an ownership interest in the Partnership, which
shall include General Partner Interests and Limited Partner Interests.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Partnership Security" means any class or series of equity interest in the
Partnership (but excluding any options, rights, warrants and appreciation
rights relating to any equity interest in the Partnership), including, without
limitation, Common Units, Subordinated Units and Incentive Distribution Rights.
"Percentage Interest" means as of the date of such determination (a) as to
the General Partner (with respect to its General Partner Interest), an
aggregate 1.0%, (b) as to any Unitholder or Assignee holding Units, the product
obtained by multiplying (i) 99% less the percentage applicable to paragraph (c)
by (ii) the quotient obtained by dividing (A) the number of Units held by such
Unitholder or Assignee by (B) the total number of all Outstanding Units, and
(c) as to the holders of additional Partnership Securities issued by the
Partnership in accordance with Section 5.6, the percentage established as a
part of such issuance. The Percentage Interest with respect to an Incentive
Distribution Right shall at all times be zero.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"Per Unit Capital Amount" means, as of any date of determination, the Capital
Account, stated on a per Unit basis, underlying any Unit held by a Person other
than the General Partner or any Affiliate of the General Partner who holds
Units.
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative Percentage
Interests, (b) when modifying Partners and Assignees, apportioned among all
Partners and Assignees in accordance with their respective Percentage Interests
and (c) when modifying holders of Incentive Distribution Rights, apportioned
equally among all holders of Incentive Distribution Rights in accordance with
the relative number of Incentive Distribution Rights held by each such holder.
"Purchase Date" means the date determined by the General Partner as the date
for purchase of all Outstanding Units (other than Units owned by the General
Partner and its Affiliates) pursuant to Article XV.
"Quarter" means, unless the context requires otherwise, a fiscal quarter of
the Partnership.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Sections 734 or 743 of the Code)
upon the disposition of any property or asset of the Partnership, which gain is
characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
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"Record Date" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution or to
participate in any offer.
"Record Holder" means the Person in whose name a Common Unit is registered on
the books of the Transfer Agent as of the opening of business on a particular
Business Day, or with respect to other Partnership Securities, the Person in
whose name any such other Partnership Security is registered on the books which
the General Partner has caused to be kept as of the opening of business on such
Business Day.
"Redeemable Interests" means any Partnership Interests for which a redemption
notice has been given, and has not been withdrawn, pursuant to Section 4.10.
"Registration Statement" means the Registration Statement on Form S-1
(Registration No. 333-32811) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Initial Offering.
"Remaining Net Positive Adjustments" means as of the end of any taxable
period, (i) with respect to the Unitholders holding Common Units or
Subordinated Units, the excess of (a) the Net Positive Adjustments of the
Unitholders holding Common Units or Subordinated Units as of the end of such
period over (b) the sum of those Partners' Share of Additional Book Basis
Derivative Items for each prior taxable period, (ii) with respect to the
General Partner (as holder of the General Partner Interest), the excess of (a)
the Net Positive Adjustments of the General Partner as of the end of such
period over (b) the sum of the General Partner's Share of Additional Book Basis
Derivative Items with respect to the General Partner Interest for each prior
taxable period, and (iii) with respect to the holders of Incentive Distribution
Rights, the excess of (a) the Net Positive Adjustments of the holders of
Incentive Distribution Rights as of the end of such period over (b) the sum of
the Share of Additional Book Basis Derivative Items of the holders of the
Incentive Distribution Rights for each prior taxable period.
"Required Allocations" means (a) any limitation imposed on any allocation of
Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and (b)
any allocation of an item of income, gain, loss or deduction pursuant to
Section 6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"Restricted Activities" means the following activities in North America: the
(i) acquisition, exchange, operation or sale of timber-producing real property
or rights to harvest timber a principal purpose of which is producing logs and
other forest products, (ii) harvesting of timber other than harvesting which is
incidental to the ownership or operation of real property not owned or operated
for a principal purpose of producing logs or other forest products, (iii) sale,
exchange or purchase of logs other than sales, exchanges or purchases which are
incidental to the ownership or operation of real property not owned or operated
for a principal purpose of producing logs or other forest products, and (iv)
any and all other activities relating to the forest products industry to the
extent such activities compete with the operations of the Partnership or the
Operating Company.
"Second Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(E).
"Second Target Distribution" means $0.633 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
1998, it means the product of $0.633 multiplied by the sum of (x) 1.00 and (y)
a fraction of which the numerator is equal to the number of days in the period
commencing on the Closing Date and ending on December 31, 1997, and of which
the denominator is 92), subject to adjustment in accordance with Sections 6.6
and 6.9.
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"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"Share of Additional Book Basis Derivative Items" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable
period, (i) with respect to the Unitholders holding Common Units or
Subordinated Units, the amount that bears the same ratio to such Additional
Book Basis Derivative Items as the Unitholders' Remaining Net Positive
Adjustments as of the end of such period bears to the Aggregate Remaining Net
Positive Adjustments as of that time, (ii) with respect to the General Partner
(as holder of the General Partner Interest), the amount that bears the same
ratio to such additional Book Basis Derivative Items as the General Partner's
Remaining Net Positive Adjustments as of the end of such period bears to the
Aggregate Remaining Net Positive Adjustment as of that time, and (iii) with
respect to the Partners holding Incentive Distribution Rights, the amount that
bears the same ratio to such Additional Book Basis Derivative Items as the
Remaining Net Positive Adjustments of the Partners holding the Incentive
Distribution Rights as of the end of such period bears to the Aggregate
Remaining Net Positive Adjustments as of that time.
"Special Approval" means approval by a majority of the members of the
Conflicts Committee.
"Subordinated Unit" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees (other than of
holders of the Incentive Distribution Rights) and having the rights and
obligations specified with respect to Subordinated Units in this Agreement. The
term "Subordinated Unit" as used herein does not include a Common Unit.
"Subordination Period" means the period commencing on the Closing Date and
ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning after December 31, 2002 in
respect of which (i) (A) distributions of Available Cash from Operating
Surplus on each of the Outstanding Common Units and Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all Outstanding Common Units and
Subordinated Units during such periods and (B) the Adjusted Operating
Surplus generated during each of the three consecutive, non-overlapping
four-Quarter periods immediately preceding such date equaled or exceeded
the sum of the Minimum Quarterly Distribution on all of the Common Units
and Subordinated Units that were outstanding during such periods on a fully
diluted basis (i.e., taking into account for purposes of such determination
all Outstanding Common Units, all Outstanding Subordinated Units, all
Common Units and Subordinated Units issuable upon exercise of employee
options that have, as of the date of determination, already vested or are
scheduled to vest prior to the end of the quarter immediately following the
quarter with respect to which such determination is made, and all Common
Units and Subordinated Units that have as of the date of determination,
been earned by but not yet issued to management of the Partnership in
respect of incentive compensation), plus the related distribution on the
General Partner Interest in the Partnership and on the managing member
interest in the Operating Company and (ii) there are no Cumulative Common
Unit Arrearages; and
(b) the date on which the General Partner is removed as general partner
of the Partnership upon the requisite vote by holders of Outstanding Units
under circumstances where Cause does not exist and Units held by the
General Partner and its Affiliates are not voted in favor of such removal.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, at the
date of determination, by such Person, by one or more Subsidiaries of such
Person or a combination thereof, (b) a partnership (whether general or limited)
in which such Person or a Subsidiary of such Person is, at the date of
determination, a general or limited partner of such partnership, but only if
more than 50% of the partnership interests of such partnership (considering all
of the partnership interests of the partnership as a single class) is owned,
directly or indirectly, at the date of determination, by such Person, by one or
more Subsidiaries of such Person, or a combination
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thereof, or (c) any other Person (other than a corporation or a partnership) in
which such Person, one or more Subsidiaries of such Person, or a combination
thereof, directly or indirectly, at the date of determination, has (i) at least
a majority ownership interest or (ii) the power to elect or direct the election
of a majority of the directors or other governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all
the rights of a Limited Partner and who is shown as a Limited Partner on the
books and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in Section
14.2(b).
"Third Target Distribution" means $0.822 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
1998, it means the product of $0.822 multiplied by the sum of (x) 1.00 and (y)
a fraction of which the numerator is equal to the number of days in the period
commencing on the Closing Date and ending on December 31, 1997, and of which
the denominator is 92), subject to adjustment in accordance with Sections 6.6
and 6.9.
"Trading Day" has the meaning assigned to such term in Section 15.1(a).
"Transfer" has the meaning assigned to such term in Section 4.4(a).
"Transfer Agent" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time
to time by the Partnership to act as registrar and transfer agent for the
Common Units and as may be appointed from time to time by the Partnership to
act as registrar and transfer agent for any other Partnership Securities;
provided that if no Transfer Agent is specifically designated for any such
other Partnership Securities, the General Partner shall act in such capacity.
"Transfer Application" means an application and agreement for transfer of
Limited Partner Interests in the form set forth on the back of a Certificate or
in a form substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule I to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement dated , 1997
among the Underwriters, the Partnership and certain other parties, providing
for the purchase of Common Units by such Underwriters.
"Unit" means a Partnership Security that is designated as a "Unit" and shall
include Common Units and Subordinated Units but shall not include (x) a General
Partner Interest or (y) Incentive Distribution Rights.
"Unitholders" means the holders of Common Units and Subordinated Units.
"Unit Majority" means, during the Subordination Period, at least a majority
of the Outstanding Common Units voting as a class and at least a majority of
the Outstanding Subordinated Units voting as a class, and thereafter, at least
a majority of the Outstanding Units.
"Unpaid MQD" has the meaning assigned to such term in Section 6.1(c)(i)(B).
"Unrealized Gain" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the fair market value
of such property as of such date (as determined under Section 5.5(d)) over (b)
the Carrying Value of such property as of such date (prior to any adjustment to
be made pursuant to Section 5.5(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the Carrying Value of
such property as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 5.5(d)).
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"Unrecovered Capital" means at any time, with respect to a Unit, the Initial
Unit Price less the sum of all distributions constituting Capital Surplus
theretofore made in respect of an Initial Common Unit and any distributions of
cash (or the Net Agreed Value of any distributions in kind) in connection with
the dissolution and liquidation of the Partnership theretofore made in respect
of an Initial Common Unit, adjusted as the General Partner determines to be
appropriate to give effect to any distribution, subdivision or combination of
such Units.
"U.S. GAAP" means United States Generally Accepted Accounting Principles
consistently applied.
"U.S. Timberlands Services Company, L.L.C." means U.S. Timberlands Service
Company, L.L.C., a Delaware limited liability company, which is the General
Partner of the Partnership as of the Closing Date, and was formerly known as
New Services, L.L.C.
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 11.1(b).
"Working Capital Facility" means the working capital facility of the
Operating Company provided for in the Credit Agreement, dated as of ,
1997, between the Operating Company and , in its individual capacity and
as agent, and the other banks which are or become parties from time to time
thereto, as it may be amended, supplemented or otherwise modified from time to
time.
Section 1.2 Construction.
Unless the context requires otherwise: (a) any pronoun used in this Agreement
shall include the corresponding masculine, feminine or neuter forms, and the
singular form of nouns, pronouns and verbs shall include the plural and vice
versa; (b) references to Articles and Sections refer to Articles and Sections
of this Agreement; and (c) "include" or "includes" means includes, without
limitation, and "including" means including, without limitation.
ARTICLE II
ORGANIZATION
Section 2.1 Formation.
The General Partner and the Organizational Limited Partner have previously
formed the Partnership as a limited partnership pursuant to the provisions of
the Delaware Act and hereby amend and restate the original Agreement of Limited
Partnership of U.S. Timberlands Company, L.P. in its entirety. This amendment
and restatement shall become effective on the date of this Agreement. Except as
expressly provided to the contrary in this Agreement, the rights, duties
(including fiduciary duties), liabilities and obligations of the Partners and
the administration, dissolution and termination of the Partnership shall be
governed by the Delaware Act. All Partnership Interests shall constitute
personal property of the owner thereof for all purposes and a Partner has no
interest in specific Partnership property.
Section 2.2 Name.
The name of the Partnership shall be "U.S. Timberlands Company, L.P." The
Partnership's business may be conducted under any other name or names deemed
necessary or appropriate by the General Partner in its sole discretion,
including the name of the General Partner. The words "Limited Partnership,"
"L.P.," "Ltd." or similar words or letters shall be included in the
Partnership's name where necessary for the purpose of complying with the laws
of any jurisdiction that so requires. The General Partner in its discretion may
change the name of the Partnership at any time and from time to time and shall
notify the Limited Partners of such change in the next regular communication to
the Limited Partners.
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Section 2.3 Registered Office; Registered Agent; Principal Office; Other
Offices.
Unless and until changed by the General Partner, the registered office of the
Partnership in the State of Delaware shall be located at 1209 Orange Street,
New Castle County, Wilmington, Delaware 19801, and the registered agent for
service of process on the Partnership in the State of Delaware at such
registered office shall be The Corporation Trust Company. The principal office
of the Partnership shall be located at 6400 Highway 66, Klamath Falls, Oregon
97601 or such other place as the General Partner may from time to time
designate by notice to the Limited Partners. The Partnership may maintain
offices at such other place or places within or outside the State of Delaware
as the General Partner deems necessary or appropriate. The address of the
General Partner shall be 625 Madison Ave, Suite 10-B, New York, New York 10022
or such other place as the General Partner may from time to time designate by
notice to the Limited Partners.
Section 2.4 Purpose and Business.
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a member of the Operating Company and, in connection
therewith, to exercise all the rights and powers conferred upon the Partnership
as a member of the Operating Company pursuant to the Operating Company
Agreement or otherwise, (b) engage directly in, or enter into or form any
corporation, partnership, joint venture, limited liability company or other
arrangement to engage indirectly in, any business activity that the Operating
Company is permitted to engage in by the Operating Company Agreement and, in
connection therewith, to exercise all of the rights and powers conferred upon
the Partnership pursuant to the agreements relating to such business activity,
(c) engage directly in, or enter into or form any corporation, partnership,
joint venture, limited liability company or other arrangement to engage
indirectly in, any business activity that is approved by the General Partner
and which lawfully may be conducted by a limited partnership organized pursuant
to the Delaware Act and, in connection therewith, to exercise all of the rights
and powers conferred upon the Partnership pursuant to the agreements relating
to such business activity; provided, however, that the General Partner
reasonably determines, as of the date of the acquisition or commencement of
such activity, that such activity (i) generates "qualifying income" (as such
term is defined pursuant to Section 7704 of the Code) or (ii) enhances the
operations of an activity of the Operating Company or a Partnership activity
that generates qualifying income, and (d) do anything necessary or appropriate
to the foregoing, including the making of capital contributions or loans to a
Group Member. The General Partner has no obligation or duty to the Partnership,
the Limited Partners, or the Assignees to propose or approve, and in its
discretion may decline to propose or approve, the conduct by the Partnership of
any business.
Section 2.5 Powers.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in
Section 2.4 and for the protection and benefit of the Partnership.
Section 2.6 Power of Attorney.
(a) Each Limited Partner and each Assignee hereby constitutes and appoints
the General Partner and, if a Liquidator (other than the General Partner) shall
have been selected pursuant to Section 12.3, the Liquidator, severally (and any
successor to the Liquidator by merger, transfer, assignment, election or
otherwise) and each of their authorized officers and attorneys-in-fact, as the
case may be, with full power of substitution, as his true and lawful agent and
attorney-in-fact, with full power and authority in his name, place and stead,
to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that the
General Partner or the Liquidator deems necessary or appropriate to form,
qualify or continue the existence or qualification of the Partnership as a
limited partnership (or a partnership in which the limited partners have
limited liability) in the State of Delaware and in all other jurisdictions
in which the Partnership may conduct business or own property; (B)
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all certificates, documents and other instruments that the General Partner
or the Liquidator deems necessary or appropriate to reflect, in accordance
with its terms, any amendment, change, modification or restatement of this
Agreement; (C) all certificates, documents and other instruments (including
conveyances and a certificate of cancellation) that the General Partner or
the Liquidator deems necessary or appropriate to reflect the dissolution
and liquidation of the Partnership pursuant to the terms of this Agreement;
(D) all certificates, documents and other instruments relating to the
admission, withdrawal, removal or substitution of any Partner pursuant to,
or other events described in, Article IV, X, XI or XII; (E) all
certificates, documents and other instruments relating to the determination
of the rights, preferences and privileges of any class or series of
Partnership Securities issued pursuant to Section 5.6; and (F) all
certificates, documents and other instruments (including agreements and a
certificate of merger) relating to a merger or consolidation of the
Partnership pursuant to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms of this Agreement or
is necessary or appropriate, in the discretion of the General Partner or
the Liquidator, to effectuate the terms or intent of this Agreement;
provided, that when required by Section 13.3 or any other provision of this
Agreement that establishes a percentage of the Limited Partners or of the
Limited Partners of any class or series required to take any action, the
General Partner and the Liquidator may exercise the power of attorney made
in this Section 2.6(a)(ii) only after the necessary vote, consent or
approval of the Limited Partners or of the Limited Partners of such class
or series, as applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with Article
XIII or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable and
a power coupled with an interest, and it shall survive and, to the maximum
extent permitted by law, not be affected by the subsequent death, incompetency,
disability, incapacity, dissolution, bankruptcy or termination of any Limited
Partner or Assignee and the transfer of all or any portion of such Limited
Partner's or Assignee's Partnership Interest and shall extend to such Limited
Partner's or Assignee's heirs, successors, assigns and personal
representatives. Each such Limited Partner or Assignee hereby agrees to be
bound by any representation made by the General Partner or the Liquidator
acting in good faith pursuant to such power of attorney; and each such Limited
Partner or Assignee, to the maximum extent permitted by law, hereby waives any
and all defenses that may be available to contest, negate or disaffirm the
action of the General Partner or the Liquidator taken in good faith under such
power of attorney. Each Limited Partner or Assignee shall execute and deliver
to the General Partner or the Liquidator, within 15 days after receipt of the
request therefor, such further designation, powers of attorney and other
instruments as the General Partner or the Liquidator deems necessary to
effectuate this Agreement and the purposes of the Partnership.
Section 2.7 Term.
The term of the Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall continue in
existence until the close of Partnership business on December 31, 2087 or until
the earlier dissolution of the Partnership in accordance with the provisions of
Article XII. The existence of the Partnership as a separate legal entity shall
continue until the cancellation of the Certificate of Limited Partnership as
provided in the Delaware Act.
Section 2.8 Title to Partnership Assets.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have
any ownership interest in such Partnership assets or any portion thereof. Title
to any or all of the
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Partnership assets may be held in the name of the Partnership, the General
Partner, one or more of its Affiliates or one or more nominees, as the General
Partner may determine. The General Partner hereby declares and warrants that
any Partnership assets for which record title is held in the name of the
General Partner or one or more of its Affiliates or one or more nominees shall
be held by the General Partner or such Affiliate or nominee for the use and
benefit of the Partnership in accordance with the provisions of this Agreement;
provided, however, that the General Partner shall use reasonable efforts to
cause record title to such assets (other than those assets in respect of which
the General Partner determines that the expense and difficulty of conveyancing
makes transfer of record title to the Partnership impracticable) to be vested
in the Partnership as soon as reasonably practicable; provided, further, that,
prior to the withdrawal or removal of the General Partner or as soon thereafter
as practicable, the General Partner shall use reasonable efforts to effect the
transfer of record title to the Partnership and, prior to any such transfer,
will provide for the use of such assets in a manner satisfactory to the General
Partner. All Partnership assets shall be recorded as the property of the
Partnership in its books and records, irrespective of the name in which record
title to such Partnership assets is held.
ARTICLE III
RIGHTS OF LIMITED PARTNERS
Section 3.1 Limitation of Liability.
The Limited Partners and the Assignees shall have no liability under this
Agreement except as expressly provided in this Agreement or the Delaware Act.
Section 3.2 Management of Business.
No Limited Partner or Assignee, in its capacity as such, shall participate in
the operation, management or control (within the meaning of the Delaware Act)
of the Partnership's business, transact any business in the Partnership's name
or have the power to sign documents for or otherwise bind the Partnership. Any
action taken by any Affiliate of the General Partner or any officer, director,
employee, member, general partner, agent or trustee of the General Partner or
any of its Affiliates, or any officers, director, employee, member, general
partner, agent or trustee of a Group Member, in its capacity as such, shall not
be deemed to be participation in the control of the business of the Partnership
by a limited partner of the Partnership (within the meaning of Section
17-303(a) of the Delaware Act) and shall not affect, impair or eliminate the
limitations on the liability of the Limited Partners or Assignees under this
Agreement.
Section 3.3 Outside Activities of the Limited Partners.
Subject to the provisions of Section 7.5, which shall continue to be
applicable to the Persons referred to therein, regardless of whether such
Persons shall also be Limited Partners or Assignees, any Limited Partner or
Assignee shall be entitled to and may have business interests and engage in
business activities in addition to those relating to the Partnership, including
business interests and activities in direct competition with the Partnership
Group. Neither the Partnership nor any of the other Partners or Assignees shall
have any rights by virtue of this Agreement in any business ventures of any
Limited Partner or Assignee.
Section 3.4 Rights of Limited Partners.
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 3.4(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable written demand and at
such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
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(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local income tax returns for each year;
(iii) to have furnished to him a current list of the name and last known
business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together
with a copy of the executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate of Limited Partnership and all
amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash and
a description and statement of the Net Agreed Value of any other Capital
Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners and
Assignees, for such period of time as the General Partner deems reasonable, (i)
any information that the General Partner reasonably believes to be in the
nature of trade secrets or (ii) other information the disclosure of which the
General Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that any Group
Member is required by law or by agreement with any third party to keep
confidential (other than agreements with Affiliates of the Partnership the
primary purpose of which is to circumvent the obligations set forth in this
Section 3.4).
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
Section 4.1 Certificates.
Upon the Partnership's issuance of Common Units or Subordinated Units to any
Person, the Partnership shall issue one or more Certificates in the name of
such Person evidencing the number of such Units being so issued. In addition,
(a) upon the General Partner's request, the Partnership shall issue to it one
or more Certificates in the name of the General Partner evidencing its
interests in the Partnership and (b) upon the request of any Person owning
Incentive Distribution Rights or any Partnership Securities, the Partnership
shall issue to such Person one or more certificates evidencing such Incentive
Distribution Rights or Partnership Securities. Certificates shall be executed
on behalf of the Partnership by the Chairman of the Board, President or any
Executive Vice President or Vice President and the Secretary or any Assistant
Secretary of the General Partner. No Common Unit Certificate shall be valid for
any purpose until it has been countersigned by the Transfer Agent. Subject to
the requirements of Section 6.7(b), the Partners holding Certificates
evidencing Subordinated Units may exchange such Certificates for Certificates
evidencing Common Units on or after the date on which such Subordinated Units
are converted into Common Units pursuant to the terms of Section 5.8.
Section 4.2 Mutilated, Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
appropriate officers of the General Partner on behalf of the Partnership shall
execute, and the Transfer Agent shall countersign and deliver in exchange
therefor, a new Certificate evidencing the same number and type of Partnership
Securities as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on behalf of the
Partnership shall execute and deliver, and the Transfer Agent shall countersign
a new Certificate in place of any Certificate previously issued if the Record
Holder of the Certificate:
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(i) makes proof by affidavit, in form and substance satisfactory to the
Partnership, that a previously issued Certificate has been lost, destroyed
or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the Partnership, delivers to the Partnership a
bond, in form and substance satisfactory to the Partnership, with surety or
sureties and with fixed or open penalty as the Partnership may reasonably
direct, in its sole discretion, to indemnify the Partnership, the Partners,
the General Partner and the Transfer Agent against any claim that may be
made on account of the alleged loss, destruction or theft of the
Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
Partnership.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Limited Partner Interests represented by the
Certificate is registered before the Partnership, the General Partner or the
Transfer Agent receives such notification, the Limited Partner or Assignee
shall be precluded from making any claim against the Partnership, the General
Partner or the Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this Section
4.2, the Partnership may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the Transfer Agent)
reasonably connected therewith.
Section 4.3 Record Holders.
The Partnership shall be entitled to recognize the Record Holder as the
Partner or Assignee with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such Partnership Interest on the part of any other Person, regardless of
whether the Partnership shall have actual or other notice thereof, except as
otherwise provided by law or any applicable rule, regulation, guideline or
requirement of any National Securities Exchange on which such Partnership
Interests are listed for trading. Without limiting the foregoing, when a Person
(such as a broker, dealer, bank, trust company or clearing corporation or an
agent of any of the foregoing) is acting as nominee, agent or in some other
representative capacity for another Person in acquiring and/or holding
Partnership Interests, as between the Partnership on the one hand, and such
other Persons on the other, such representative Person (a) shall be the Partner
or Assignee (as the case may be) of record and beneficially, (b) must execute
and deliver a Transfer Application and (c) shall be bound by this Agreement and
shall have the rights and obligations of a Partner or Assignee (as the case may
be) hereunder and as, and to the extent, provided for herein.
Section 4.4 Transfer Generally.
(a) The term "transfer," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its Partnership Interest as a general partner in the
Partnership to another Person who becomes the General Partner, by which the
holder of a Limited Partner Interest assigns such Limited Partner Interest to
another Person who is or becomes a Limited Partner or an Assignee, and includes
a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage,
exchange or any other disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part, except
in accordance with the terms and conditions set forth in this Article IV. Any
transfer or purported transfer of a Partnership Interest not made in accordance
with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any member of the General Partner of any or all of the issued
and outstanding member interests of the General Partner.
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Section 4.5 Registration and Transfer of Limited Partner Interests.
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as it
may prescribe and subject to the provisions of Section 4.5(b), the Partnership
will provide for the registration and transfer of Limited Partner Interests.
The Transfer Agent is hereby appointed registrar and transfer agent for the
purpose of registering Common Units and transfers of such Common Units as
herein provided. The Partnership shall not recognize transfers of Certificates
evidencing Limited Partner Interests unless such transfers are effected in the
manner described in this Section 4.5. Upon surrender of a Certificate for
registration of transfer of any Limited Partner Interests evidenced by a
Certificate, and subject to the provisions of Section 4.5(b), the appropriate
officers of the General Partner on behalf of the Partnership shall execute and
deliver, and in the case of Common Units, the Transfer Agent shall countersign
and deliver, in the name of the holder or the designated transferee or
transferees, as required pursuant to the holder's instructions, one or more new
Certificates evidencing the same aggregate number and type of Limited Partner
Interests as was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 4.9, the Partnership shall not
recognize any transfer of Limited Partner Interests until the Certificates
evidencing such Limited Partner Interests are surrendered for registration of
transfer and such Certificates are accompanied by a Transfer Application duly
executed by the transferee (or the transferee's attorney-in-fact duly
authorized in writing). No charge shall be imposed by the Partnership for such
transfer; provided, that as a condition to the issuance of any new Certificate
under this Section 4.5, the Partnership may require the payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
with respect thereto.
(c) Limited Partner Interests may be transferred only in the manner described
in this Section 4.5. The transfer of any Limited Partner Interests and the
admission of any new Limited Partner shall not constitute an amendment to this
Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section 10.2,
the Record Holder of a Limited Partner Interest shall be an Assignee in respect
of such Limited Partner Interest. Limited Partners may include custodians,
nominees or any other individual or entity in its own or any representative
capacity.
(e) A transferee of a Limited Partner Interest who has completed and
delivered a Transfer Application shall be deemed to have (i) requested
admission as a Substituted Limited Partner, (ii) agreed to comply with and be
bound by and to have executed this Agreement, (iii) represented and warranted
that such transferee has the right, power and authority and, if an individual,
the capacity to enter into this Agreement, (iv) granted the powers of attorney
set forth in this Agreement and (v) given the consents and approvals and made
the waivers contained in this Agreement.
(f) The General Partner and its Affiliates shall have the right at any time
to transfer its Subordinated Units and Common Units (whether issued upon
conversion of the Subordinated Units or otherwise) to one or more Persons.
Section 4.6 Transfer of General Partner Interest.
(a) Subject to Section 4.6(c) below, prior to December 31, 2007, the General
Partner shall not transfer all or any part of its General Partner Interest to a
Person unless such transfer (i) has been approved by the prior written consent
or vote of the holders of at least a Unit Majority or (ii) is of all, but not
less than all, of its General Partner Interest to (A) an Affiliate of the
General Partner or (B) another Person in connection with the merger or
consolidation of the General Partner with or into another Person or the
transfer by the General Partner of all or substantially all of its assets to
another Person.
(b) Subject to Section 4.6(c) below, on or after December 31, 2007, the
General Partner may transfer all or any of its General Partner Interest without
Unitholder approval.
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(c) Notwithstanding anything herein to the contrary, no transfer by the
General Partner of all or any part of its General Partner Interest to another
Person shall be permitted unless (i) the transferee agrees to assume the rights
and duties of the General Partner under this Agreement and the Operating
Company Agreement and to be bound by the provisions of this Agreement and the
Operating Company Agreement, (ii) the Partnership receives an Opinion of
Counsel that such transfer would not result in the loss of limited liability of
any Limited Partner or of any member of the Operating Company or cause the
Partnership or the Operating Company to be treated as an association taxable as
a corporation or otherwise to be taxed as an entity for federal income tax
purposes (to the extent not already so treated or taxed) and (iii) such
transferee also agrees to purchase all (or the appropriate portion thereof, if
applicable) of the partnership or member interest of the General Partner as the
general partner or managing member of each other Group Member. In the case of a
transfer pursuant to and in compliance with this Section 4.6, the transferee or
successor (as the case may be) shall, subject to compliance with the terms of
Section 10.3, be admitted to the Partnership as a General Partner immediately
prior to the transfer of the General Partner Interest, and the business of the
Partnership shall continue without dissolution.
Section 4.7 Transfer of Incentive Distribution Rights.
Prior to December 31, 2007, a holder of Incentive Distribution Rights may
transfer any or all of the Incentive Distribution Rights held by such holder
without any consent of the Unitholders (a) to an Affiliate or (b) to another
Person in connection with (i) the merger or consolidation of such holder of
Incentive Distribution Rights with or into such other Person or (ii) the
transfer by such holder of all or substantially all of its assets to such other
Person. Any other transfer of the Incentive Distribution Rights prior to
December 31, 2007, shall require the prior approval of holders of at least a
Unit Majority. On or after December 31, 2007, a holder of Incentive
Distribution Rights may transfer any or all of its Incentive Distribution
Rights without Unitholder approval. The General Partner shall have the
authority (but shall not be required) to adopt such reasonable restrictions on
the transfer of Incentive Distribution Rights and requirements for registering
the transfer of Incentive Distribution Rights as the General Partner, in its
sole discretion, shall determine are necessary or appropriate.
Section 4.8 Restrictions on Transfers.
(a) Except as provided in Section 4.8(d) below, but notwithstanding the other
provisions of this Article IV, no transfer of any Partnership Interests shall
be made if such transfer would (i) violate the then applicable federal or state
securities laws or rules and regulations of the Commission, any state
securities commission or any other governmental authority with jurisdiction
over such transfer, (ii) terminate the existence or qualification of the
Partnership or the Operating Company under the laws of the jurisdiction of its
formation, or (iii) cause the Partnership or the Operating Company to be
treated as an association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes (to the extent not already so treated
or taxed).
(b) The General Partner may impose restrictions on the transfer of
Partnership Interests if a subsequent Opinion of Counsel determines that such
restrictions are necessary to avoid a significant risk of the Partnership or
the Operating Company becoming taxable as a corporation or otherwise to be
taxed as an entity for federal income tax purposes. The restrictions may be
imposed by making such amendments to this Agreement as the General Partner may
determine to be necessary or appropriate to impose such restrictions; provided,
however, that any amendment that the General Partner believes, in the exercise
of its reasonable discretion, could result in the delisting or suspension of
trading of any class of Limited Partner Interests on the principal National
Securities Exchange on which such class of Limited Partner Interests is then
traded must be approved, prior to such amendment being effected, by the holders
of at least a majority of the Outstanding Limited Partner Interests of such
class.
(c) The transfer of a Subordinated Unit that has converted into a Common Unit
shall be subject to the restrictions imposed by Section 6.7(b).
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(d) Nothing contained in this Article IV, or elsewhere in this Agreement,
shall preclude the settlement of any transactions involving Partnership
Interests entered into through the facilities of any National Securities
Exchange on which such Partnership Interests are listed for trading.
Section 4.9 Citizenship Certificates; Non-citizen Assignees.
(a) If any Group Member is or becomes subject to any federal, state or local
law or regulation that, in the reasonable determination of the General Partner,
creates a substantial risk of cancellation or forfeiture of any property in
which the Group Member has an interest based on the nationality, citizenship or
other related status of a Limited Partner or Assignee, the General Partner may
request any Limited Partner or Assignee to furnish to the General Partner,
within 30 days after receipt of such request, an executed Citizenship
Certification or such other information concerning his nationality, citizenship
or other related status (or, if the Limited Partner or Assignee is a nominee
holding for the account of another Person, the nationality, citizenship or
other related status of such Person) as the General Partner may request. If a
Limited Partner or Assignee fails to furnish to the General Partner within the
aforementioned 30-day period such Citizenship Certification or other requested
information or if upon receipt of such Citizenship Certification or other
requested information the General Partner determines, with the advice of
counsel, that a Limited Partner or Assignee is not an Eligible Citizen, the
Partnership Interests owned by such Limited Partner or Assignee shall be
subject to redemption in accordance with the provisions of Section 4.10. In
addition, the General Partner may require that the status of any such Limited
Partner or Assignee be changed to that of a Non-citizen Assignee and,
thereupon, the General Partner shall be substituted for such Non-citizen
Assignee as the Limited Partner in respect of his Limited Partner Interests.
(b) The General Partner shall, in exercising voting rights in respect of
Limited Partner Interests held by it on behalf of Non-citizen Assignees,
distribute the votes in the same ratios as the votes of Partners (including
without limitation the General Partner) in respect of Limited Partner Interests
other than those of Non-citizen Assignees are cast, either for, against or
abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have no
right to receive a distribution in kind pursuant to Section 12.4 but shall be
entitled to the cash equivalent thereof, and the Partnership shall provide cash
in exchange for an assignment of the Non-citizen Assignee's share of the
distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the Partnership from the Non-citizen
Assignee of his Limited Partner Interest (representing his right to receive his
share of such distribution in kind).
(d) At any time after he can and does certify that he has become an Eligible
Citizen, a Non-citizen Assignee may, upon application to the General Partner,
request admission as a Substituted Limited Partner with respect to any Limited
Partner Interests of such Non-citizen Assignee not redeemed pursuant to Section
4.10, and upon his admission pursuant to Section 10.2, the General Partner
shall cease to be deemed to be the Limited Partner in respect of the Non-
citizen Assignee's Limited Partner Interests.
Section 4.10 Redemption of Partnership Interests of Non-citizen Assignees.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 4.9(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee
establishes to the satisfaction of the General Partner that such Limited
Partner or Assignee is an Eligible Citizen or has transferred his Partnership
Interests to a Person who is an Eligible Citizen and who furnishes a
Citizenship Certification to the General Partner prior to the date fixed for
redemption as provided below, redeem the Partnership Interest of such Limited
Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
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Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Interests, the date fixed for
redemption, the place of payment, that payment of the redemption price will
be made upon surrender of the Certificate evidencing the Redeemable
Interests and that on and after the date fixed for redemption no further
allocations or distributions to which the Limited Partner or Assignee would
otherwise be entitled in respect of the Redeemable Interests will accrue or
be made.
(ii) The aggregate redemption price for Redeemable Interests shall be an
amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Partnership Interests of
the class to be so redeemed multiplied by the number of Partnership
Interests of each such class included among the Redeemable Interests. The
redemption price shall be paid, in the discretion of the General Partner,
in cash or by delivery of a promissory note of the Partnership in the
principal amount of the redemption price, bearing interest at the rate of
10% annually and payable in three equal annual installments of principal
together with accrued interest, commencing one year after the redemption
date.
(iii) Upon surrender by or on behalf of the Limited Partner or Assignee,
at the place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Interests, duly endorsed in blank or accompanied
by an assignment duly executed in blank, the Limited Partner or Assignee or
his duly authorized representative shall be entitled to receive the payment
therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Partnership Interests.
(b) The provisions of this Section 4.10 shall also be applicable to
Partnership Interests held by a Limited Partner or Assignee as nominee of a
Person determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.10 shall prevent the recipient of a notice of
redemption from transferring his Partnership Interest before the redemption
date if such transfer is otherwise permitted under this Agreement. Upon receipt
of notice of such a transfer, the General Partner shall withdraw the notice of
redemption, provided the transferee of such Partnership Interest certifies to
the satisfaction of the General Partner in a Citizenship Certification
delivered in connection with the Transfer Application that he is an Eligible
Citizen. If the transferee fails to make such certification, such redemption
shall be effected from the transferee on the original redemption date.
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1 Organizational Contributions.
In connection with the formation of the Partnership under the Delaware Act,
the General Partner made an initial Capital Contribution to the Partnership in
the amount of $10.00, for an interest in the Partnership and has been admitted
as the General Partner of the Partnership, and the Organizational Limited
Partner made an initial Capital Contribution to the Partnership in the amount
of $990.00 for an interest in the Partnership and has been admitted as a
Limited Partner of the Partnership. As of the Closing Date, the interest of the
Organizational Limited Partner shall be redeemed as provided in the
Contribution and Conveyance Agreement; the initial Capital Contributions of
each Partner shall thereupon be refunded; and the Organizational Limited
Partner shall cease to be a Limited Partner of the Partnership. Ninety-nine
percent of any interest or other profit that may have resulted from the
investment or other use of such initial Capital Contributions shall be
allocated and distributed to the Organizational Limited Partner, and the
balance thereof shall be allocated and distributed to the General Partner.
Section 5.2 Contributions by the General Partner and its Affiliates.
(a) On the Closing Date and pursuant to the Contribution and Conveyance
Agreement, the General Partner shall contribute to the Partnership, as a
Capital Contribution, all but 1.0101% of its member interest in the
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Operating Company in exchange for (i) the continuation of its Partnership
Interest as General Partner of the Partnership, subject to all of the rights,
privileges and duties of the General Partner under this Agreement, (ii)
1,428,571 Subordinated Units, and (iii) the Incentive Distribution Rights.
(b) On the Closing Date and pursuant to the Contribution and Conveyance
Agreement, Holdings shall contribute to the Partnership, as a Capital
Contribution, all of its member interest in the Operating Company in exchange
for 2,978,833 Subordinated Units.
(c) Upon the issuance of any additional Limited Partner Interests by the
Partnership (other than the issuance of the Common Units issued in the Initial
Offering or pursuant to the Over-Allotment Option), the General Partner shall
be required to make additional Capital Contributions equal to 1/99th of any
amount contributed to the Partnership in exchange for such additional Limited
Partner Interests. Except as set forth in the immediately preceding sentence
and Article XII, the General Partner shall not be obligated to make any
additional Capital Contributions to the Partnership.
Section 5.3 Contributions by Initial Limited Partners.
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall contribute to the Partnership cash in an amount equal to the
Issue Price per Initial Common Unit, multiplied by the number of Common Units
specified in the Underwriting Agreement to be purchased by such Underwriter at
the Closing Date. In exchange for such Capital Contributions by the
Underwriters, the Partnership shall issue Common Units to each Underwriter on
whose behalf such Capital Contribution is made in an amount equal to the
quotient obtained by dividing (i) the cash contribution to the Partnership by
or on behalf of such Underwriter by (ii) the Issue Price per Initial Common
Unit.
(b) Upon the exercise of the Over-Allotment Option, each Underwriter shall
contribute to the Partnership cash in an amount equal to the Issue Price per
Initial Common Unit, multiplied by the number of Common Units specified in the
Underwriting Agreement to be purchased by such Underwriter at the Option
Closing Date. In exchange for such Capital Contributions by the Underwriters,
the Partnership shall issue Common Units to each Underwriter on whose behalf
such Capital Contribution is made in an amount equal to the quotient obtained
by dividing (i) the cash contributions to the Partnership by or on behalf of
such Underwriter by (ii) the Issue Price per Initial Common Unit.
(c) No Limited Partner Partnership Interests will be issued or issuable as
of or at the Closing Date other than (i) the Common Units issuable pursuant to
subparagraph (a) hereof in aggregate number equal to 7,458,684, (ii) the
"Additional Units" as such term is used in the Underwriting Agreement in
aggregate number up to 1,118,803 issuable upon exercise of the Over-Allotment
Option pursuant to subparagraph (b) hereof, (ii) the 1,428,571 Subordinated
Units issuable to the General Partner and the 2,978,833 Subordinated Units
issuable to Holdings, in each case pursuant to Section 5.2 hereof, and (iii)
the Incentive Distribution Rights.
Section 5.4 Interest and Withdrawal.
No interest shall be paid by the Partnership on Capital Contributions. No
Partner or Assignee shall be entitled to the withdrawal or return of its
Capital Contribution, except to the extent, if any, that distributions made
pursuant to this Agreement or upon termination of the Partnership may be
considered as such by law and then only to the extent provided for in this
Agreement. Except to the extent expressly provided in this Agreement, no
Partner or Assignee shall have priority over any other Partner or Assignee
either as to the return of Capital Contributions or as to profits, losses or
distributions. Any such return shall be a compromise to which all Partners and
Assignees agree within the meaning of 17-502(b) of the Delaware Act.
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Section 5.5 Capital Accounts.
(a) The Partnership shall maintain for each Partner (or a beneficial owner of
Partnership Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion) owning a Partnership Interest a separate
Capital Account with respect to such Partnership Interest in accordance with
the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital
Account shall be increased by (i) the amount of all Capital Contributions made
to the Partnership with respect to such Partnership Interest pursuant to this
Agreement and (ii) all items of Partnership income and gain (including, without
limitation, income and gain exempt from tax) computed in accordance with
Section 5.5(b) and allocated with respect to such Partnership Interest pursuant
to Section 6.1, and decreased by (x) the amount of cash or Net Agreed Value of
all actual and deemed distributions of cash or property made with respect to
such Partnership Interest pursuant to this Agreement and (y) all items of
Partnership deduction and loss computed in accordance with Section 5.5(b) and
allocated with respect to such Partnership Interest pursuant to Section 6.1.
(b) For purposes of computing the amount of any item of income, gain, loss or
deduction which is to be allocated pursuant to Article VI and is to be
reflected in the Partners' Capital Accounts, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes (including,
without limitation, any method of depreciation, cost recovery or amortization
used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Company
Agreement) of all property owned by the Operating Company.
(ii) All fees and other expenses incurred by the Partnership to promote
the sale of (or to sell) a Partnership Interest that can neither be
deducted nor amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall be
allocated among the Partners pursuant to Section 6.1.
(iii) Except as otherwise provided in Treasury Regulation Section 1.704-
1(b)(2)(iv)(m), computation of all items of income, gain, loss and
deduction shall be made without regard to any election under Section 754 of
the Code which may be made by the Partnership and, as to those items
described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or
are neither currently deductible nor capitalized for federal income tax
purposes. To the extent an adjustment to the adjusted tax basis of any
Partnership asset pursuant to Section 734(b) or 743(b) of the Code is
required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to
be taken into account in determining Capital Accounts, the amount of such
adjustment in the Capital Accounts shall be treated as an item of gain or
loss.
(iv) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
5.5(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for
such depreciation, cost recovery or amortization attributable to such
property shall be determined (A) as if the adjusted basis of such property
were equal to the Carrying Value of such property immediately following
such adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income tax
purposes; provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any reasonable method
that the General Partner may adopt.
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(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
(c) (i) A transferee of a Partnership Interest shall succeed to a pro rata
portion of the Capital Account of the transferor relating to the Partnership
Interest so transferred.
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to Section 5.8
by a holder thereof (other than a transfer to an Affiliate unless the General
Partner elects to have this subparagraph 5.5(c)(ii) apply), the Capital Account
maintained for such Person with respect to its Subordinated Units or converted
Subordinated Units will (A) first, be allocated to the Subordinated Units or
converted Subordinated Units to be transferred in an amount equal to the
product of (x) the number of such Subordinated Units or converted Subordinated
Units to be transferred and (y) the Per Unit Capital Amount for a Common Unit,
and (B) second, any remaining balance in such Capital Account will be retained
by the transferor, regardless of whether it has retained any Subordinated Units
or converted Subordinated Units. Following any such allocation, the
transferor's Capital Account, if any, maintained with respect to the retained
Subordinated Units or converted Subordinated Units, if any, will have a balance
equal to the amount allocated under clause (B) hereinabove, and the
transferee's Capital Account established with respect to the transferred
Subordinated Units or converted Subordinated Units will have a balance equal to
the amount allocated under clause (A) hereinabove.
(d) (i) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
on an issuance of additional Partnership Interests for cash or Contributed
Property or the conversion of the General Partner's Combined Interest to Common
Units pursuant to Section 11.3(b), the Capital Account of all Partners and the
Carrying Value of each Partnership property immediately prior to such issuance
shall be adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property, as if such
Unrealized Gain or Unrealized Loss had been recognized on an actual sale of
each such property immediately prior to such issuance and had been allocated to
the Partners at such time pursuant to Section 6.1 in the same manner as any
item of gain or loss actually recognized during such period would have been
allocated. In determining such Unrealized Gain or Unrealized Loss, the
aggregate cash amount and fair market value of all Partnership assets
(including, without limitation, cash or cash equivalents) immediately prior to
the issuance of additional Partnership Interests shall be determined by the
General Partner using such reasonable method of valuation as it may adopt;
provided, however, that the General Partner, in arriving at such valuation,
must take fully into account the fair market value of the Partnership Interests
of all Partners at such time. The General Partner shall allocate such aggregate
value among the assets of the Partnership (in such manner as it determines in
its discretion to be reasonable) to arrive at a fair market value for
individual properties.
(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a Partner of any
Partnership property (other than a distribution of cash that is not in
redemption or retirement of a Partnership Interest), the Capital Accounts of
all Partners and the Carrying Value of all Partnership property shall be
adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as if such Unrealized Gain or
Unrealized Loss had been recognized in a sale of such property immediately
prior to such distribution for an amount equal to its fair market value, and
had been allocated to the Partners, at such time, pursuant to Section 6.1 in
the same manner as any item of gain or loss actually recognized during such
period would have been allocated. In determining such Unrealized Gain or
Unrealized Loss the aggregate cash amount and fair market value of all
Partnership assets (including, without limitation, cash or cash equivalents)
immediately prior to a distribution shall (A) in the case of an actual
distribution which is not made pursuant to Section 12.4 or in the case of a
deemed contribution and/or distribution occurring as a result of a termination
of the Partnership pursuant to Section 708 of the Code, be determined and
allocated in the same manner as that provided in Section 5.5(d)(i) or (B) in
the case of a
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liquidating distribution pursuant to Section 12.4, be determined and allocated
by the Liquidator using such reasonable method of valuation as it may adopt.
Section 5.6 Issuances of Additional Partnership Securities.
(a) Subject to Section 5.7, the Partnership may issue additional Partnership
Securities and options, rights, warrants and appreciation rights relating to
the Partnership Securities for any Partnership purpose at any time and from
time to time to such Persons for such consideration and on such terms and
conditions as shall be established by the General Partner in its sole
discretion, all without the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes, or
one or more series of any such classes, with such designations, preferences,
rights, powers and duties (which may be senior to existing classes and series
of Partnership Securities), as shall be fixed by the General Partner in the
exercise of its sole discretion, including (i) the right to share Partnership
profits and losses or items thereof; (ii) the right to share in Partnership
distributions; (iii) the rights upon dissolution and liquidation of the
Partnership; (iv) whether, and the terms and conditions upon which, the
Partnership may redeem the Partnership Security; (v) whether such Partnership
Security is issued with the privilege of conversion or exchange and, if so, the
terms and conditions of such conversion or exchange; (vi) the terms and
conditions upon which each Partnership Security will be issued, evidenced by
certificates and assigned or transferred; and (vii) the right, if any, of each
such Partnership Security to vote on Partnership matters, including matters
relating to the relative rights, preferences and privileges of such Partnership
Security.
(c) The General Partner is hereby authorized and directed to take all actions
that it deems necessary or appropriate in connection with (i) each issuance of
Partnership Securities and options, rights, warrants and appreciation rights
relating to Partnership Securities pursuant to this Section 5.6, (ii) the
conversion of the General Partner Interest and Incentive Distribution Rights
into Units pursuant to the terms of this Agreement, (iii) the admission of
Additional Limited Partners and (iv) all additional issuances of Partnership
Securities. The General Partner is further authorized and directed to specify
the relative rights, powers and duties of the holders of the Units or other
Partnership Securities being so issued. The General Partner shall do all things
necessary to comply with the Delaware Act and is authorized and directed to do
all things it deems to be necessary or advisable in connection with any future
issuance of Partnership Securities or in connection with the conversion of the
General Partner Interest and Incentive Distribution Rights into Units pursuant
to the terms of this Agreement, including compliance with any statute, rule,
regulation or guideline of any federal, state or other governmental agency or
any National Securities Exchange on which the Units or other Partnership
Securities are listed for trading.
Section 5.7 Limitations on Issuance of Additional Partnership Securities.
The issuance of Partnership Securities pursuant to Section 5.6 shall be
subject to the following restrictions and limitations:.
(a) During the Subordination Period, the Partnership shall not issue (and
shall not issue any options, rights, warrants or appreciation rights
relating to) an aggregate of more than 7,458,684 additional Parity Units
without the prior approval of the holders of a Unit Majority. In applying
this limitation, there shall be excluded Common Units and other Parity
Units issued (A) in connection with the exercise of the Over-Allotment
Option, (B) in accordance with Sections 5.7(b) and 5.7(c), (C) upon
conversion of Subordinated Units pursuant to Section 5.8, (D) upon
conversion of the General Partner Interest and Incentive Distribution
Rights pursuant to Section 11.3(b), (E) pursuant to the employee benefit
plans of the General Partner, the Partnership or any other Group Member and
(F) in the event of a combination or subdivision of Common Units.
(b) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the approval of
the Unitholders, if the proceeds from such issuance are used exclusively to
repay up to $50.0 million of indebtedness of a Group Member where the
aggregate
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amount of distributions that would have been paid with respect to such
newly issued Units or Partnership Securities, plus the related
distributions on the General Partner Interest and on the managing member
interest in the Operating Company in respect of the four-Quarter period
ending prior to the first day of the Quarter in which the issuance is to be
consummated (assuming such additional Units or other Partnership Securities
had been Outstanding throughout such period and that distributions equal to
the distributions that were actually paid on the Outstanding Units during
the period were paid on such additional Units or other Partnership
Securities) did not exceed the interest costs actually incurred during such
period on the indebtedness that is to be repaid (or, if such indebtedness
was not outstanding throughout the entire period, would have been incurred
had such indebtedness been outstanding for the entire period). In the event
that the Partnership is required to pay a prepayment penalty in connection
with the repayment of such indebtedness, for purposes of the foregoing test
the number of Parity Units issued to repay such indebtedness shall be
deemed increased by the number of Parity Units that would need to be issued
to pay such penalty.
(c) During the Subordination Period, the Partnership shall not issue (and
shall not issue any options, rights, warrants or appreciation rights
relating to) additional Partnership Securities having rights to
distributions or in liquidation ranking prior or senior to the Common
Units, without the prior approval of the holders of a Unit Majority.
(d) No fractional Units shall be issued by the Partnership.
Section 5.8 Conversion of Subordinated Units.
(a) A total of 1,101,851 of the Outstanding Subordinated Units will convert
into Common Units on a one-for-one basis on the first day after the Record Date
for distribution in respect of any Quarter ending on or after December 31,
2000, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding Common
Units and Subordinated Units with respect to each of the three consecutive,
non-overlapping four-Quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on all of
the Outstanding Common Units and Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the two
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Common Units and Subordinated Units that were outstanding
during such periods on a fully diluted basis (i.e., taking into account for
purposes of such determination all Outstanding Common Units, all
Outstanding Subordinated Units, all Common Units and Subordinated Units
issuable upon exercise of employee options that have, as of the date of
determination, already vested or are scheduled to vest prior to the end of
the quarter immediately following the quarter with respect to which such
determination is made, and all Common Units and Subordinated Units that
have as of the date of determination, been earned by but not yet issued to
management of the Partnership in respect of incentive compensation), plus
the related distribution on the General Partner Interest and on the
managing member interest in the Operating Company; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units is
zero.
(b) An additional 1,101,851 of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis on the first day after the
Record Date for distribution in respect of any Quarter ending on or after
December 31, 2001, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding Common
Units and Subordinated Units with respect to each of the three consecutive,
non-overlapping four-Quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on all of
the Outstanding Common Units and Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the two
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum
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Quarterly Distribution on all of the Common Units and Subordinated Units
that were outstanding during such periods on a fully diluted basis (i.e.,
taking into account for purposes of such determination all Outstanding
Common Units, all Outstanding Subordinated Units, all Common Units and
Subordinated Units issuable upon exercise of employee options that have, as
of the date of determination, already vested or are scheduled to vest prior
to the end of the quarter immediately following the quarter with respect to
which such determination is made, and all Common Units and Subordinated
Units that have as of the date of determination, been earned by but not yet
issued to management of the Partnership in respect of incentive
compensation), plus the related distribution on the General Partner
Interest and on the managing member interest in the Operating Company; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units is
zero;
provided, however, that the conversion of Subordinated Units pursuant to this
Section 5.8(b) may not occur until at least one year following the conversion
of Subordinated Units pursuant to Section 5.8(a).
(c) In the event that less than all of the Outstanding Subordinated Units
shall convert into Common Units pursuant to Section 5.8(a) or 5.8(b) at a time
when there shall be more than one holder of Subordinated Units, then, unless
all of the holders of Subordinated Units shall agree to a different allocation,
the Subordinated Units that are to be converted into Common Units shall be
allocated among the holders of Subordinated Units pro rata based on the number
of Subordinated Units held by each such holder.
(d) Any Subordinated Units that are not converted into Common Units pursuant
to Sections 5.8(a) and (b) shall convert into Common Units on a one-for-one
basis on the first day following the Record Date for distributions in respect
of the final Quarter of the Subordination Period.
(e) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units on
a one-for-one basis as set forth in, and pursuant to the terms of, Section
11.4.
(f) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
Section 5.9 Limited Preemptive Right.
Except as provided in this Section 5.9 and in Section 5.2, no Person shall
have any preemptive, preferential or other similar right with respect to the
issuance of any Partnership Security, whether unissued, held in the treasury or
hereafter created. The General Partner shall have the right, which it may from
time to time assign in whole or in part to any of its Affiliates, to purchase
Partnership Securities from the Partnership whenever, and on the same terms
that, the Partnership issues Partnership Securities to Persons other than the
General Partner and its Affiliates, to the extent necessary to maintain the
Percentage Interests of the General Partner and its Affiliates equal to that
which existed immediately prior to the issuance of such Partnership Securities.
Section 5.10 Splits and Combination.
(a) Subject to Sections 5.10(d), 6.6 and 6.9 (dealing with adjustments of
distribution levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including any
Common Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a
number of Units (including the number of Subordinated Units that may convert
prior to the end of the Subordination Period and the number of additional
Parity Units that may be issued pursuant to Section 5.7 without a Unitholder
vote) are proportionately adjusted retroactive to the beginning of the
Partnership.
(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the General Partner shall select a Record Date as of
which the distribution, subdivision or combination shall be
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effective and shall send notice thereof at least 20 days prior to such Record
Date to each Record Holder as of a date not less than 10 days prior to the date
of such notice. The General Partner also may cause a firm of independent public
accountants selected by it to calculate the number of Partnership Securities to
be held by each Record Holder after giving effect to such distribution,
subdivision or combination. The General Partner shall be entitled to rely on
any certificate provided by such firm as conclusive evidence of the accuracy of
such calculation.
(c) Promptly following any such distribution, subdivision or combination, the
Partnership may issue Certificates to the Record Holders of Partnership
Securities as of the applicable Record Date representing the new number of
Partnership Securities held by such Record Holders, or the General Partner may
adopt such other procedures as it may deem appropriate to reflect such changes.
If any such combination results in a smaller total number of Partnership
Securities Outstanding, the Partnership shall require, as a condition to the
delivery to a Record Holder of such new Certificate, the surrender of any
Certificate held by such Record Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions of Section 5.7(e) and this Section 5.10(d), each fractional Unit
shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to
the next higher Unit).
Section 5.11 Fully Paid and Non-Assessable Nature of Limited Partner Interests.
All Limited Partner Interests issued pursuant to, and in accordance with the
requirements of, this Article V shall be fully paid and non-assessable Limited
Partner Interests in the Partnership, except as such non-assessability may be
affected by Section 17-607 of the Delaware Act.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1 Allocations for Capital Account Purposes.
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 5.5(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
(a) Net Income. After giving effect to the special allocations set forth
in Section 6.1(d), Net Income for each taxable year and all items of
income, gain, loss and deduction taken into account in computing Net Income
for such taxable year shall be allocated as follows:
(i) First, 100% to the General Partner in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to
Section 6.1(b)(iii) for all previous taxable years until the aggregate
Net Income allocated to the General Partner pursuant to this Section
6.1(a)(i) for the current taxable year and all previous taxable years
is equal to the aggregate Net Losses allocated to the General Partner
pursuant to Section 6.1(b)(iii) for all previous taxable years;
(ii) Second, 1% to the General Partner in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to
Section 6.1(b)(ii) for all previous taxable years and 99% to the
Unitholders, in accordance with their respective Percentage Interests,
until the aggregate Net Income allocated to such Partners pursuant to
this Section 6.1(a)(ii) for the current taxable year and all previous
taxable years is equal to the aggregate Net Losses allocated to such
Partners pursuant to Section 6.1(b)(ii) for all previous taxable years;
and
(iii) Third, the balance, if any, 100% to the General Partner and the
Unitholders in accordance with their respective Percentage Interests.
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(b) Net Losses. After giving effect to the special allocations set forth
in Section 6.1(d), Net Losses for each taxable period and all items of
income, gain, loss and deduction taken into account in computing Net Losses
for such taxable period shall be allocated as follows:
(i) First, 1% to the General Partner and 99% to the Unitholders, in
accordance with their respective Percentage Interests, until the
aggregate Net Losses allocated pursuant to this Section 6.1(b)(i) for
the current taxable year and all previous taxable years is equal to the
aggregate Net Income allocated to such Partners pursuant to Section
6.1(a)(iii) for all previous taxable years; provided that the Net
Losses shall not be allocated pursuant to this Section 6.1(b)(i) to the
extent that such allocation would cause any Unitholder to have a
deficit balance in its Adjusted Capital Account at the end of such
taxable year (or increase any existing deficit balance in its Adjusted
Capital Account);
(ii) Second, 1% to the General Partner and 99% to the Unitholders in
accordance with their respective Percentage Interests; provided, that
Net Losses shall not be allocated pursuant to this Section 6.1(b)(ii)
to the extent that such allocation would cause any Unitholder to have a
deficit balance in its Adjusted Capital Account at the end of such
taxable year (or increase any existing deficit balance in its Adjusted
Capital Account);
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 6.1(d), all items of income, gain, loss
and deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same
manner as such Net Termination Gain or Net Termination Loss is allocated
hereunder. All allocations under this Section 6.1(c) shall be made after
Capital Account balances have been adjusted by all other allocations
provided under this Section 6.1 and after all distributions of Available
Cash provided under Sections 6.4 and 6.5 have been made; provided, however,
that solely for purposes of this Section 6.1(c), Capital Accounts shall not
be adjusted for distributions made pursuant to Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Gain shall be
allocated among the Partners in the following manner (and the Capital
Accounts of the Partners shall be increased by the amount so allocated
in each of the following subclauses, in the order listed, before an
allocation is made pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the
total deficit balances in the Capital Accounts of all Partners,
until each such Partner has been allocated Net Termination Gain
equal to any such deficit balance in its Capital Account;
(B) Second, 99% to all Unitholders holding Common Units, in
proportion to their relative Percentage Interests, and 1% to the
General Partner until the Capital Account in respect of each Common
Unit then Outstanding is equal to the sum of (1) its Unrecovered
Capital plus (2) the Minimum Quarterly Distribution for the Quarter
during which the Liquidation Date occurs, reduced by any
distribution pursuant to Section 6.4(a)(i) or (b)(i) with respect to
such Common Unit for such Quarter (the amount determined pursuant to
this clause (2) is hereinafter defined as the "Unpaid MQD"), plus
(3) any then existing Cumulative Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or is
deemed to be recognized) prior to the expiration of the
Subordination Period, 99% to all Unitholders holding Subordinated
Units, in proportion to their relative Percentage Interests, and 1%
to the General Partner until the Capital Account in respect of each
Subordinated Unit then Outstanding equals the sum of (1) its
Unrecovered Capital, determined for the taxable year (or portion
thereof) to which this allocation of gain relates, plus (2) the
Minimum Quarterly Distribution for the Quarter during which the
Liquidation Date occurs, reduced by any distribution pursuant to
Section 6.4(a)(iii) with respect to such Subordinated Unit for such
Quarter;
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(D) Fourth, 99% to all Unitholders, in accordance with their
relative Percentage Interests, and 1% to the General Partner until
the Capital Account in respect of each Common Unit then Outstanding
is equal to the sum of (1) its Unrecovered Capital, plus (2) the
Unpaid MQD, plus (3) any then existing Cumulative Common Unit
Arrearage, plus (4) the excess of (aa) the First Target Distribution
less the Minimum Quarterly Distribution for each Quarter of the
Partnership's existence over (bb) the cumulative per Unit amount of
any distributions of Operating Surplus that was distributed pursuant
to Sections 6.4(a)(iv) and 6.4(b)(ii) (the sum of (1) plus (2) plus
(3) plus (4) is hereinafter defined as the "First Liquidation Target
Amount");
(E) Fifth, 85.8673% to all Unitholders, in accordance with their
relative Percentage Interests, 13.1327% to the holders of the
Incentive Distribution Rights, Pro Rata, and 1% to the General
Partner until the Capital Account in respect of each Common Unit
then Outstanding is equal to the sum of (1) the First Liquidation
Target Amount, plus (2) the excess of (aa) the Second Target
Distribution less the First Target Distribution for each Quarter of
the Partnership's existence over (bb) the cumulative per Unit amount
of any distributions of Operating Surplus that was distributed
pursuant to Sections 6.4(a)(v) and 6.4(b)(iii) (the sum of (1) plus
(2) is hereinafter defined as the "Second Liquidation Target
Amount");
(F) Sixth, 75.7653% to all Unitholders, in accordance with their
relative Percentage Interests, 23.2347% to the holders of the
Incentive Distribution Rights, Pro Rata, and 1% to the General
Partner until the Capital Account in respect of each Common Unit
then Outstanding is equal to the sum of (1) the Second Liquidation
Target Amount, plus (2) the excess of (aa) the Third Target
Distribution less the Second Target Distribution for each Quarter of
the Partnership's existence over (bb) the cumulative per Unit amount
of any distributions of Operating Surplus that was distributed
pursuant to Sections 6.4(a)(vi) and 6.4(b)(iv); and
(G) Finally, any remaining amount 50.5102% to all Unitholders, in
accordance with their relative Percentage Interests, 48.4898% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to
the General Partner.
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Loss shall be
allocated among the Partners in the following manner:
(A) First, if such Net Termination Loss is recognized (or is
deemed to be recognized) prior to the conversion of the last
Outstanding Subordinated Unit, 99% to the Unitholders holding
Subordinated Units, in proportion to their relative Percentage
Interests, and 1% to the General Partner until the Capital Account
in respect of each Subordinated Unit then Outstanding has been
reduced to zero;
(B) Second, 99% to all Unitholders holding Common Units, in
proportion to their relative Percentage Interests, and 1% to the
General Partner until the Capital Account in respect of each Common
Unit then Outstanding has been reduced to zero; and
(C) Third, the balance, if any, 100% to the General Partner.
(d) Special Allocations. Notwithstanding any other provision of this
Section 6.1, the following special allocations shall be made for such
taxable period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 6.1, if there is a net decrease in
Partnership Minimum Gain during any Partnership taxable period, each
Partner shall be allocated items of Partnership income and gain for
such period (and, if necessary, subsequent periods) in the manner and
amounts provided in Treasury Regulation Sections 1.704-2(f)(6), 1.704-
2(g)(2) and 1.704-2(j)(2)(i), or any successor provision. For purposes
of this Section 6.1(d), each Partner's Adjusted Capital Account balance
shall be determined, and the allocation of income or gain required
hereunder shall be effected, prior to the application of any other
allocations pursuant to this Section 6.1(d) with respect to such
taxable period (other than an allocation pursuant to
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Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section 6.1(d)(i) is
intended to comply with the Partnership Minimum Gain chargeback
requirement in Treasury Regulation Section 1.704-2(f) and shall be
interpreted consistently therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum
Gain. Notwithstanding the other provisions of this Section 6.1 (other
than Section 6.1(d)(i)), except as provided in Treasury Regulation
Section 1.704-2(i)(4), if there is a net decrease in Partner
Nonrecourse Debt Minimum Gain during any Partnership taxable period,
any Partner with a share of Partner Nonrecourse Debt Minimum Gain at
the beginning of such taxable period shall be allocated items of
Partnership income and gain for such period (and, if necessary,
subsequent periods) in the manner and amounts provided in Treasury
Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any
successor provisions. For purposes of this Section 6.1(d), each
Partner's Adjusted Capital Account balance shall be determined, and the
allocation of income or gain required hereunder shall be effected,
prior to the application of any other allocations pursuant to this
Section 6.1(d), other than Section 6.1(d)(i) and other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii), with
respect to such taxable period. This Section 6.1(d)(ii) is intended to
comply with the chargeback of items of income and gain requirement in
Treasury Regulation Section 1.704-2(i)(4) and shall be interpreted
consistently therewith.
(iii) Priority Allocations.
(A) If the amount of cash or the Net Agreed Value of any property
distributed (except cash or property distributed pursuant to Section
12.4) to any Unitholder with respect to its Units for a taxable year
is greater (on a per Unit basis) than the amount of cash or the Net
Agreed Value of property distributed to the other Unitholders with
respect to their Units (on a per Unit basis), then (1) each
Unitholder receiving such greater cash or property distribution
shall be allocated gross income in an amount equal to the product of
(aa) the amount by which the distribution (on a per Unit basis) to
such Unitholder exceeds the distribution (on a per Unit basis) to
the Unitholders receiving the smallest distribution and (bb) the
number of Units owned by the Unitholder receiving the greater
distribution; and (2) the General Partner shall be allocated gross
income in an aggregate amount equal to 1/99 of the sum of the
amounts allocated in clause (1) above.
(B) After the application of Section 6.1(d)(iii)(A), all or any
portion of the remaining items of Partnership gross income or gain
for the taxable period, if any, shall be allocated 100% to the
holders of Incentive Distribution Rights, Pro Rata, until the
aggregate amount of such items allocated to the holders of Incentive
Distribution Rights pursuant to this paragraph 6.1(d)(iii)(B) for
the current taxable year and all previous taxable years is equal to
the cumulative amount of all Incentive Distributions made to the
holders of Incentive Distribution Rights from the Closing Date to a
date 45 days after the end of the current taxable year.
(iv) Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-
1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership
income and gain shall be specially allocated to such Partner in an
amount and manner sufficient to eliminate, to the extent required by
the Treasury Regulations promulgated under Section 704(b) of the Code,
the deficit balance, if any, in its Adjusted Capital Account created by
such adjustments, allocations or distributions as quickly as possible
unless such deficit balance is otherwise eliminated pursuant to Section
6.1(d)(i) or (ii).
(v) Gross Income Allocations. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable
period in excess of the sum of (A) the amount such Partner is required
to restore pursuant to the provisions of this Agreement and (B) the
amount such Partner is deemed obligated to restore pursuant to Treasury
Regulation Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be
specially allocated items of Partnership gross income and gain in the
amount of such excess as quickly as possible; provided, that an
allocation pursuant to this Section 6.1(d)(v) shall be made only if and
to the extent that such Partner would have a deficit balance in its
Capital Account as adjusted after all other allocations provided for in
this Section 6.1 have been tentatively made as if this Section
6.1(d)(v) were not in this Agreement.
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(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in
its good faith discretion that the Partnership's Nonrecourse Deductions
must be allocated in a different ratio to satisfy the safe harbor
requirements of the Treasury Regulations promulgated under Section
704(b) of the Code, the General Partner is authorized, upon notice to
the other Partners, to revise the prescribed ratio to the numerically
closest ratio that does satisfy such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner that
bears the Economic Risk of Loss with respect to the Partner Nonrecourse
Debt to which such Partner Nonrecourse Deductions are attributable in
accordance with Treasury Regulation Section 1.704-2(i). If more than
one Partner bears the Economic Risk of Loss with respect to a Partner
Nonrecourse Debt, such Partner Nonrecourse Deductions attributable
thereto shall be allocated between or among such Partners in accordance
with the ratios in which they share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities
of the Partnership in excess of the sum of (A) the amount of
Partnership Minimum Gain and (B) the total amount of Nonrecourse Built-
in Gain shall be allocated among the Partners in accordance with their
respective Percentage Interests.
(ix) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b)
or 743(c) of the Code is required, pursuant to Treasury Regulation
Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining
Capital Accounts, the amount of such adjustment to the Capital Accounts
shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis),
and such item of gain or loss shall be specially allocated to the
Partners in a manner consistent with the manner in which their Capital
Accounts are required to be adjusted pursuant to such Section of the
Treasury Regulations.
(x) Economic Uniformity. At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of
the Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, after taking
into account allocations pursuant to Section 6.1(d)(iii), shall be
allocated 100% to each Partner holding Subordinated Units that are
Outstanding as of the termination of the Subordination Period ("Final
Subordinated Units") in the proportion of the number of Final
Subordinated Units held by such Partner to the total number of Final
Subordinated Units then Outstanding, until each such Partner has been
allocated an amount of gross income or gain which increases the Capital
Account maintained with respect to such Final Subordinated Units to an
amount equal to the product of (A) the number of Final Subordinated
Units held by such Partner and (B) the Per Unit Capital Amount for a
Common Unit. The purpose of this allocation is to establish uniformity
between the Capital Accounts underlying Final Subordinated Units and
the Capital Accounts underlying Common Units held by Persons other than
the General Partner and its Affiliates immediately prior to the
conversion of such Final Subordinated Units into Common Units. This
allocation method for establishing such economic uniformity will only
be available to the General Partner if the method for allocating the
Capital Account maintained with respect to the Subordinated Units
between the transferred and retained Subordinated Units pursuant to
Section 5.5(c)(ii) does not otherwise provide such economic uniformity
to the Final Subordinated Units.
(xi) Curative Allocation.
(A) Notwithstanding any other provision of this Section 6.1, other
than the Required Allocations, the Required Allocations shall be
taken into account in making the Agreed Allocations so that, to the
extent possible, the net amount of items of income, gain, loss and
deduction allocated to each Partner pursuant to the Required
Allocations and the Agreed Allocations, together, shall be equal to
the net amount of such items that would have been allocated to each
such Partner under the Agreed Allocations had the Required
Allocations and the
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related Curative Allocation not otherwise been provided in this
Section 6.1. Notwithstanding the preceding sentence, Required
Allocations relating to (1) Nonrecourse Deductions shall not be
taken into account except to the extent that there has been a
decrease in Partnership Minimum Gain and (2) Partner Nonrecourse
Deductions shall not be taken into account except to the extent that
there has been a decrease in Partner Nonrecourse Debt Minimum Gain.
Allocations pursuant to this Section 6.1(d)(xi)(A) shall only be
made with respect to Required Allocations to the extent the General
Partner reasonably determines that such allocations will otherwise
be inconsistent with the economic agreement among the Partners.
Further, allocations pursuant to this Section 6.1(d)(xi)(A) shall be
deferred with respect to allocations pursuant to clauses (1) and (2)
hereof to the extent the General Partner reasonably determines that
such allocations are likely to be offset by subsequent Required
Allocations.
(B) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of
Section 6.1(d)(xi)(A) in whatever order is most likely to minimize
the economic distortions that might otherwise result from the
Required Allocations, and (2) divide all allocations pursuant to
Section 6.1(d)(xi)(A) among the Partners in a manner that is likely
to minimize such economic distortions.
(xii) Corrective Allocations. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event or any
recognition of a Net Termination Loss, the following rules shall apply:
(A) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 5.5(d) hereof), the General Partner
shall allocate additional items of gross income and gain away from
the holders of Incentive Distribution Rights, Pro Rata, to the
Unitholders and the General Partner, or additional items of
deduction and loss away from the Unitholders and the General Partner
to the holders of Incentive Distribution Rights, Pro Rata, to the
extent that the Additional Book Basis Derivative Items allocated to
the Unitholders or the General Partner exceed their Share of
Additional Book Basis Derivative Items. For this purpose, the
Unitholders and the General Partner shall be treated as being
allocated Additional Book Basis Derivative Items to the extent that
such Additional Book Basis Derivative Items have reduced the amount
of income that would otherwise have been allocated to the
Unitholders or the General Partner under the Partnership Agreement
(e.g., Additional Book Basis Derivative Items taken into account in
computing cost of goods sold would reduce the amount of book income
otherwise available for allocation among the Partners). Any
allocation made pursuant to this Section 6.1(d)(xii)(A) shall be
made after all of the other Agreed Allocations have been made as if
this Section 6.1(d)(xii) were not in this Agreement and, to the
extent necessary, shall require the reallocation of items that have
been allocated pursuant to such other Agreed Allocations.
(B) In the case of any negative adjustments to the Capital
Accounts of the Partners resulting from a Book-Down Event or from
the recognition of a Net Termination Loss, such negative adjustment
(1) shall first be allocated, to the extent of the Aggregate
Remaining Net Positive Adjustments, in such a manner, as reasonably
determined by the General Partner, that to the extent possible the
aggregate Capital Accounts of the Partners will equal the amount
which would have been the Capital Account balance of the Partners if
no prior Book-Up Events had occurred, and (2) any negative
adjustment in excess of the Aggregate Remaining Net Positive
Adjustments shall be allocated pursuant to Section 6.1(c) hereof.
(C) In making the allocations required under this Section
6.1(d)(xii), the General Partner, in its sole discretion, may apply
whatever conventions or other methodology it deems reasonable to
satisfy the purpose of this Section 6.1(d)(xii).
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Section 6.2 Allocations for Tax Purposes.
(a) Except as otherwise provided herein, for federal income tax purposes,
each item of income, gain, loss and deduction shall be allocated among the
Partners in the same manner as its correlative item of "book" income, gain,
loss or deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners in the manner provided under
Section 704(c) of the Code that takes into account the variation between
the Agreed Value of such property and its adjusted basis at the time of
contribution; and (B) any item of Residual Gain or Residual Loss
attributable to a Contributed Property shall be allocated among the
Partners in the same manner as its correlative item of "book" gain or loss
is allocated pursuant to Section 6.1.
(ii) (A) In the case of an Adjusted Property, such items shall (1) first,
be allocated among the Partners in a manner consistent with the principles
of Section 704(c) of the Code to take into account the Unrealized Gain or
Unrealized Loss attributable to such property and the allocations thereof
pursuant to Section 5.5(d)(i) or 5.5(d)(ii), and (2) second, in the event
such property was originally a Contributed Property, be allocated among the
Partners in a manner consistent with Section 6.2(b)(i)(A); and (B) any item
of Residual Gain or Residual Loss attributable to an Adjusted Property
shall be allocated among the Partners in the same manner as its correlative
item of "book" gain or loss is allocated pursuant to Section 6.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the preservation
of uniformity of the Limited Partner Interests (or any class or classes
thereof), the General Partner shall have sole discretion to (i) adopt such
conventions as it deems appropriate in determining the amount of depreciation,
amortization and cost recovery deductions; (ii) make special allocations for
federal income tax purposes of income (including, without limitation, gross
income) or deductions; and (iii) amend the provisions of this Agreement as
appropriate (x) to reflect the proposal or promulgation of Treasury Regulations
under Section 704(b) or Section 704(c) of the Code or (y) otherwise to preserve
or achieve uniformity of the Limited Partner Interests (or any class or classes
thereof). The General Partner may adopt such conventions, make such allocations
and make such amendments to this Agreement as provided in this Section 6.2(c)
only if such conventions, allocations or amendments would not have a material
adverse effect on the Partners, the holders of any class or classes of Limited
Partner Interests issued and Outstanding or the Partnership, and if such
allocations are consistent with the principles of Section 704 of the Code.
(d) The General Partner in its discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the extent
of the unamortized Book-Tax Disparity) using a predetermined rate derived from
the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite any inconsistency of such
approach with Proposed Treasury Regulation Section 1.168-2(n), Treasury
Regulation Section 1.167(c)-l(a)(6) or the legislative history of Section 197
of the Code. If the General Partner determines that such reporting position
cannot reasonably be taken, the General Partner may adopt depreciation and
amortization conventions under which all purchasers acquiring Limited Partner
Interests in the same month would receive depreciation and amortization
deductions, based upon the same applicable rate as if they had purchased a
direct interest in the Partnership's property. If the General Partner chooses
not to utilize such aggregate method, the General Partner may use any other
reasonable depreciation and amortization conventions to preserve the uniformity
of the intrinsic tax characteristics of any Limited Partner Interests that
would not have
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a material adverse effect on the Limited Partners or the Record Holders of any
class or classes of Limited Partner Interests.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after
taking into account other required allocations of gain pursuant to this Section
6.2, be characterized as Recapture Income in the same proportions and to the
same extent as such Partners (or their predecessors in interest) have been
allocated any deductions directly or indirectly giving rise to the treatment of
such gains as Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof shall be determined without regard to any
election under Section 754 of the Code which may be made by the Partnership;
provided, however, that such allocations, once made, shall be adjusted as
necessary or appropriate to take into account those adjustments permitted or
required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction attributable to
a transferred Partnership Interest, shall for federal income tax purposes, be
determined on an annual basis and prorated on a monthly basis and shall be
allocated to the Partners as of the opening of the principal National
Securities Exchange on which the Common Units are then traded on the first
Business Day of each month; provided, however, that such items for the period
beginning on the Closing Date and ending on the last day of the month in which
the Option Closing Date or the expiration of the Over-allotment Option occurs
shall be allocated to the Partners as of the opening of the Nasdaq National
Market on the first Business Day of the next succeeding month; and provided,
further, that gain or loss on a sale or other disposition of any assets of the
Partnership other than in the ordinary course of business shall be allocated to
the Partners as of the opening of the Nasdaq National Market (or such other
National Securities Exchange on which the Common Units are then primarily
traded) on the first Business Day of the month in which such gain or loss is
recognized for federal income tax purposes. The General Partner may revise,
alter or otherwise modify such methods of allocation as it determines
necessary, to the extent permitted or required by Section 706 of the Code and
the regulations or rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article VI shall instead be made to the beneficial owner of
Limited Partner Interests held by a nominee in any case in which the nominee
has furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion.
Section 6.3 Requirement and Characterization of Distributions; Distributions to
Record Holders.
(a) Within 45 days following the end of each Quarter commencing with the
Quarter ending on March 31, 1998, an amount equal to 100% of Available Cash
with respect to such Quarter shall, subject to Section 17-607 of the Delaware
Act, be distributed in accordance with this Article VI by the Partnership to
the Partners as of the Record Date selected by the General Partner in its
reasonable discretion. All amounts of Available Cash distributed by the
Partnership on any date from any source shall be deemed to be Operating Surplus
until the sum of all amounts of Available Cash theretofore distributed by the
Partnership to the Partners pursuant to Section 6.4 equals the Operating
Surplus from the Closing Date through the close of the immediately preceding
Quarter. Any remaining amounts of Available Cash distributed by the Partnership
on such date shall, except as otherwise provided in Section 6.5, be deemed to
be "Capital Surplus." All distributions required to be made under this
Agreement shall be made subject to Section 17-607 of the Delaware Act.
(b) Notwithstanding Section 6.3(a), in the event of the dissolution and
liquidation of the Partnership, all receipts received during or after the
Quarter in which the Liquidation Date occurs, other than from borrowings
described in (a)(ii) of the definition of Available Cash, shall be applied and
distributed solely in accordance with, and subject to the terms and conditions
of, Section 12.4.
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(c) The General Partner shall have the discretion to treat taxes paid by the
Partnership on behalf of, or amounts withheld with respect to, all or less than
all of the Partners, as a distribution of Available Cash to such Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid by
the Partnership, directly or through the Transfer Agent or through any other
Person or agent, only to the Record Holder of such Partnership Interest as of
the Record Date set for such distribution. Such payment shall constitute full
payment and satisfaction of the Partnership's liability in respect of such
payment, regardless of any claim of any Person who may have an interest in such
payment by reason of an assignment or otherwise.
Section 6.4 Distributions of Available Cash from Operating Surplus.
(a) During Subordination Period. Available Cash with respect to any Quarter
within the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5 shall, subject to Section 17-607 of the
Delaware Act, be distributed as follows, except as otherwise required by
Section 5.6(b) in respect of additional Partnership Securities issued pursuant
thereto:
(i) First, 99% to the Unitholders holding Common Units, Pro Rata, and 1%
to the General Partner until there has been distributed in respect of each
Common Unit then Outstanding an amount equal to the Minimum Quarterly
Distribution for such Quarter;
(ii) Second, 99% to the Unitholders holding Common Units, Pro Rata, and
1% to the General Partner until there has been distributed in respect of
each Common Unit then Outstanding an amount equal to the Cumulative Common
Unit Arrearage existing with respect to such Quarter;
(iii) Third, 99% to the Unitholders holding Subordinated Units, Pro Rata,
and 1% to the General Partner until there has been distributed in respect
of each Subordinated Unit then Outstanding an amount equal to the Minimum
Quarterly Distribution for such Quarter;
(iv) Fourth, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target Distribution
over the Minimum Quarterly Distribution for such Quarter;
(v) Fifth, 85.8673% to all Unitholders, Pro Rata, 13.1327% to the holders
of the Incentive Distribution Rights, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the Second Target Distribution
over the First Target Distribution for such Quarter;
(vi) Sixth, 75.7653% to all Unitholders, Pro Rata, 23.2347% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such Quarter; and
(vii) Thereafter, 50.5102% to all Unitholders, Pro Rata, 48.4898% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner;
provided, that no distributions may be made pursuant to Sections 6.4(a)(iii),
(iv), (v), (vi) or (vii) with respect to any Quarter within the Subordination
Period if the Consolidated Fixed Charge Coverage Ratio for the Four-Quarter
Period ended with such Quarter is equal to or less than 1.75 to 1.00; provided,
further, if the Minimum Quarterly Distribution, the First Target Distribution,
the Second Target Distribution and the Third Target Distribution have been
reduced to zero pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section
6.4(a)(vii).
(b) After Subordination Period. Available Cash with respect to any Quarter
after the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5, subject to Section 17-607
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of the Delaware Act, shall be distributed as follows, except as otherwise
required by Section 5.6(b) in respect of additional Partnership Securities
issued pursuant thereto:
(i) First, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution for such
Quarter;
(ii) Second, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target Distribution
over the Minimum Quarterly Distribution for such Quarter;
(iii) Third, 85.8673% to all Unitholders, Pro Rata, and 13.1327% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(iv) Fourth, 75.7653% to all Unitholders, Pro Rata, and 23.2347% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such Quarter; and
(v) Thereafter, 50.5102% to all Unitholders, Pro Rata, and 48.4898% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a),
the distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section
6.4(b)(v).
Section 6.5 Distributions of Available Cash from Capital Surplus.
Available Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3(a) shall, subject to Section 17-607 of the Delaware
Act, be distributed, unless the provisions of Section 6.3 require otherwise,
99% to all Unitholders, Pro Rata, and 1% to the General Partner until a
hypothetical holder of a Common Unit acquired on the Closing Date has received
with respect to such Common Unit, during the period since the Closing Date
through such date, distributions of Available Cash that are deemed to be
Capital Surplus in an aggregate amount equal to the Initial Unit Price.
Available Cash that is deemed to be Capital Surplus shall then be distributed
99% to all Unitholders holding Common Units, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Common Unit then
Outstanding an amount equal to the Cumulative Common Unit Arrearage.
Thereafter, all Available Cash shall be distributed as if it were Operating
Surplus and shall be distributed in accordance with Section 6.4.
Section 6.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels.
(a) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution, Third Target Distribution, Common Unit Arrearages and
Cumulative Common Unit Arrearages shall be proportionately adjusted in the
event of any distribution, combination or subdivision (whether effected by a
distribution payable in Units or otherwise) of Units or other Partnership
Securities in accordance with Section 5.10. In the event of a distribution of
Available Cash that is deemed to be from Capital Surplus, the then applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted proportionately
downward to equal the product obtained by multiplying the otherwise applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, as the case may be, by a fraction
of which the numerator is the Unrecovered Capital of the Common Units
immediately after giving effect to such distribution and of which the
denominator is the Unrecovered Capital of the Common Units immediately prior to
giving effect to such distribution.
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(b) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution shall also be subject to
adjustment pursuant to Section 6.9.
Section 6.7 Special Provisions Relating to the Holders of Subordinated Units.
(a) Except with respect to the right to vote on or approve matters requiring
the vote or approval of a percentage of the holders of Outstanding Common Units
and the right to participate in allocations of income, gain, loss and deduction
and distributions made with respect to Common Units, the holder of a
Subordinated Unit shall have all of the rights and obligations of a Unitholder
holding Common Units hereunder; provided, however, that immediately upon the
conversion of Subordinated Units into Common Units pursuant to Section 5.8, the
Unitholder holding a Subordinated Unit shall possess all of the rights and
obligations of a Unitholder holding Common Units hereunder, including the right
to vote as a Common Unitholder and the right to participate in allocations of
income, gain, loss and deduction and distributions made with respect to Common
Units; provided, however, that such converted Subordinated Units shall remain
subject to the provisions of Sections 5.5(c)(ii), 6.1(d)(x) and 6.7(b).
(b) The Unitholder holding a Subordinated Unit which has converted into a
Common Unit pursuant to Section 5.8 shall not be issued a Common Unit
Certificate pursuant to Section 4.1, and shall not be permitted to transfer its
converted Subordinated Units to a Person which is not an Affiliate of the
holder until such time as the General Partner determines, based on advice of
counsel, that a converted Subordinated Unit should have, as a substantive
matter, like intrinsic economic and federal income tax characteristics, in all
material respects, to the intrinsic economic and federal income tax
characteristics of an Initial Common Unit. In connection with the condition
imposed by this Section 6.7(b), the General Partner may take whatever
reasonable steps are required to provide economic uniformity to the converted
Subordinated Units in preparation for a transfer of such converted Subordinated
Units, including the application of Sections 5.5(c)(ii) and 6.1(d)(x);
provided, however, that no such steps may be taken that would have a material
adverse effect on the Unitholders holding Common Units represented by Common
Unit Certificates.
Section 6.8 Special Provisions Relating to the Holders of Incentive
Distribution Rights.
Notwithstanding anything to the contrary set forth in this Agreement, the
holders of the Incentive Distribution Rights (a) shall (i) possess the rights
and obligations provided in this Agreement with respect to a Limited Partner
pursuant to Articles III and VII and (ii) have a Capital Account as a Partner
pursuant to Section 5.5 and all other provisions related thereto and (b) shall
not (i) be entitled to vote on any matters requiring the approval or vote of
the holders of Outstanding Units, (ii) be entitled to any distributions other
than as provided in Sections 6.4(a)(v), (vi) and (vii), 6.4(b)(iii), (iv) and
(v), and 12.4 or (iii) be allocated items of income, gain, loss or deduction
other than as specified in this Article VI.
Section 6.9 Entity-Level Taxation.
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes the Partnership or
the Operating Company to be treated as an association taxable as a corporation
or otherwise subjects the Partnership or the Operating Company to entity-level
taxation for federal income tax purposes, the then applicable Minimum Quarterly
Distribution, First Target Distribution, Second Target Distribution and Third
Target Distribution shall be adjusted to equal the product obtained by
multiplying (a) the amount thereof by (b) one minus the sum of (i) the highest
marginal federal corporate (or other entity, as applicable) income tax rate of
the Partnership or the Operating Company for the taxable year of the
Partnership or the Operating Company in which such Quarter occurs (expressed as
a percentage) plus (ii) the effective overall state and local income tax rate
(expressed as a percentage) applicable to the Partnership or the Operating
Company for the calendar year next preceding the calendar year in which such
Quarter occurs (after taking into account the benefit of any deduction
allowable for federal income tax purposes with respect to the payment of state
and local income taxes), but only to the extent of the increase in such rates
resulting from such legislation or interpretation. Such effective overall state
and local income tax rate shall be determined for the taxable year
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next preceding the first taxable year during which the Partnership or the
Operating Company is taxable for federal income tax purposes as an association
taxable as a corporation or is otherwise subject to entity-level taxation by
determining such rate as if the Partnership or the Operating Company had been
subject to such state and local taxes during such preceding taxable year.
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1 Management.
(a) The General Partner shall conduct, direct and manage all activities of
the Partnership. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership shall be
exclusively vested in the General Partner, and no Limited Partner or Assignee
shall have any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted a general
partner of a limited partnership under applicable law or which are granted to
the General Partner under any other provision of this Agreement, the General
Partner, subject to Section 7.3, shall have full power and authority to do all
things and on such terms as it, in its sole discretion, may deem necessary or
appropriate to conduct the business of the Partnership, to exercise all powers
set forth in Section 2.5 and to effectuate the purposes set forth in Section
2.4, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness, including
indebtedness that is convertible into Partnership Securities, and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 7.3);
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership Group, the
lending of funds to other Persons (including the Operating Company), the
repayment of obligations of the Partnership Group and the making of capital
contributions to any member of the Partnership Group;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, corporations or other relationships
(including the acquisition of interests in, and the contributions of
property to, the Operating Company from time to time) subject to the
restrictions set forth in Section 2.4;
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(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Limited Partner
Interests from, or requesting that trading be suspended on, any such
exchange (subject to any prior approval that may be required under Section
4.8);
(xiii) unless restricted or prohibited by Section 5.7, the purchase, sale
or other acquisition or disposition of Partnership Securities, or the
issuance of additional options, rights, warrants and appreciation rights
relating to Partnership Securities; and
(xiv) the undertaking of any action in connection with the Partnership's
participation in the Operating Company as a member.
(b) Notwithstanding any other provision of this Agreement, the Operating
Company Agreement, the Delaware Act or any applicable law, rule or regulation,
each of the Partners and Assignees and each other Person who may acquire an
interest in Partnership Securities hereby (i) approves, ratifies and confirms
the execution, delivery and performance by the parties thereto of the Operating
Company Agreement, the Underwriting Agreement, the Contribution and Conveyance
Agreement, the agreements and other documents filed as exhibits to the
Registration Statement, and the other agreements described in or filed as a
part of the Registration Statement; (ii) agrees that the General Partner (on
its own or through any officer of the Partnership) is authorized to execute,
deliver and perform the agreements referred to in clause (i) of this sentence
and the other agreements, acts, transactions and matters described in or
contemplated by the Registration Statement on behalf of the Partnership without
any further act, approval or vote of the Partners or the Assignees or the other
Persons who may acquire an interest in Partnership Securities; and (iii) agrees
that the execution, delivery or performance by the General Partner, any Group
Member or any Affiliate of any of them, of this Agreement or any agreement
authorized or permitted under this Agreement (including the exercise by the
General Partner or any Affiliate of the General Partner of the rights accorded
pursuant to Article XV), shall not constitute a breach by the General Partner
of any duty that the General Partner may owe the Partnership or the Limited
Partners or any other Persons under this Agreement (or any other agreements) or
of any duty stated or implied by law or equity.
Section 7.2 Certificate of Limited Partnership.
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act and shall use all reasonable efforts to cause to be filed such
other certificates or documents as may be determined by the General Partner in
its sole discretion to be reasonable and necessary or appropriate for the
formation, continuation, qualification and operation of a limited partnership
(or a partnership in which the limited partners have limited liability) in the
State of Delaware or any other state in which the Partnership may elect to do
business or own property. To the extent that such action is determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate of Limited Partnership and do all things to maintain the
Partnership as a limited partnership (or a partnership or other entity in which
the limited partners have limited liability) under the laws of the State of
Delaware or of any other state in which the Partnership may elect to do
business or own property. Subject to the terms of Section 3.4(a), the General
Partner shall not be required, before or after filing, to deliver or mail a
copy of the Certificate of Limited Partnership, any qualification document or
any amendment thereto to any Limited Partner.
Section 7.3 Restrictions on General Partner's Authority.
(a) The General Partner may not, without written approval of the specific act
by holders of all of the Outstanding Limited Partner Interests or by other
written instrument executed and delivered by holders of all of
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the Outstanding Limited Partner Interests subsequent to the date of this
Agreement, take any action in contravention of this Agreement, including,
except as otherwise provided in this Agreement, (i) committing any act that
would make it impossible to carry on the ordinary business of the Partnership;
(ii) possessing Partnership property, or assigning any rights in specific
Partnership property, for other than a Partnership purpose; (iii) admitting a
Person as a Partner; (iv) amending this Agreement in any manner; or (v)
transferring its interest as general partner of the Partnership.
(b) Except as provided in Articles XII and XIV, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related
transactions or approve on behalf of the Partnership the sale, exchange or
other disposition of all or substantially all of the assets of the Operating
Company, without the approval of holders of at least a Unit Majority; provided
however that this provision shall not preclude or limit the General Partner's
ability to mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the assets of the Partnership or Operating Company and
shall not apply to any forced sale of any or all of the assets of the
Partnership or Operating Company pursuant to the foreclosure of, or other
realization upon, any such encumbrance. Without the approval of holders of at
least a Unit Majority, the General Partner shall not, on behalf of the
Partnership, (i) consent to any amendment to the Operating Company Agreement
or, except as expressly permitted by Section 7.9(d), take any action permitted
to be taken by a member of the Operating Company, in either case, that would
have a material adverse effect on the Partnership as a member of the Operating
Company or (ii) except as permitted under Sections 4.6, 11.1 and 11.2, elect or
cause the Partnership to elect a successor general partner of the Partnership
or manager of the Operating Company.
Section 7.4 Reimbursement of the General Partner.
(a) Except as provided in this Section 7.4 and elsewhere in this Agreement or
in the Operating Company Agreement, the General Partner shall not be
compensated for its services as general partner or managing member of any Group
Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such other
reasonable basis as the General Partner may determine in its sole discretion,
for (i) all direct and indirect expenses it incurs or payments it makes on
behalf of the Partnership (including salary, bonus, incentive compensation and
other amounts paid to any Person including Affiliates of the General Partner to
perform services for the Partnership or for the General Partner in the
discharge of its duties to the Partnership), and (ii) all other necessary or
appropriate expenses allocable to the Partnership or otherwise reasonably
incurred by the General Partner in connection with operating the Partnership's
business (including expenses allocated to the General Partner by its
Affiliates). The General Partner shall determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the General
Partner in its sole discretion. Reimbursements pursuant to this Section 7.4
shall be in addition to any reimbursement to the General Partner as a result of
indemnification pursuant to Section 7.7.
(c) Subject to Section 5.7, the General Partner, in its sole discretion and
without the approval of the Limited Partners (who shall have no right to vote
in respect thereof), may propose and adopt on behalf of the Partnership
employee benefit plans, employee programs and employee practices (including
plans, programs and practices involving the issuance of Partnership Securities
or options to purchase Partnership Securities), or cause the Partnership to
issue Partnership Securities in connection with, or pursuant to, any employee
benefit plan, employee program or employee practice maintained or sponsored by
the General Partner or any of its Affiliates, in each case for the benefit of
employees of the General Partner, any Group Member or any Affiliate, or any of
them, in respect of services performed, directly or indirectly, for the benefit
of the Partnership Group. The Partnership agrees to issue and sell to the
General Partner or any of its Affiliates any Partnership Securities that the
General Partner or such Affiliate is obligated to provide to any employees
pursuant to any such employee benefit plans, employee programs or employee
practices. Expenses incurred by the General Partner in connection with any such
plans, programs and practices (including the net cost to the General Partner or
such Affiliate of Partnership Securities purchased by the General Partner or
such Affiliate from the Partnership to fulfill options or awards under such
plans, programs and practices) shall be reimbursed in accordance with Section
7.4(b). Any
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and all obligations of the General Partner under any employee benefit plans,
employee programs or employee practices adopted by the General Partner as
permitted by this Section 7.4(c) shall constitute obligations of the General
Partner hereunder and shall be assumed by any successor General Partner
approved pursuant to Section 11.1 or 11.2 or the transferee of or successor to
all of the General Partner's Partnership Interest as the General Partner in the
Partnership pursuant to Section 4.6.
Section 7.5 Outside Activities.
(a) After the Closing Date, the General Partner, for so long as it is the
General Partner of the Partnership (i) agrees that its sole business will be to
act as the general partner or managing member of the Partnership, the Operating
Company, and any other partnership or limited liability company of which the
Partnership or the Operating Company is, directly or indirectly, a partner or
managing member and to undertake activities that are ancillary or related
thereto (including being a limited partner in the partnership), (ii) shall not
engage in any business or activity or incur any debts or liabilities except in
connection with or incidental to (A) its performance as general partner of one
or more Group Members or as described in or contemplated by the Registration
Statement or (B) the acquiring, owning or disposing of debt or equity
securities in any Group Member and (iii) shall not, and shall cause its
Affiliates not to, engage in any Restricted Activity.
(b) Except as specifically restricted by Section 7.5(a), each Indemnitee
(other than the General Partner) shall have the right to engage in businesses
of every type and description and other activities for profit and to engage in
and possess an interest in other business ventures of any and every type or
description, whether in businesses engaged in or anticipated to be engaged in
by any Group Member, independently or with others, including business interests
and activities (other than Restricted Activities in North America) in direct
competition with the business and activities of any Group Member, and none of
the same shall constitute a breach of this Agreement or any duty express or
implied by law to any Group Member or any Partner or Assignee. Neither any
Group Member, any Limited Partner nor any other Person shall have any rights by
virtue of this Agreement, the Operating Company Agreement or the partnership
relationship established hereby or thereby in any business ventures of any
Indemnitee.
(c) Subject to the terms of Section 7.5(a) and 7.5(b), but otherwise
notwithstanding anything to the contrary in this Agreement, (i) the engaging in
competitive activities by any Indemnitees (other than the General Partner) in
accordance with the provisions of this Section 7.5 is hereby approved by the
Partnership and all Partners and (ii) it shall be deemed not to be a breach of
the General Partner's fiduciary duty or any other obligation of any type
whatsoever of the General Partner for the Indemnitees (other than the General
Partner) to engage in such business interests and activities in preference to
or to the exclusion of the Partnership (including, without limitation, the
General Partner and the Indemnities shall have no obligation to present
business opportunities to the Partnership).
(d) The General Partner and any of its Affiliates may acquire Partnership
Securities in addition to those acquired on the Closing Date and, except as
otherwise provided in this Agreement, shall be entitled to exercise all rights
of the General Partner or Limited Partner, as applicable, relating to such
Partnership Securities.
(e) The term "Affiliates" when used in Sections 7.5(a) and 7.5(b) with
respect to the General Partner shall not include any Group Member or any
Subsidiary of the Group Member.
(f) Anything in this Agreement to the contrary notwithstanding, to the extent
that provisions of Sections 7.7, 7.8, 7.9, 7.10 or other Sections of this
Agreement purport or are interpreted to have the effect of restricting the
fiduciary duties that might otherwise, as a result of Delaware or other
applicable law, be owed by the General Partner to the Partnership and its
Limited Partners, or to constitute a waiver or consent by the Limited Partners
to any such restriction, such provisions shall be inapplicable and have no
effect in determining whether the General Partner has complied with its
fiduciary duties in connection with determinations made by it under this
Section 7.5.
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Section 7.6 Loans from the General Partner; Loans or Contributions from the
Partnership; Contracts with Affiliates; Certain Restrictions on the
General Partner.
(a) The General Partner or its Affiliates may lend to any Group Member, and
any Group Member may borrow from the General Partner or any of its Affiliates,
funds needed or desired by the Group Member for such periods of time and in
such amounts as the General Partner may determine; provided, however, that in
any such case the lending party may not charge the borrowing party interest at
a rate greater than the rate that would be charged the borrowing party or
impose terms less favorable to the borrowing party than would be charged or
imposed on the borrowing party by unrelated lenders on comparable loans made on
an arm's-length basis (without reference to the lending party's financial
abilities or guarantees). The borrowing party shall reimburse the lending party
for any costs (other than any additional interest costs) incurred by the
lending party in connection with the borrowing of such funds. For purposes of
this Section 7.6(a) and Section 7.6(b), the term "Group Member" shall include
any Affiliate of a Group Member that is controlled by the Group Member. No
Group Member may lend funds to the General Partner or any of its Affiliates
(other than another Group Member).
(b) The Partnership may lend or contribute to any Group Member, and any Group
Member may borrow from the Partnership, funds on terms and conditions
established in the sole discretion of the General Partner; provided, however,
that the Partnership may not charge the Group Member interest at a rate less
than the rate that would be charged to the Group Member (without reference to
the General Partner's financial abilities or guarantees) by unrelated lenders
on comparable loans. The foregoing authority shall be exercised by the General
Partner in its sole discretion and shall not create any right or benefit in
favor of any Group Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement with any
of its Affiliates to, render services to a Group Member or to the General
Partner in the discharge of its duties as general partner of the Partnership.
Any services rendered to a Group Member by the General Partner or any of its
Affiliates shall be on terms that are fair and reasonable to the Partnership;
provided, however, that the requirements of this Section 7.6(c) shall be deemed
satisfied as to (i) any transaction approved by Special Approval, (ii) any
transaction, the terms of which are no less favorable to the Partnership Group
than those generally being provided to or available from unrelated third
parties or (iii) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership Group), is
equitable to the Partnership Group. The provisions of Section 7.4 shall apply
to the rendering of services described in this Section 7.6(c).
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the
requirements of this Section 7.6(e) shall be deemed to be satisfied as to (i)
the transactions effected pursuant to Sections 5.2 and 5.3, the Contribution
and Conveyance Agreement and any other transactions described in or
contemplated by the Registration Statement, (ii) any transaction approved by
Special Approval, (iii) any transaction, the terms of which are no less
favorable to the Partnership than those generally being provided to or
available from unrelated third parties, or (iv) any transaction that, taking
into account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or
advantageous to the Partnership), is equitable to the Partnership. With respect
to any contribution of assets to the Partnership in exchange for Partnership
Securities, the Conflicts Committee, in determining whether the appropriate
number of Partnership Securities are being issued, may take into account, among
other things, the fair market value of the assets, the liquidated and
contingent liabilities assumed, the tax basis in the assets, the extent to
which tax-only allocations to the transferor will protect the existing partners
of the Partnership against a low tax basis, and such other factors as the
Conflicts Committee deems relevant under the circumstances.
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(f) The General Partner and its Affiliates will have no obligation to permit
any Group Member to use any facilities or assets of the General Partner and its
Affiliates, except as may be provided in contracts entered into from time to
time specifically dealing with such use, nor shall there be any obligation on
the part of the General Partner or its Affiliates to enter into such contracts.
(g) Without limitation of Sections 7.6(a) through 7.6(f), and notwithstanding
anything to the contrary in this Agreement, the existence of the conflicts of
interest described in the Registration Statement are hereby approved by all
Partners.
Section 7.7 Indemnification.
(a) To the fullest extent permitted by law but subject to the limitations
expressly provided in this Agreement, all Indemnitees shall be indemnified and
held harmless by the Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including legal fees and
expenses), judgments, fines, penalties, interest, settlements or other amounts
arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as an Indemnitee; provided, that in each
case the Indemnitee acted in good faith and in a manner that such Indemnitee
reasonably believed to be in, or (in the case of a Person other than the
General Partner) not opposed to, the best interests of the Partnership and,
with respect to any criminal proceeding, had no reasonable cause to believe its
conduct was unlawful; provided, further, no indemnification pursuant to this
Section 7.7 shall be available to the General Partner with respect to its
obligations incurred pursuant to the Underwriting Agreement or the Contribution
and Conveyance Agreement (other than obligations incurred by the General
Partner on behalf of the Partnership or the Operating Company). The termination
of any action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere, or its equivalent, shall not create a
presumption that the Indemnitee acted in a manner contrary to that specified
above. Any indemnification pursuant to this Section 7.7 shall be made only out
of the assets of the Partnership, it being agreed that the General Partner
shall not be personally liable for such indemnification and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
7.7(a) in defending any claim, demand, action, suit or proceeding shall, from
time to time, be advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Partnership
of any undertaking by or on behalf of the Indemnitee to repay such amount if it
shall be determined that the Indemnitee is not entitled to be indemnified as
authorized in this Section 7.7.
(c) The indemnification provided by this Section 7.7 shall be in addition to
any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Limited Partner Interests
entitled to vote on such matter, as a matter of law or otherwise, both as to
actions in the Indemnitee's capacity as an Indemnitee and as to actions in any
other capacity (including any capacity under the Underwriting Agreement), and
shall continue as to an Indemnitee who has ceased to serve in such capacity and
shall inure to the benefit of the heirs, successors, assigns and administrators
of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the General
Partner, its Affiliates and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expense that
may be incurred by such Person in connection with the Partnership's activities
or such Person's activities on behalf of the Partnership, regardless of whether
the Partnership would have the power to indemnify such Person against such
liability under the provisions of this Agreement.
(e) For purposes of this Section 7.7, the Partnership shall be deemed to have
requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership
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also imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall constitute "fines" within the meaning of Section 7.7(a); and action taken
or omitted by it with respect to any employee benefit plan in the performance
of its duties for a purpose reasonably believed by it to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be for a
purpose which is in, or not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 7.7 or any provision
hereof shall in any manner terminate, reduce or impair the right of any past,
present or future Indemnitee to be indemnified by the Partnership, nor the
obligations of the Partnership to indemnify any such Indemnitee under and in
accordance with the provisions of this Section 7.7 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
Section 7.8 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in this Agreement, no
Indemnitee shall be liable for monetary damages to the Partnership, the Limited
Partners, the Assignees or any other Persons who have acquired interests in the
Partnership Securities, for losses sustained or liabilities incurred as a
result of any act or omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 7.1(a), the General Partner may exercise any of the powers granted to
it by this Agreement and perform any of the duties imposed upon it hereunder
either directly or by or through its agents, and the General Partner shall not
be responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(c) To the extent that, at law or in equity, an Indemnitee has duties
(including fiduciary duties) and liabilities relating thereto to the
Partnership or to the Partners, the General Partner and any other Indemnitee
acting in connection with the Partnership's business or affairs shall not be
liable to the Partnership or to any Partner for its good faith reliance on the
provisions of this Agreement. The provisions of this Agreement, to the extent
that they restrict or otherwise modify the duties and liabilities of an
Indemnitee otherwise existing at law or in equity, are agreed by the Partners
to replace such other duties and liabilities of such Indemnitee.
(d) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership, the Limited Partners, the
General Partner, and the Partnership's and General Partner's directors,
officers and employees under this Section 7.8 as in effect immediately prior to
such amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be
asserted.
Section 7.9 Resolution of Conflicts of Interest.
(a) Unless otherwise expressly provided in this Agreement or the Operating
Company Agreement, whenever a potential conflict of interest exists or arises
between the General Partner or any of its Affiliates, on
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the one hand, and the Partnership, the Operating Company, any Partner or any
Assignee, on the other, any resolution or course of action by the General
Partner or its Affiliates in respect of such conflict of interest shall be
permitted and deemed approved by all Partners, and shall not constitute a
breach of this Agreement, of the Operating Company Agreement, of any agreement
contemplated herein or therein, or of any duty stated or implied by law or
equity, if the resolution or course of action is, or by operation of this
Agreement is deemed to be, fair and reasonable to the Partnership. The General
Partner shall be authorized but not required in connection with its resolution
of such conflict of interest to seek Special Approval of such resolution. Any
conflict of interest and any resolution of such conflict of interest shall be
conclusively deemed fair and reasonable to the Partnership if such conflict of
interest or resolution is (i) approved by Special Approval (as long as the
material facts known to the General Partner or any of its Affiliates regarding
any proposed transaction were disclosed to the Conflicts Committee at the time
it gave its approval), (ii) on terms no less favorable to the Partnership than
those generally being provided to or available from unrelated third parties or
(iii) fair to the Partnership, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership). The General
Partner may also adopt a resolution or course of action that has not received
Special Approval. The General Partner (including the Conflicts Committee in
connection with Special Approval) shall be authorized in connection with its
determination of what is "fair and reasonable" to the Partnership and in
connection with its resolution of any conflict of interest to consider (A) the
relative interests of any party to such conflict, agreement, transaction or
situation and the benefits and burdens relating to such interest; (B) any
customary or accepted industry practices and any customary or historical
dealings with a particular Person; (C) any applicable generally accepted
accounting practices or principles; and (D) such additional factors as the
General Partner (including the Conflicts Committee) determines in its sole
discretion to be relevant, reasonable or appropriate under the circumstances.
Nothing contained in this Agreement, however, is intended to nor shall it be
construed to require the General Partner (including the Conflicts Committee) to
consider the interests of any Person other than the Partnership. In the absence
of bad faith by the General Partner, the resolution, action or terms so made,
taken or provided by the General Partner with respect to such matter shall not
constitute a breach of this Agreement or any other agreement contemplated
herein or a breach of any standard of care or duty imposed herein or therein
or, to the extent permitted by law, under the Delaware Act or any other law,
rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a
grant of similar authority or latitude, except as otherwise provided herein,
the General Partner or such Affiliate shall be entitled to consider only such
interests and factors as it desires and shall have no duty or obligation to
give any consideration to any interest of, or factors affecting, the
Partnership, the Operating Company, any Limited Partner or any Assignee, (ii)
it may make such decision in its sole discretion (regardless of whether there
is a reference to "sole discretion" or "discretion") unless another express
standard is provided for, or (iii) in "good faith" or under another express
standard, the General Partner or such Affiliate shall act under such express
standard and shall not be subject to any other or different standards imposed
by this Agreement, the Operating Company Agreement, any other agreement
contemplated hereby or under the Delaware Act or any other law, rule or
regulation. In addition, any actions taken by the General Partner or such
Affiliate consistent with the standards of "reasonable discretion" set forth in
the definitions of Available Cash or Operating Surplus shall not constitute a
breach of any duty of the General Partner to the Partnership or the Limited
Partners. The General Partner shall have no duty, express or implied, to sell
or otherwise dispose of any asset of the Partnership Group other than in the
ordinary course of business. No borrowing by any Group Member or the approval
thereof by the General Partner shall be deemed to constitute a breach of any
duty of the General Partner to the Partnership or the Limited Partners by
reason of the fact that the purpose or effect of such borrowing is directly or
indirectly to (A) enable distributions to the General Partner or its Affiliates
(including in their capacities as Limited Partners) to exceed 1% of the total
amount distributed to all partners or (B) hasten the expiration of the
Subordination Period or the conversion of any Subordinated Units into Common
Units.
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(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Unitholders hereby authorize the General Partner, on behalf of the
Partnership as a partner or member of a Group Member, to approve of actions by
the general partner or managing member of such Group Member similar to those
actions permitted to be taken by the General Partner pursuant to this Section
7.9.
Section 7.10 Other Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture or other
paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion (including an Opinion of Counsel) of such Persons as
to matters that the General Partner reasonably believes to be within such
Person's professional or expert competence shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its powers
or obligations hereunder, to act through any of its duly authorized officers, a
duly appointed attorney or attorneys-in-fact or the duly authorized officers of
the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit the
General Partner to act under this Agreement or any other agreement contemplated
by this Agreement and to make any decision pursuant to the authority prescribed
in this Agreement, so long as such action is reasonably believed by the General
Partner to be in, or not inconsistent with, the best interests of the
Partnership.
Section 7.11 Purchase or Sale of Partnership Securities.
The General Partner may cause the Partnership to purchase or otherwise
acquire Partnership Securities (other than Incentive Distribution Rights);
provided that, except as permitted pursuant to Section 4.10, the General
Partner may not cause any Group Member to purchase Subordinated Units during
the Subordination Period. As long as Partnership Securities are held by any
Group Member, such Partnership Securities shall not be considered Outstanding
for any purpose, except as otherwise provided herein. The General Partner or
any Affiliate of the General Partner may also purchase or otherwise acquire and
sell or otherwise dispose of Partnership Securities for its own account,
subject to the provisions of Articles IV and X.
Section 7.12 Registration Rights of the General Partner and its Affiliates.
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 7.12, any Person that is an Affiliate
of the General Partner at the date hereof notwithstanding that it may later
cease to be an Affiliate of the General Partner) holds Partnership Securities
that it desires to sell and (ii) Rule 144 of the Securities Act (or any
successor rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of Partnership Securities
(the "Holder") to dispose of the number of Partnership Securities it desires to
sell at the time it desires to do so without registration under the Securities
Act, then upon the request of the General Partner or any of its Affiliates, the
Partnership shall file with the Commission as promptly as practicable after
receiving such request, and use all reasonable efforts to cause to become
effective and remain effective for a period of not less than six months
following its effective date or such shorter period as shall terminate when all
Partnership Securities covered by such registration statement have been sold, a
registration statement under the Securities Act registering the offering and
sale of the number of
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Partnership Securities specified by the Holder; provided, however, that the
Partnership shall not be required to effect more than three registrations
pursuant to this Section 7.12(a); and provided further, however, that if the
Conflicts Committee determines in its good faith judgment that a postponement
of the requested registration for up to six months would be in the best
interests of the Partnership and its Partners due to a pending transaction,
investigation or other event, the filing of such registration statement or the
effectiveness thereof may be deferred for up to six months, but not thereafter.
In connection with any registration pursuant to the immediately preceding
sentence, the Partnership shall promptly prepare and file (x) such documents as
may be necessary to register or qualify the securities subject to such
registration under the securities laws of such states as the Holder shall
reasonably request; provided, however, that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Partnership would
become subject to general service of process or to taxation or qualification to
do business as a foreign corporation or partnership doing business in such
jurisdiction solely as a result of such registration, and (y) such documents as
may be necessary to apply for listing or to list the Partnership Securities
subject to such registration on such National Securities Exchange as the Holder
shall reasonably request, and do any and all other acts and things that may
reasonably be necessary or advisable to enable the Holder to consummate a
public sale of such Partnership Securities in such states. Except as set forth
in Section 7.12(c), all costs and expenses of any such registration and
offering (other than the underwriting discounts and commissions) shall be paid
by the Partnership, without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include such
number or amount of securities held by the Holder in such registration
statement as the Holder shall request. If the proposed offering pursuant to
this Section 7.12(b) shall be an underwritten offering, then, in the event that
the managing underwriter or managing underwriters of such offering advise the
Partnership and the Holder in writing that in their opinion the inclusion of
all or some of the Holder's Partnership Securities would adversely and
materially affect the success of the offering, the Partnership shall include in
such offering only that number or amount, if any, of securities held by the
Holder which, in the opinion of the managing underwriter or managing
underwriters, will not so adversely and materially affect the offering. Except
as set forth in Section 7.12(c), all costs and expenses of any such
registration and offering (other than the underwriting discounts and
commissions) shall be paid by the Partnership, without reimbursement by the
Holder.
(c) If underwriters are engaged in connection with any registration referred
to in this Section 7.12, the Partnership shall provide indemnification,
representations, covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters. Further, in
addition to and not in limitation of the Partnership's obligation under Section
7.7, the Partnership shall, to the fullest extent permitted by law, indemnify
and hold harmless the Holder, its officers, directors and each Person who
controls the Holder (within the meaning of the Securities Act) and any agent
thereof (collectively, "Indemnified Persons") against any losses, claims,
demands, actions, causes of action, assessments, damages, liabilities (joint or
several), costs and expenses (including interest, penalties and reasonable
attorneys' fees and disbursements), resulting to, imposed upon, or incurred by
the Indemnified Persons, directly or indirectly, under the Securities Act or
otherwise (hereinafter referred to in this Section 7.12(c) as a "claim" and in
the plural as "claims") based upon, arising out of or resulting from any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which any Partnership Securities were registered
under the Securities Act or any state securities or Blue Sky laws, in any
preliminary prospectus (if used prior to the effective date of such
registration statement), or in any summary or final prospectus or in any
amendment or supplement thereto (if used during the period the Partnership is
required to keep the registration statement current), or arising out of, based
upon or resulting from the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
made therein not misleading; provided, however, that the Partnership shall not
be liable to any Indemnified Person to the extent that any such claim arises
out of, is based upon or results from an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
such preliminary, summary or final prospectus or such amendment or supplement,
in
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reliance upon and in conformity with written information furnished to the
Partnership by or on behalf of such Indemnified Person specifically for use in
the preparation thereof.
(d) The provisions of Section 7.12(a) and 7.12(b) shall continue to be
applicable with respect to the General Partner (and any of the General
Partner's Affiliates) after it ceases to be a Partner of the Partnership,
during a period of two years subsequent to the effective date of such cessation
and for so long thereafter as is required for the Holder to sell all of the
Partnership Securities with respect to which it has requested during such two-
year period inclusion in a registration statement otherwise filed or that a
registration statement be filed; provided, however, that the Partnership shall
not be required to file successive registration statements covering the same
Partnership Securities for which registration was demanded during such two-year
period. The provisions of Section 7.12(c) shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
7.12 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present
intent to offer such shares for distribution, (iii) describe the nature or
method of the proposed offer and sale of Partnership Securities, and (iv)
contain the undertaking of such Person to provide all such information and
materials and take all action as may be required in order to permit the
Partnership to comply with all applicable requirements in connection with the
registration of such Partnership Securities.
Section 7.13 Reliance by Third Parties.
(a) Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the General Partner authorized by the General
Partner to act on behalf of and in the name of the Partnership has full power
and authority to encumber, sell or otherwise use in any manner any and all
assets of the Partnership and to enter into any authorized contracts on behalf
of the Partnership, and such Person shall be entitled to deal with the General
Partner or any such officer as if it were the Partnership's sole party in
interest, both legally and beneficially. Each Limited Partner hereby waives any
and all defenses or other remedies that may be available against such Person to
contest, negate or disaffirm any action of the General Partner or any such
officer in connection with any such dealing. In no event shall any Person
dealing with the General Partner or any such officer or its representatives be
obligated to ascertain that the terms of the Agreement have been complied with
or to inquire into the necessity or expedience of any act or action of the
General Partner or any such officer or its representatives. Each and every
certificate, document or other instrument executed on behalf of the Partnership
by the General Partner or its representatives shall be conclusive evidence in
favor of any and every Person relying thereon or claiming thereunder that (a)
at the time of the execution and delivery of such certificate, document or
instrument, this Agreement was in full force and effect, (b) the Person
executing and delivering such certificate, document or instrument was duly
authorized and empowered to do so for and on behalf of the Partnership and (c)
such certificate, document or instrument was duly executed and delivered in
accordance with the terms and provisions of this Agreement and is binding upon
the Partnership.
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting.
The General Partner shall keep or cause to be kept at the principal office of
the Partnership appropriate books and records with respect to the Partnership's
business, including all books and records necessary to provide to the Limited
Partners any information required to be provided pursuant to Section 3.4(a).
Any books and records maintained by or on behalf of the Partnership in the
regular course of its business, including the record of the Record Holders and
Assignees of Units or other Partnership Securities, books of account and
records of Partnership proceedings, may be kept on, or be in the form of,
computer disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; provided, that the books
and
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records so maintained are convertible into clearly legible written form within
a reasonable period of time. The books of the Partnership shall be maintained,
for financial reporting purposes, on an accrual basis in accordance with U.S.
GAAP.
Section 8.2 Fiscal Year.
The fiscal year of the Partnership shall be a fiscal year ending December 31.
Section 8.3 Reports.
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause
to be mailed or furnished to each Record Holder of a Unit as of a date selected
by the General Partner in its discretion, an annual report containing financial
statements of the Partnership for such fiscal year of the Partnership,
presented in accordance with U.S. GAAP, including a balance sheet and
statements of operations, Partnership equity and cash flows, such statements to
be audited by a firm of independent public accountants selected by the General
Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the General
Partner shall cause to be mailed or furnished to each Record Holder of a Unit,
as of a date selected by the General Partner in its discretion, a report
containing unaudited financial statements of the Partnership and such other
information as may be required by applicable law, regulation or rule of any
National Securities Exchange on which the Units are listed for trading, or as
the General Partner determines to be necessary or appropriate.
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information.
The Partnership shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax
reporting purposes with respect to a taxable year shall be furnished to them
within 90 days of the close of the calendar year in which the Partnership's
taxable year ends. The classification, realization and recognition of income,
gain, losses and deductions and other items shall be on the accrual method of
accounting for federal income tax purposes.
Section 9.2 Tax Elections.
(a) The Partnership shall make the election under Section 754 of the Code in
accordance with applicable regulations thereunder, subject to the reservation
of the right to seek to revoke any such election upon the General Partner's
determination that such revocation is in the best interests of the Limited
Partners. Notwithstanding any other provision herein contained, for the
purposes of computing the adjustments under Section 743(b) of the Code, the
General Partner shall be authorized (but not required) to adopt a convention
whereby the price paid by a transferee of a Limited Partner Interest that is
traded on any National Securities Exchange will be deemed to be the lowest
quoted closing price of such Limited Partner Interests on any National
Securities Exchange on which such Limited Partner Interests are traded during
the calendar month in which such transfer is deemed to occur pursuant to
Section 6.2(g) without regard to the actual price paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing the
Partnership ratably over a sixty-month period as provided in Section 709 of the
Code.
(c) Except as otherwise provided herein, the General Partner shall determine
whether the Partnership should make any other elections permitted by the Code.
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Section 9.3 Tax Controversies.
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in the Code) and is authorized and required to
represent the Partnership (at the Partnership's expense) in connection with all
examinations of the Partnership's affairs by tax authorities, including
resulting administrative and judicial proceedings, and to expend Partnership
funds for professional services and costs associated therewith. Each Partner
agrees to cooperate with the General Partner and to do or refrain from doing
any or all things reasonably required by the General Partner to conduct such
proceedings.
Section 9.4 Withholding.
Notwithstanding any other provision of this Agreement, the General Partner is
authorized to take any action that it determines in its discretion to be
necessary or appropriate to cause the Partnership and the Operating Company to
comply with any withholding requirements established under the Code or any
other federal, state or local law including, without limitation, pursuant to
Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the
Partnership is required or elects to withhold and pay over to any taxing
authority any amount resulting from the allocation or distribution of income to
any Partner or Assignee (including, without limitation, by reason of Section
1446 of the Code), the amount withheld may at the discretion of the General
Partner be treated by the Partnership as a distribution of cash pursuant to
Section 6.3 in the amount of such withholding from such Partner.
ARTICLE X
ADMISSION OF PARTNERS
Section 10.1 Admission of Initial Limited Partners.
Upon the issuance by the Partnership of Subordinated Units and Incentive
Distribution Rights to Holdings and the General Partner as described in Section
5.2, each of Holdings and the General Partner shall be deemed to have been
admitted to the Partnership as a Limited Partner in respect of the Subordinated
Units and Incentive Distribution Rights issued to it. Upon the issuance by the
Partnership of Common Units to the Underwriters as described in Section 5.3 in
connection with the Initial Offering and the execution by each Underwriter of a
Transfer Application, the General Partner shall admit the Underwriters to the
Partnership as Initial Limited Partners in respect of the Common Units
purchased by them.
Section 10.2 Admission of Substituted Limited Partner.
By transfer of a Limited Partner Interest in accordance with Article IV, the
transferor shall be deemed to have given the transferee the right to seek
admission as a Substituted Limited Partner subject to the conditions of, and in
the manner permitted under, this Agreement. A transferor of a Certificate
representing a Limited Partner Interest shall, however, only have the authority
to convey to a purchaser or other transferee who does not execute and deliver a
Transfer Application (a) the right to negotiate such Certificate to a purchaser
or other transferee and (b) the right to transfer the right to request
admission as a Substituted Limited Partner to such purchaser or other
transferee in respect of the transferred Limited Partner Interests. Each
transferee of a Limited Partner Interest (including any nominee holder or an
agent acquiring such Limited Partner Interest for the account of another
Person) who executes and delivers a Transfer Application shall, by virtue of
such execution and delivery, be an Assignee and be deemed to have applied to
become a Substituted Limited Partner with respect to the Limited Partner
Interests so transferred to such Person. Such Assignee shall become a
Substituted Limited Partner (x) at such time as the General Partner consents
thereto, which consent may be given or withheld in the General Partner's
discretion, and (y) when any such admission is shown on the books and records
of the Partnership. If such consent is withheld, such transferee shall be an
Assignee. An Assignee shall have an interest in the Partnership equivalent to
that of a Limited Partner with respect to allocations and distributions,
including liquidating distributions, of the Partnership. With respect to voting
rights attributable to Limited Partner Interests that are held by Assignees,
the General Partner shall be deemed to be the Limited Partner with respect
thereto
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and shall, in exercising the voting rights in respect of such Limited Partner
Interests on any matter, vote such Limited Partner Interests at the written
direction of the Assignee who is the Record Holder of such Limited Partner
Interests. If no such written direction is received, such Limited Partner
Interests will not be voted. An Assignee shall have no other rights of a
Limited Partner.
Section 10.3 Admission of Successor General Partner.
A successor General Partner approved pursuant to Section 11.1 or 11.2 or the
transferee of or successor to all of the General Partner's Partnership Interest
as general partner in the Partnership pursuant to Section 4.6 who is proposed
to be admitted as a successor General Partner shall be admitted to the
Partnership as the General Partner, effective immediately prior to the
withdrawal or removal of the predecessor or transferring General Partner
pursuant to Section 11.1 or 11.2 or the transfer of the General Partner's
Partnership Interest as a general partner in the Partnership pursuant to
Section 4.6, provided, however, that no such successor shall be admitted to the
Partnership until compliance with the terms of Section 4.6 has occurred and
such successor has executed and delivered such other documents or instruments
as may be required to effect such admission. Any such successor shall, subject
to the terms hereof, carry on the business of the members of the Partnership
Group without dissolution.
Section 10.4 Admission of Additional Limited Partners.
(a) A Person (other than the General Partner, an Initial Limited Partner or a
Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the
General Partner (i) evidence of acceptance in form satisfactory to the General
Partner of all of the terms and conditions of this Agreement, including the
power of attorney granted in Section 2.6, and (ii) such other documents or
instruments as may be required in the discretion of the General Partner to
effect such Person's admission as an Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 10.4, no Person
shall be admitted as an Additional Limited Partner without the consent of the
General Partner, which consent may be given or withheld in the General
Partner's discretion. The admission of any Person as an Additional Limited
Partner shall become effective on the date upon which the name of such Person
is recorded as such in the books and records of the Partnership, following the
consent of the General Partner to such admission.
Section 10.5 Amendment of Agreement and Certificate of Limited Partnership.
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act
to amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practicable an amendment to this Agreement
and, if required by law, the General Partner shall prepare and file an
amendment to the Certificate of Limited Partnership, and the General Partner
may for this purpose, among others, exercise the power of attorney granted
pursuant to Section 2.6.
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 Withdrawal of the General Partner.
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each such
event herein referred to as an "Event of Withdrawal");
(i) The General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners (and it shall be deemed that
the General Partner has withdrawn pursuant to this Section 11.1(a)(i) if
the General Partner voluntarily withdraws as managing member of the
Operating Company);
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(ii) The General Partner transfers all of its rights as General Partner
pursuant to Section 4.6;
(iii) The General Partner is removed pursuant to Section 11.2;
(iv) The General Partner (A) makes a general assignment for the benefit
of creditors; (B) files a voluntary bankruptcy petition for relief under
Chapter 7 of the United States Bankruptcy Code; (C) files a petition or
answer seeking for itself a liquidation, dissolution or similar relief (but
not a reorganization) under any law; (D) files an answer or other pleading
admitting or failing to contest the material allegations of a petition
filed against the General Partner in a proceeding of the type described in
clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks, consents to or
acquiesces in the appointment of a trustee (but not a debtor-in-
possession), receiver or liquidator of the General Partner or of all or any
substantial part of its properties;
(v) A final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or against
the General Partner; or
(vi) (A) in the event the General Partner is a corporation, a certificate
of dissolution or its equivalent is filed for the General Partner, or 90
days expire after the date of notice to the General Partner of revocation
of its charter without a reinstatement of its charter, under the laws of
its state of incorporation; (B) in the event the General Partner is a
partnership or a limited liability company, the dissolution and
commencement of winding up of the General Partner; (C) in the event the
General Partner is acting in such capacity by virtue of being a trustee of
a trust, the termination of the trust; (D) in the event the General Partner
is a natural person, his death or adjudication of incompetency; and (E)
otherwise in the event of the termination of the General Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A),
(B), (C) or (E) occurs, the withdrawing General Partner shall give notice to
the Limited Partners within 30 days after such occurrence. The Partners hereby
agree that only the Events of Withdrawal described in this Section 11.1 shall
result in the withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Closing Date and ending at 12:00 midnight, Eastern Standard
Time, on December 31, 2007, the General Partner voluntarily withdraws by giving
at least 90 days' advance notice of its intention to withdraw to the Limited
Partners; provided that prior to the effective date of such withdrawal, the
withdrawal is approved by Unitholders holding at least a Unit Majority and the
General Partner delivers to the Partnership an Opinion of Counsel ("Withdrawal
Opinion of Counsel") that such withdrawal (following the selection of the
successor General Partner) would not result in the loss of the limited
liability of any Limited Partner or of a member of the Operating Company or
cause the Partnership or the Operating Company to be treated as an association
taxable as a corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not previously treated as such); (ii) at any
time after 12:00 midnight, Eastern Standard Time, on December 31, 2007, the
General Partner voluntarily withdraws by giving at least 90 days' advance
notice to the Unitholders, such withdrawal to take effect on the date specified
in such notice; (iii) at any time that the General Partner ceases to be the
General Partner pursuant to Section 11.1(a)(ii) or is removed pursuant to
Section 11.2; or (iv) notwithstanding clause (i) of this sentence, at any time
that the General Partner voluntarily withdraws by giving at least 90 days'
advance notice of its intention to withdraw to the Limited Partners, such
withdrawal to take effect on the date specified in the notice, if at the time
such notice is given one Person and its Affiliates (other than the General
Partner and its Affiliates) own beneficially or of record or control at least
50% of the Outstanding Units. The withdrawal of the General Partner from the
Partnership upon the occurrence of an Event of Withdrawal shall also constitute
the withdrawal of the General Partner as general partner or managing member, as
the case may be, of the other Group Members. If the General Partner gives a
notice of withdrawal pursuant to Section 11.1(a)(i), the holders of a Unit
Majority, may, prior to the effective date of such withdrawal, elect a
successor General Partner. The Person so elected as successor General Partner
shall automatically become
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the successor general partner or managing member, as the case may be, of the
other Group Members of which the General Partner is a general partner or a
managing member. If, prior to the effective date of the General Partner's
withdrawal, a successor is not selected by the Unitholders as provided herein
or the Partnership does not receive a Withdrawal Opinion of Counsel, the
Partnership shall be dissolved in accordance with Section 12.1. Any successor
General Partner elected in accordance with the terms of this Section 11.1 shall
be subject to the provisions of Section 10.3.
Section 11.2 Removal of the General Partner.
The General Partner may be removed if such removal is approved by the
Unitholders holding at least 66 2/3% of the Outstanding Units (including Units
held by the General Partner and its Affiliates). Any such action by such
holders for removal of the General Partner must also provide for the election
of a successor General Partner by the Unitholders holding at least a Unit
Majority (including Units held by the General Partner and its Affiliates). Such
removal shall be effective immediately following the admission of a successor
General Partner pursuant to Section 10.3. The removal of the General Partner
shall also automatically constitute the removal of the General Partner as
general partner or managing member, as the case may be, of the other Group
Members of which the General Partner is a general partner or a managing member.
If a Person is elected as a successor General Partner in accordance with the
terms of this Section 11.2, such Person shall, upon admission pursuant to
Section 10.3, automatically become a successor general partner or managing
member, as the case may be, of the other Group Members of which the General
Partner is a general partner or a managing member. The right of the holders of
Outstanding Units to remove the General Partner shall not exist or be exercised
unless the Partnership has received an opinion opining as to the matters
covered by a Withdrawal Opinion of Counsel. Any successor General Partner
elected in accordance with the terms of this Section 11.2 shall be subject to
the provisions of Section 10.3.
Section 11.3 Interest of Departing Partner and Successor General Partner.
(a) In the event of (i) withdrawal of the General Partner under circumstances
where such withdrawal does not violate this Agreement or (ii) removal of the
General Partner by the holders of Outstanding Units under circumstances where
Cause does not exist, if a successor General Partner is elected in accordance
with the terms of Section 11.1 or 11.2, the Departing Partner shall have the
option exercisable prior to the effective date of the departure of such
Departing Partner to require its successor to purchase its Partnership Interest
as a general partner in the Partnership and its partnership or member interest
as the general partner or managing member in the other Group Members and all of
its Incentive Distribution Rights (collectively, the "Combined Interest") in
exchange for an amount in cash equal to the fair market value of such Combined
Interest, such amount to be determined and payable as of the effective date of
its departure. If the General Partner is removed by the Unitholders under
circumstances where Cause exists or if the General Partner withdraws under
circumstances where such withdrawal violates this Agreement or the Operating
Company Agreement, and if a successor General Partner is elected in accordance
with the terms of Section 11.1 or 11.2, such successor shall have the option,
exercisable prior to the effective date of the departure of such Departing
Partner, to purchase the Combined Interest for such fair market value of such
Combined Interest. In either event, the Departing Partner shall be entitled to
receive all reimbursements due such Departing Partner pursuant to Section 7.4,
including any employee-related liabilities (including severance liabilities),
incurred in connection with the termination of any employees employed by the
General Partner for the benefit of the Partnership or the other Group Members.
For purposes of this Section 11.3(a), the fair market value of the Combined
Interest shall be determined by agreement between the Departing Partner and its
successor or, failing agreement within 30 days after the effective date of such
Departing Partner's departure, by an independent investment banking firm or
other independent expert selected by the Departing Partner and its successor,
which, in turn, may rely on other experts, and the determination of which shall
be conclusive as to such matter. If such parties cannot agree upon one
independent investment banking firm or other independent expert within 45 days
after the effective date of such departure, then the Departing Partner shall
designate an independent investment banking firm or other independent expert,
the Departing Partner's successor shall designate an independent investment
banking firm or
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other independent expert, and such firms or experts shall mutually select a
third independent investment banking firm or independent expert, which third
independent investment banking firm or other independent expert shall determine
the fair market value of the Combined Interest. In making its determination,
such third independent investment banking firm or other independent expert may
consider the then current trading price of Units on any National Securities
Exchange on which Units are then listed, the value of the Partnership's assets,
the rights and obligations of the Departing Partner and other factors it may
deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 11.3(a), the Departing Partner (or its transferee) shall become a
Limited Partner and its Combined Interest shall be converted into Common Units
pursuant to a valuation made by an investment banking firm or other independent
expert selected pursuant to Section 11.3(a), without reduction in such
Partnership Interest (but subject to proportionate dilution by reason of the
admission of its successor). Any successor General Partner shall indemnify the
Departing Partner (or its transferee) as to all debts and liabilities of the
Partnership arising on or after the date on which the Departing Partner (or its
transferee) becomes a Limited Partner. For purposes of this Agreement,
conversion of the Combined Interest to Common Units will be characterized as if
the General Partner (or its transferee) contributed its Combined Interest to
the Partnership in exchange for the newly issued Common Units.
(c) If a successor General Partner is elected in accordance with the terms of
Section 11.1 or 11.2 and the option described in Section 11.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
Partnership cash in the amount equal to 1/99th of the Net Agreed Value of the
Partnership's assets on such date. In such event, such successor General
Partner shall, subject to the following sentence, be entitled to 1% of all
Partnership allocations and distributions. The successor General Partner shall
cause this Agreement to be amended to reflect that, from and after the date of
such successor General Partner's admission, the successor General Partner's
interest in all Partnership distributions and allocations shall be 1%.
Section 11.4 Termination of Subordination Period, Conversion of Subordinated
Units and Extinguishment of Cumulative Common Unit Arrearages.
Notwithstanding any provision of this Agreement, if the General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partner and its Affiliates are not
voted in favor of such removal, (i) the Subordination Period will end and all
Outstanding Subordinated Units will immediately and automatically convert into
Common Units on a one-for-one basis and (ii) all Cumulative Common Unit
Arrearages on the Common Units will be extinguished.
Section 11.5 Withdrawal of Limited Partners.
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Limited
Partner Interest becomes a Record Holder of the Limited Partner Interest so
transferred, such transferring Limited Partner shall cease to be a Limited
Partner with respect to the Limited Partner Interest so transferred.
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1 Dissolution.
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General
Partner is elected pursuant to Section 11.1 or 11.2, the Partnership shall not
be dissolved and such successor General Partner shall continue the business of
the Partnership. The Partnership shall dissolve, and (subject to Section 12.2)
its affairs shall be wound up, upon:
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(a) the expiration of its term as provided in Section 2.7;
(b) an Event of Withdrawal of the General Partner as provided in Section
11.1(a) (other than Section 11.1(a)(ii)), unless a successor is elected and
an Opinion of Counsel is received as provided in Section 11.1(b) or 11.2
and such successor is admitted to the Partnership pursuant to Section 10.3;
(c) an election to dissolve the Partnership by the General Partner that
is approved by the holders of a Unit Majority;
(d) the entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership Group.
Section 12.2 Continuation of the Business of the Partnership After Dissolution.
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 11.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 11.1 or 11.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or
(vi), then, to the maximum extent permitted by law, within 180 days thereafter,
the holders of a Unit Majority may elect to reconstitute the Partnership and
continue its business on the same terms and conditions set forth in this
Agreement by forming a new limited partnership on terms identical to those set
forth in this Agreement and having as the successor general partner a Person
approved by the holders of a Unit Majority. Unless such an election is made
within the applicable time period as set forth above, the Partnership shall
conduct only activities necessary to wind up its affairs. If such an election
is so made, then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 2.7 unless earlier dissolved in accordance with
this Article XII;
(ii) if the successor General Partner is not the former General Partner,
then the interest of the former General Partner shall be treated in the
manner provided in Section 11.3; and
(iii) all necessary steps shall be taken to cancel this Agreement and the
Certificate of Limited Partnership and to enter into and, as necessary, to
file a new partnership agreement and certificate of limited partnership,
and the successor general partner may for this purpose exercise the powers
of attorney granted the General Partner pursuant to Section 2.6; provided,
that the right of the holders of a Unit Majority to approve a successor
General Partner and to reconstitute and to continue the business of the
Partnership shall not exist and may not be exercised unless the Partnership
has received an Opinion of Counsel that (x) the exercise of the right would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor the
Operating Company would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of such right to continue.
Section 12.3 Liquidator.
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 12.2, the General Partner shall select one or more Persons to act as
Liquidator. The Liquidator (if other than the General Partner) shall be
entitled to receive such compensation for its services as may be approved by
holders of at least a majority of the Outstanding Common Units and Subordinated
Units voting as a single class. The Liquidator (if other than the General
Partner) shall agree not to resign at any time without 15 days' prior notice
and may be removed at any time, with or without cause, by notice of removal
approved by holders of at least a majority of the Outstanding Common Units and
Subordinated Units voting as a single class. Upon dissolution, removal or
resignation of the Liquidator, a successor and substitute Liquidator (who shall
have and succeed to all rights, powers and duties of the original Liquidator)
shall within 30 days thereafter be approved by holders of at least a majority
of the Outstanding Common Units and Subordinated Units voting as a single
class. The right to approve a successor or substitute
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Liquidator in the manner provided herein shall be deemed to refer also to any
such successor or substitute Liquidator approved in the manner herein provided.
Except as expressly provided in this Article XII, the Liquidator approved in
the manner provided herein shall have and may exercise, without further
authorization or consent of any of the parties hereto, all of the powers
conferred upon the General Partner under the terms of this Agreement (but
subject to all of the applicable limitations, contractual and otherwise, upon
the exercise of such powers, other than the limitation on sale set forth in
Section 7.3(b)) to the extent necessary or desirable in the good faith judgment
of the Liquidator to carry out the duties and functions of the Liquidator
hereunder for and during such period of time as shall be reasonably required in
the good faith judgment of the Liquidator to complete the winding up and
liquidation of the Partnership as provided for herein.
Section 12.4 Liquidation.
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines to be in the best interest of the
Partners, subject to Section 17-804 of the Delaware Act and the following:
(a) Disposition of Assets. The assets may be disposed of by public or
private sale or by distribution in kind to one or more Partners on such
terms as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the property shall
be deemed for purposes of Section 12.4(c) to have received cash equal to
its fair market value; and contemporaneously therewith, appropriate cash
distributions must be made to the other Partners. The Liquidator may, in
its absolute discretion, defer liquidation or distribution of the
Partnership's assets for a reasonable time if it determines that an
immediate sale or distribution of all or some of the Partnership's assets
would be impractical or would cause undue loss to the Partners. The
Liquidator may, in its absolute discretion, distribute the Partnership's
assets, in whole or in part, in kind if it determines that a sale would be
impractical or would cause undue loss to the partners.
(b) Discharge of Liabilities. Liabilities of the Partnership include
amounts owed to Partners otherwise than in respect of their distribution
rights under Article VI. With respect to any liability that is contingent,
conditional or unmatured or is otherwise not yet due and payable, the
Liquidator shall either settle such claim for such amount as it thinks
appropriate or establish a reserve of cash or other assets to provide for
its payment. When paid, any unused portion of the reserve shall be
distributed as additional liquidation proceeds.
(c) Liquidation Distributions. All property and all cash in excess of
that required to discharge liabilities as provided in Section 12.4(b) shall
be distributed to the Partners in accordance with, and to the extent of,
the positive balances in their respective Capital Accounts, as determined
after taking into account all Capital Account adjustments (other than those
made by reason of distributions pursuant to this Section 12.4(c)) for the
taxable year of the Partnership during which the liquidation of the
Partnership occurs (with such date of occurrence being determined pursuant
to Treasury Regulation Section 1.704-1(b)(2)(ii)(g)), and such distribution
shall be made by the end of such taxable year (or, if later, within 90 days
after said date of such occurrence).
Section 12.5 Cancellation of Certificate of Limited Partnership.
Upon the completion of the distribution of Partnership cash and property as
provided in Section 12.4 in connection with the liquidation of the Partnership,
the Partnership shall be terminated and the Certificate of Limited Partnership
and all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
Section 12.6 Return of Contributions.
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the
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Limited Partners or Unitholders, or any portion thereof, it being expressly
understood that any such return shall be made solely from Partnership assets.
Section 12.7 Waiver of Partition.
To the maximum extent permitted by law, each Partner hereby waives any right
to partition of the Partnership property.
Section 12.8 Capital Account Restoration.
No Limited Partner shall have any obligation to restore any negative balance
in its Capital Account upon liquidation of the Partnership. The General Partner
shall be obligated to restore any negative balance in its Capital Account upon
liquidation of its interest in the Partnership by the end of the taxable year
of the Partnership during which such liquidation occurs, or, if later, within
90 days after the date of such liquidation.
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1 Amendment to be Adopted Solely by the General Partner.
Each Partner agrees that the General Partner, without the approval of any
Partner or Assignee, may amend any provision of this Agreement and execute,
swear to, acknowledge, deliver, file and record whatever documents may be
required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the Limited
Partners have limited liability under the laws of any state or to ensure
that the Partnership and the Operating Company will not be treated as an
association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes;
(d) a change that, in the discretion of the General Partner, (i) does not
adversely affect the Limited Partners in any material respect, (ii) is
necessary or advisable to (A) satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or regulation
of any federal or state agency or judicial authority or contained in any
federal or state statute (including the Delaware Act) or (B) facilitate the
trading of the Limited Partner Interest (including the division of any
class or classes of Outstanding Limited Partner Interest into different
classes to facilitate uniformity of tax consequences within such classes of
Limited Partner Interests) or comply with any rule, regulation, guideline
or requirement of any National Securities Exchange on which the Limited
Partner Interests are or will be listed for trading, compliance with any of
which the General Partner determines in its discretion to be in the best
interests of the Partnership and the Limited Partners, (iii) is necessary
or advisable in connection with action taken by the General Partner
pursuant to Section 5.10 or (iv) is required to effect the intent expressed
in the Registration Statement or the intent of the provisions of this
Agreement or is otherwise contemplated by this Agreement;
(e) a change in the fiscal year or taxable year of the Partnership and
any changes that, in the discretion of the General Partner, are necessary
or advisable as a result of a change in the fiscal year or taxable year of
the Partnership including, if the General Partner shall so determine, a
change in the definition of "Quarter" and the dates on which distributions
are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to prevent
the Partnership, or the General Partner or its directors, officers,
trustees or agents from in any manner being subjected to the provisions of
the Investment Company Act of 1940, as amended, the Investment Advisers Act
of 1940, as
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amended, or "plan asset" regulations adopted under the Employee Retirement
Income Security Act of 1974, as amended, regardless of whether such are
substantially similar to plan asset regulations currently applied or
proposed by the United States Department of Labor;
(g) subject to the terms of Section 5.7, an amendment that, in the
discretion of the General Partner, is necessary or advisable in connection
with the authorization of issuance of any class or series of Partnership
Securities pursuant to Section 5.6;
(h) any amendment expressly permitted in this Agreement to be made by the
General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 14.3;
(j) an amendment that, in the discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately
the formation by the Partnership of, or investment by the Partnership in,
any corporation, partnership, joint venture, limited liability company or
other entity other than the Operating Company, in connection with the
conduct by the Partnership of activities permitted by the terms of Section
2.4;
(k) a merger or conveyance pursuant to Section 14.3(d); or
(l) any other amendments substantially similar to the foregoing.
Section 13.2 Amendment Procedures.
Except as provided in Sections 13.1 and 13.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of the
General Partner which consent may be given or withheld in its sole discretion.
A proposed amendment shall be effective upon its approval by the holders of at
least a Unit Majority, unless a greater or different percentage is required
under this Agreement or by Delaware law. Each proposed amendment that requires
the approval of the holders of a specified percentage of Outstanding Units
shall be set forth in a writing that contains the text of the proposed
amendment. If such an amendment is proposed, the General Partner shall seek the
written approval of the requisite percentage of Outstanding Units or call a
meeting of the Unitholders to consider and vote on such proposed amendment. The
General Partner shall notify all Record Holders upon final adoption of any such
proposed amendments.
Section 13.3 Amendment Requirements.
(a) Notwithstanding the provisions of Sections 13.1 and 13.2, no provision of
this Agreement that establishes a percentage of Outstanding Units (including
Units deemed owned by the General Partner) required to take any action shall be
amended, altered, changed, repealed or rescinded in any respect that would have
the effect of reducing such voting percentage unless such amendment is approved
by the written consent or the affirmative vote of holders of Outstanding Units
whose aggregate Outstanding Units constitute not less than the voting
requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 13.1 and 13.2, no amendment to
this Agreement may (i) enlarge the obligations of any Limited Partner without
its consent, unless such shall be deemed to have occurred as a result of an
amendment approved pursuant to Section 13.3(c), (ii) enlarge the obligations
of, restrict in any way any action by or rights of, or reduce in any way the
amounts distributable, reimbursable or otherwise payable to, the General
Partner or any of its Affiliates without its consent, which consent may be
given or withheld in its sole discretion, (iii) change Section 12.1(a) or
12.1(c), or (iv) change the term of the Partnership or, except as set forth in
Section 12.1(c), give any Person the right to dissolve the Partnership.
(c) Except as provided in Section 14.3, and except as otherwise provided, and
without limitation of the General Partner's authority to adopt amendments to
this Agreement as contemplated in Section 13.1, any amendment that would have a
material adverse effect on the rights or preferences of any class of
Partnership
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Interests in relation to other classes of Partnership Interests must be
approved by the holders of not less than a majority of the Outstanding
Partnership Interests of the class affected.
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 13.1 and except as otherwise provided by Section
14.3(b), no amendments shall become effective without the approval of the
holders of at least 90% of the Outstanding Common Units and Subordinated Units
voting as a single class unless the Partnership obtains an Opinion of Counsel
to the effect that such amendment will not affect the limited liability of any
Limited Partner under applicable law.
(e) Except as provided in Section 13.1, this Section 13.3 shall only be
amended with the approval of the holders of at least 90% of the Outstanding
Units.
Section 13.4 Special Meetings.
All acts of Limited Partners to be taken pursuant to this Agreement shall be
taken in the manner provided in this Article XIII. Special meetings of the
Limited Partners may be called by the General Partner or by Limited Partners
owning 20% or more of the Outstanding Limited Partner Interests of the class or
classes for which a meeting is proposed. Limited Partners shall call a special
meeting by delivering to the General Partner one or more requests in writing
stating that the signing Limited Partners wish to call a special meeting and
indicating the general or specific purposes for which the special meeting is to
be called. Within 60 days after receipt of such a call from Limited Partners or
within such greater time as may be reasonably necessary for the Partnership to
comply with any statutes, rules, regulations, listing agreements or similar
requirements governing the holding of a meeting or the solicitation of proxies
for use at such a meeting, the General Partner shall send a notice of the
meeting to the Limited Partners either directly or indirectly through the
Transfer Agent. A meeting shall be held at a time and place determined by the
General Partner on a date not less than 10 days nor more than 60 days after the
mailing of notice of the meeting. Limited Partners shall not vote on matters
that would cause the Limited Partners to be deemed to be taking part in the
management and control of the business and affairs of the Partnership so as to
jeopardize the Limited Partners' limited liability under the Delaware Act or
the law of any other state in which the Partnership is qualified to do
business.
Section 13.5 Notice of a Meeting.
Notice of a meeting called pursuant to Section 13.4 shall be given to the
Record Holders of the class or classes of Limited Partner Interests for which a
meeting is proposed in writing by mail or other means of written communication
in accordance with Section 16.1. The notice shall be deemed to have been given
at the time when deposited in the mail or sent by other means of written
communication.
Section 13.6 Record Date.
For purposes of determining the Limited Partners entitled to notice of or to
vote at a meeting of the Limited Partners or to give approvals without a
meeting as provided in Section 13.11 the General Partner may set a Record Date,
which shall not be less than 10 nor more than 60 days before (a) the date of
the meeting (unless such requirement conflicts with any rule, regulation,
guideline or requirement of any National Securities Exchange on which the
Limited Partner Interests are listed for trading, in which case the rule,
regulation, guideline or requirement of such exchange shall govern) or (b) in
the event that approvals are sought without a meeting, the date by which
Limited Partners are requested in writing by the General Partner to give such
approvals.
Section 13.7 Adjournment.
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 45 days. At the adjourned
meeting, the Partnership may transact any business which might have been
transacted at the original meeting. If the
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adjournment is for more than 45 days or if a new Record Date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given in
accordance with this Article XIII.
Section 13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes.
The transactions of any meeting of Limited Partners, however called and
noticed, and whenever held, shall be as valid as if it had occurred at a
meeting duly held after regular call and notice, if a quorum is present either
in person or by proxy, and if, either before or after the meeting, Limited
Partners representing such quorum who were present in person or by proxy and
entitled to vote, sign a written waiver of notice or an approval of the holding
of the meeting or an approval of the minutes thereof. All waivers and approvals
shall be filed with the Partnership records or made a part of the minutes of
the meeting. Attendance of a Limited Partner at a meeting shall constitute a
waiver of notice of the meeting, except when the Limited Partner does not
approve, at the beginning of the meeting, of the transaction of any business
because the meeting is not lawfully called or convened; and except that
attendance at a meeting is not a waiver of any right to disapprove the
consideration of matters required to be included in the notice of the meeting,
but not so included, if the disapproval is expressly made at the meeting.
Section 13.9 Quorum.
The holders of a majority of the Outstanding Limited Partner Interests of the
class or classes for which a meeting has been called (including Limited Partner
Interests deemed owned by the General Partner) represented in person or by
proxy shall constitute a quorum at a meeting of Limited Partners of such class
or classes unless any such action by the Limited Partners requires approval by
holders of a greater percentage of such Limited Partner Interests, in which
case the quorum shall be such greater percentage. At any meeting of the Limited
Partners duly called and held in accordance with this Agreement at which a
quorum is present, the act of Limited Partners holding Outstanding Limited
Partner Interests that in the aggregate represent a majority of the Outstanding
Limited Partner Interests entitled to vote and be present in person or by proxy
at such meeting shall be deemed to constitute the act of all Limited Partners,
unless a greater or different percentage is required with respect to such
action under the provisions of this Agreement, in which case the act of the
Limited Partners holding Outstanding Limited Partner Interests that in the
aggregate represent at least such greater or different percentage shall be
required. The Limited Partners present at a duly called or held meeting at
which a quorum is present may continue to transact business until adjournment,
notwithstanding the withdrawal of enough Limited Partners to leave less than a
quorum, if any action taken (other than adjournment) is approved by the
required percentage of Outstanding Limited Partner Interests specified in this
Agreement (including Limited Partner Interests deemed owned by the General
Partner). In the absence of a quorum any meeting of Limited Partners may be
adjourned from time to time by the affirmative vote of holders of at least a
majority of the Outstanding Limited Partner Interests entitled to vote at such
meeting (including Limited Partner Interests deemed owned by the General
Partner) represented either in person or by proxy, but no other business may be
transacted, except as provided in Section 13.7.
Section 13.10 Conduct of a Meeting.
The General Partner shall have full power and authority concerning the manner
of conducting any meeting of the Limited Partners or solicitation of approvals
in writing, including the determination of Persons entitled to vote, the
existence of a quorum, the satisfaction of the requirements of Section 13.4,
the conduct of voting, the validity and effect of any proxies and the
determination of any controversies, votes or challenges arising in connection
with or during the meeting or voting. The General Partner shall designate a
Person to serve as chairman of any meeting and shall further designate a Person
to take the minutes of any meeting. All minutes shall be kept with the records
of the Partnership maintained by the General Partner. The General Partner may
make such other regulations consistent with applicable law and this Agreement
as it may deem advisable concerning the conduct of any meeting of the Limited
Partners or solicitation of approvals in writing, including regulations in
regard to the appointment of proxies, the appointment and duties of inspectors
of votes and
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approvals, the submission and examination of proxies and other evidence of the
right to vote, and the revocation of approvals in writing.
Section 13.11 Action Without a Meeting.
If authorized by the General Partner, any action that may be taken at a
meeting of the Limited Partners may be taken without a meeting if an approval
in writing setting forth the action so taken is signed by Limited Partners
owning not less than the minimum percentage of the Outstanding Limited Partner
Interests (including Limited Partner Interests deemed owned by the General
Partner) that would be necessary to authorize or take such action at a meeting
at which all the Limited Partners were present and voted (unless such provision
conflicts with any rule, regulation, guideline or requirement of any National
Securities Exchange on which the Limited Partner Interests are listed for
trading, in which case the rule, regulation, guideline or requirement of such
exchange shall govern). Prompt notice of the taking of action without a meeting
shall be given to the Limited Partners who have not approved in writing. The
General Partner may specify that any written ballot submitted to Limited
Partners for the purpose of taking any action without a meeting shall be
returned to the Partnership within the time period, which shall be not less
than 20 days, specified by the General Partner. If a ballot returned to the
Partnership does not vote all of the Limited Partner Interests held by the
Limited Partners the Partnership shall be deemed to have failed to receive a
ballot for the Limited Partner Interests that were not voted. If approval of
the taking of any action by the Limited Partners is solicited by any Person
other than by or on behalf of the General Partner, the written approvals shall
have no force and effect unless and until (a) they are deposited with the
Partnership in care of the General Partner, (b) approvals sufficient to take
the action proposed are dated as of a date not more than 90 days prior to the
date sufficient approvals are deposited with the Partnership and (c) an Opinion
of Counsel is delivered to the General Partner to the effect that the exercise
of such right and the action proposed to be taken with respect to any
particular matter (i) will not cause the Limited Partners to be deemed to be
taking part in the management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners' limited liability, and
(ii) is otherwise permissible under the state statutes then governing the
rights, duties and liabilities of the Partnership and the Partners.
Section 13.12 Voting and Other Rights.
(a) Only those Record Holders of the Limited Partner Interests on the Record
Date set pursuant to Section 13.6 (and also subject to the limitations
contained in the definition of "Outstanding") shall be entitled to notice of,
and to vote at, a meeting of Limited Partners or to act with respect to matters
as to which the holders of the Outstanding Limited Partner Interests have the
right to vote or to act. All references in this Agreement to votes of, or other
acts that may be taken by, the Outstanding Limited Partner Interests shall be
deemed to be references to the votes or acts of the Record Holders of such
Outstanding Limited Partner Interests.
(b) With respect to Limited Partner Interests that are held for a Person's
account by another Person (such as a broker, dealer, bank, trust company or
clearing corporation, or an agent of any of the foregoing), in whose name such
Limited Partner Interests are registered, such other Person shall, in
exercising the voting rights in respect of such Limited Partner Interests on
any matter, and unless the arrangement between such Persons provides otherwise,
vote such Limited Partner Interests in favor of, and at the direction of, the
Person who is the beneficial owner, and the Partnership shall be entitled to
assume it is so acting without further inquiry. The provisions of this Section
13.12(b) (as well as all other provisions of this Agreement) are subject to the
provisions of Section 4.3.
ARTICLE XIV
MERGER
Section 14.1 Authority.
The Partnership may merge or consolidate with one or more corporations,
limited liability companies, business trusts or associations, real estate
investment trusts, common law trusts or unincorporated businesses,
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including a general partnership or limited partnership, formed under the laws
of the State of Delaware or any other state of the United States of America,
pursuant to a written agreement of merger or consolidation ("Merger Agreement")
in accordance with this Article XIV.
Section 14.2 Procedure for Merger or Consolidation.
Merger or consolidation of the Partnership pursuant to this Article XIV
requires the prior approval of the General Partner. If the General Partner
shall determine, in the exercise of its discretion, to consent to the merger or
consolidation, the General Partner shall approve the Merger Agreement, which
shall set forth:
(a) The names and jurisdictions of formation or organization of each of
the business entities proposing to merge or consolidate;
(b) The name and jurisdiction of formation or organization of the
business entity that is to survive the proposed merger or consolidation
(the "Surviving Business Entity");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partner interests, rights, securities or obligations
of the Surviving Business Entity; and (i) if any general or limited partner
interests, securities or rights of any constituent business entity are not
to be exchanged or converted solely for, or into, cash, property or general
or limited partner interests, rights, securities or obligations of the
Surviving Business Entity, the cash, property or general or limited partner
interests, rights, securities or obligations of any limited partnership,
corporation, trust or other entity (other than the Surviving Business
Entity) which the holders of such general or limited partner interests,
securities or rights are to receive in exchange for, or upon conversion of
their general or limited partner interests, securities or rights, and (ii)
in the case of securities represented by certificates, upon the surrender
of such certificates, which cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other
entity (other than the Surviving Business Entity), or evidences thereof,
are to be delivered;
(e) A statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership or other similar charter or governing
document) of the Surviving Business Entity to be effected by such merger or
consolidation;
(f) The effective time of the merger, which may be the date of the filing
of the certificate of merger pursuant to Section 14.4 or a later date
specified in or determinable in accordance with the Merger Agreement
(provided, that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective time shall
be fixed no later than the time of the filing of the certificate of merger
and stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General
Partner.
Section 14.3 Approval by Limited Partners of Merger or Consolidation.
(a) Except as provided in Section 14.3(d), the General Partner, upon its
approval of the Merger Agreement, shall direct that the Merger Agreement be
submitted to a vote of Limited Partners, whether at a special meeting or by
written consent, in either case in accordance with the requirements of Article
XIII. A copy or a summary of the Merger Agreement shall be included in or
enclosed with the notice of a special meeting or the written consent.
(b) Except as provided in Section 14.3(d), the Merger Agreement shall be
approved upon receiving the affirmative vote or consent of the holders of a
Unit Majority unless the Merger Agreement contains any provision
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that, if contained in an amendment to this Agreement, the provisions of this
Agreement or the Delaware Act would require for its approval the vote or
consent of a greater percentage of the Outstanding Limited Partner Interests or
of any class of Limited Partners, in which case such greater percentage vote or
consent shall be required for approval of the Merger Agreement.
(c) Except as provided in Section 14.3(d), after such approval by vote or
consent of the Limited Partners, and at any time prior to the filing of the
certificate of merger pursuant to Section 14.4, the merger or consolidation may
be abandoned pursuant to provisions therefor, if any, set forth in the Merger
Agreement.
(d) Notwithstanding anything else contained in this Article XIV or in this
Agreement, the General Partner is permitted, in its discretion, without Limited
Partner approval, to merge the Partnership or any Group Member into, or convey
all of the Partnership's assets to, another limited liability entity which
shall be newly formed and shall have no assets, liabilities or operations at
the time of such Merger other than those it receives from the Partnership or
other Group Member if (i) the General Partner has received an Opinion of
Counsel that the merger or conveyance, as the case may be, would not result in
the loss of the limited liability of any Limited Partner or any member in the
Operating Company or cause the Partnership or Operating Company to be treated
as an association taxable as a corporation or otherwise to be taxed as an
entity for federal income tax purposes (to the extent not previously treated as
such), (ii) the sole purpose of such merger or conveyance is to effect a mere
change in the legal form of the Partnership into another limited liability
entity and (iii) the governing instruments of the new entity provide the
Limited Partners and the General Partner with the same rights and obligations
as are herein contained.
Section 14.4 Certificate of Merger.
Upon the required approval by the General Partner and the Limited Partners of
a Merger Agreement, a certificate of merger shall be executed and filed with
the Secretary of State of the State of Delaware in conformity with the
requirements of the Delaware Act.
Section 14.5 Effect of Merger.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all
other things and causes of action belonging to each of those business
entities, shall be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise in any of
those constituent business entities shall not revert and is not in any way
impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests in
property of any of those constituent business entities shall be preserved
unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not be
deemed to result in a transfer or assignment of assets or liabilities from one
entity to another.
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ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
Section 15.1 Right to Acquire Limited Partner Interests.
(a) Notwithstanding any other provision of this Agreement, if at any time not
more than 20% of the total Limited Partner Interests of any class then
Outstanding is held by Persons other than the General Partner and its
Affiliates, the General Partner shall then have the right, which right it may
assign and transfer in whole or in part to the Partnership or any Affiliate of
the General Partner, exercisable in its sole discretion, to purchase all, but
not less than all, of such Limited Partner Interests of such class then
Outstanding held by Persons other than the General Partner and its Affiliates,
at the greater of (x) the Current Market Price as of the date three days prior
to the date that the notice described in Section 15 is mailed and (y) the
highest price paid by the General Partner or any of its Affiliates for any such
Limited Partner Interest of such class purchased during the 90-day period
preceding the date that the notice described in Section 15.1(b) is mailed. As
used in this Agreement, (i) "Current Market Price" as of any date of any class
of Limited Partner Interests listed or admitted to trading on any National
Securities Exchange means the average of the daily Closing Prices (as
hereinafter defined) per limited partner interest of such class for the 20
consecutive Trading Days (as hereinafter defined) immediately prior to such
date; (ii) "Closing Price" for any day means the last sale price on such day,
regular way, or in case no such sale takes place on such day, the average of
the closing bid and asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted for trading on the principal National
Securities Exchange (other than the Nasdaq Stock Market) on which such Limited
Partner Interests of such class are listed or admitted to trading or, if such
Limited Partner Interests of such class are not listed or admitted to trading
on any National Securities Exchange (other than the Nasdaq Stock Market), the
last quoted price on such day or, if not so quoted, the average of the high bid
and low asked prices on such day in the over-the-counter market, as reported by
the Nasdaq Stock Market or such other system then in use, or, if on any such
day such Limited Partner Interests of such class are not quoted by any such
organization, the average of the closing bid and asked prices on such day as
furnished by a professional market maker making a market in such Limited
Partner Interests of such class selected by the General Partner, or if on any
such day no market maker is making a market in such Limited Partner Interests
of such class, the fair value of such Limited Partner Interests on such day as
determined reasonably and in good faith by the General Partner; and (iii)
"Trading Day" means a day on which the principal National Securities Exchange
on which such Limited Partner Interests of any class are listed or admitted to
trading is open for the transaction of business or, if Limited Partner
Interests of a class are not listed or admitted to trading on any National
Securities Exchange, a day on which banking institutions in New York City
generally are open.
(b) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase Limited Partner Interests
granted pursuant to Section 15.1(a), the General Partner shall deliver to the
Transfer Agent notice of such election to purchase (the "Notice of Election to
Purchase") and shall cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of Limited Partner Interests of such
class (as of a Record Date selected by the General Partner) at least 10, but
not more than 60, days prior to the Purchase Date. Such Notice of Election to
Purchase shall also be published for a period of at least three consecutive
days in at least two daily newspapers of general circulation printed in the
English language and published in the Borough of Manhattan, New York. The
Notice of Election to Purchase shall specify the Purchase Date and the price
(determined in accordance with Section 15.1(a)) at which Limited Partner
Interests will be purchased and state that the General Partner, its Affiliate
or the Partnership, as the case may be, elects to purchase such Limited Partner
Interests, upon surrender of Certificates representing such Limited Partner
Interests in exchange for payment, at such office or offices of the Transfer
Agent as the Transfer Agent may specify, or as may be required by any National
Securities Exchange on which such Limited Partner Interests are listed or
admitted to trading. Any such Notice of Election to Purchase mailed to a Record
Holder of Limited Partner Interests at his address as reflected in the records
of the Transfer Agent shall be conclusively presumed to have been given
regardless of whether the owner receives such notice. On or prior to the
Purchase Date, the General Partner, its Affiliate or the Partnership, as the
case may be, shall deposit with the Transfer Agent cash in
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an amount sufficient to pay the aggregate purchase price of all of such Limited
Partner Interests to be purchased in accordance with this Section 15.1. If the
Notice of Election to Purchase shall have been duly given as aforesaid at least
10 days prior to the Purchase Date, and if on or prior to the Purchase Date the
deposit described in the preceding sentence has been made for the benefit of
the holders of Limited Partner Interests subject to purchase as provided
herein, then from and after the Purchase Date, notwithstanding that any
Certificate shall not have been surrendered for purchase, all rights of the
holders of such Limited Partner Interests (including any rights pursuant to
Articles IV, V, VI, and XII) shall thereupon cease, except the right to receive
the purchase price (determined in accordance with Section 15.1(a)) for Limited
Partner Interests therefor, without interest, upon surrender to the Transfer
Agent of the Certificates representing such Limited Partner Interests, and such
Limited Partner Interests shall thereupon be deemed to be transferred to the
General Partner, its Affiliate or the Partnership, as the case may be, on the
record books of the Transfer Agent and the Partnership, and the General Partner
or any Affiliate of the General Partner, or the Partnership, as the case may
be, shall be deemed to be the owner of all such Limited Partner Interests from
and after the Purchase Date and shall have all rights as the owner of such
Limited Partner Interests (including all rights as owner of such Limited
Partner Interests pursuant to Articles IV, V, VI and XII).
(c) At any time from and after the Purchase Date, a holder of an Outstanding
Limited Partner Interest subject to purchase as provided in this Section 15.1
may surrender his Certificate evidencing such Limited Partner Interest to the
Transfer Agent in exchange for payment of the amount described in Section
15.1(a), therefor, without interest thereon.
ARTICLE XVI
GENERAL PROVISIONS
Section 16.1 Addresses and Notices.
Any notice, demand, request, report or proxy materials required or permitted
to be given or made to a Partner or Assignee under this Agreement shall be in
writing and shall be deemed given or made when delivered in person or when sent
by first class United States mail or by other means of written communication to
the Partner or Assignee at the address described below. Any notice, payment or
report to be given or made to a Partner or Assignee hereunder shall be deemed
conclusively to have been given or made, and the obligation to give such notice
or report or to make such payment shall be deemed conclusively to have been
fully satisfied, upon sending of such notice, payment or report to the Record
Holder of such Partnership Securities at his address as shown on the records of
the Transfer Agent or as otherwise shown on the records of the Partnership,
regardless of any claim of any Person who may have an interest in such
Partnership Securities by reason of any assignment or otherwise. An affidavit
or certificate of making of any notice, payment or report in accordance with
the provisions of this Section 16.1 executed by the General Partner, the
Transfer Agent or the mailing organization shall be prima facie evidence of the
giving or making of such notice, payment or report. If any notice, payment or
report addressed to a Record Holder at the address of such Record Holder
appearing on the books and records of the Transfer Agent or the Partnership is
returned by the United States Post Office marked to indicate that the United
States Postal Service is unable to deliver it, such notice, payment or report
and any subsequent notices, payments and reports shall be deemed to have been
duly given or made without further mailing (until such time as such Record
Holder or another Person notifies the Transfer Agent or the Partnership of a
change in his address) if they are available for the Partner or Assignee at the
principal office of the Partnership for a period of one year from the date of
the giving or making of such notice, payment or report to the other Partners
and Assignees. Any notice to the Partnership shall be deemed given if received
by the General Partner at the principal office of the Partnership designated
pursuant to Section 2.3. The General Partner may rely and shall be protected in
relying on any notice or other document from a Partner, Assignee or other
Person if believed by it to be genuine.
A-71
<PAGE>
Section 16.2 Further Action.
The parties shall execute and deliver all documents, provide all information
and take or refrain from taking action as may be necessary or appropriate to
achieve the purposes of this Agreement.
Section 16.3 Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 16.4 Integration.
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
Section 16.5 Creditors.
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
Section 16.6 Waiver.
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach of any other covenant, duty, agreement or condition.
Section 16.7 Counterparts.
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto or, in the case of a Person acquiring a Unit, upon accepting
the certificate evidencing such Unit or executing and delivering a Transfer
Application as herein described, independently of the signature of any other
party.
Section 16.8 Applicable Law.
This Agreement shall be construed in accordance with and governed by the laws
of the State of Delaware, without regard to the principles of conflicts of law.
Section 16.9 Invalidity of Provisions.
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
Section 16.10 Consent of Partners.
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be so taken upon
the concurrence of less than all of the Partners and each Partner shall be
bound by the results of such action.
A-72
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
General Partner:
U.S. TIMBERLANDS SERVICES COMPANY,
L.L.C.
By: _________________________________
Name:
Title:
ORGANIZATIONAL LIMITED PARTNER:
_____________________________________
John M. Rudey
LIMITED PARTNERS
All Limited Partners now and
hereafter admitted as Limited
Partners of the Partnership,
pursuant to powers of attorney now
and hereafter executed in favor of,
and granted and delivered to the
General Partner.
By: _________________________________
A-73
<PAGE>
EXHIBIT A TO THE AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
U.S. TIMBERLANDS COMPANY, L.P.
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS IN
U.S. TIMBERLANDS COMPANY, L.P.
No. Common Units
In accordance with Section 4.1 of the Amended and Restated Agreement of
Limited Partnership of U.S. Timberlands Company, L.P., as amended, supplemented
or restated from time to time (the "Partnership Agreement"), U.S. Timberlands
Company, L.P., a Delaware limited partnership (the "Partnership"), hereby
certifies that (the "Holder") is the registered owner of
Common Units representing limited partner interests in the Partnership
(the "Common Units") transferable on the books of the Partnership, in person or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed and accompanied by a properly executed application for transfer of the
Common Units represented by this Certificate. The rights, preferences and
limitations of the Common Units are set forth in, and this Certificate and the
Common Units represented hereby are issued and shall in all respects be subject
to the terms and provisions of, the Partnership Agreement. Copies of the
Partnership Agreement are on file at, and will be furnished without charge on
delivery of written request to the Partnership at, the principal office of the
Partnership located at 6400 Highway 66, Klamath Falls, Oregon 97601.
Capitalized terms used herein but not defined shall have the meanings given
them in the Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement,
(ii) represented and warranted that the Holder has all right, power and
authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (iii) granted the powers of attorney provided for in the
Partnership Agreement and (iv) made the waivers and given the consents and
approvals contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
Dated: U.S. TIMBERLANDS COMPANY, L.P.
Countersigned and Registered by:
U.S. Timberlands Services Company,
L.L.C., its General Partner
By: _________________________________
By: _________________________________
as Transfer Agent and Registrar President and Chief Executive
Officer
By: _________________________________
Authorized Signature By: _________________________________
Secretary
A-74
<PAGE>
[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as follows according to applicable laws or
regulations:
<TABLE>
<C> <S> <C>
TEN COM-- as tenants in common UNIF GIFT/TRANSFERS MIN
ACT
TEN ENT-- as tenants by the entireties Custodian
(Cust__________(Minor) )
JT TEN-- as joint tenants with right of survivorship under Uniform
and not as tenants in common Gifts/Transfers to
Minors Act _____________
(State)
</TABLE>
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
IN
U.S. TIMBERLANDS COMPANY, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF U.S. TIMBERLANDS COMPANY, L.P.
You have acquired an interest in U.S. Timberlands Company, L.P., 6400 Highway
66, Klamath Falls, Oregon 97601, whose taxpayer identification number is .
The Internal Revenue Service has issued U.S. Timberlands Company, L.P. the
following tax shelter registration number:
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT OR OTHER TAX BENEFIT OR REPORT ANY INCOME
BY REASON OF YOUR INVESTMENT IN U.S. TIMBERLANDS COMPANY, L.P.
You must report the registration number as well as the name and taxpayer
identification number of U.S. Timberlands Company, L.P. on Form 8271. FORM 8271
MUST BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT
OR OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN U.S.
TIMBERLANDS COMPANY, L.P.
If you transfer your interest in U.S. Timberlands Company, L.P. to another
person, you are required by the Internal Revenue Service to keep a list
containing (a) that person's name, address and taxpayer identification number,
(b) the date on which you transferred the interest and (c) the name, address
and tax shelter registration number of U.S. Timberlands Company, L.P. If you do
not want to keep such a list, you must (1) send the information specified above
to the Partnership, which will keep the list for this tax shelter, and (2) give
a copy of this notice to the person to whom you transfer your interest. Your
failure to comply with any of the above-described responsibilities could result
in the imposition of a penalty under Section 6707(b) or 6708(a) of the Internal
Revenue Code of 1986, as amended, unless such failure is shown to be due to
reasonable cause.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
A-75
<PAGE>
FOR VALUE RECEIVED, HEREBY ASSIGNS, CONVEYS, SELLS AND
TRANSFERS UNTO
_____________________________________ _____________________________________
(Please print or typewrite name and (Please insert Social Security or
address of Assignee) other identifying number of
Assignee)
Common Units representing limited partner interests evidenced by this
Certificate, subject to the Partnership Agreement, and does hereby irrevocably
constitute and appoint as its attorney-in-fact with full power
of substitution to transfer the same on the books of U.S. Timberlands Company,
L.P.
Date: NOTE: The signature to any
endorsement hereon must
correspond with the name as
written upon the face of this
Certificate in every
particular, without
alteration, enlargement or
change.
_____________________________________
SIGNATURE(S) MUST BE GUARANTEED BY A (Signature)
MEMBER FIRM OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS,
INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY
_____________________________________
(Signature)
SIGNATURE(S) GUARANTEED
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on
the form set forth below or (b) on a separate application that the Partnership
will furnish on request without charge. A transferor of the Common Units shall
have no duty to the transferee with respect to execution of the transfer
application in order for such transferee to obtain registration of the transfer
of the Common Units.
A-76
<PAGE>
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of U.S. Timberlands Company, L.P.
(the "Partnership"), as amended, supplemented or restated to the date hereof
(the "Partnership Agreement"), (b) represents and warrants that the Assignee
has all right, power and authority and, if an individual, the capacity
necessary to enter into the Partnership Agreement, (c) appoints the General
Partner of the Partnership and, if a Liquidator shall be appointed, the
Liquidator of the Partnership as the Assignee's attorney-in-fact to execute,
swear to, acknowledge and file any document, including, without limitation, the
Partnership Agreement and any amendment thereto and the Certificate of Limited
Partnership of the Partnership and any amendment thereto, necessary or
appropriate for the Assignee's admission as a Substituted Limited Partner and
as a party to the Partnership Agreement, (d) gives the powers of attorney
provided for in the Partnership Agreement, and (e) makes the waivers and gives
the consents and approvals contained in the Partnership Agreement. Capitalized
terms not defined herein have the meanings assigned to such terms in the
Partnership Agreement.
Date: _______________________________
_____________________________________ _____________________________________
Social Security or other identifying Signature of Assignee
number of Assignee
_____________________________________ _____________________________________
Purchase Price including Name and Address of Assignee
commissions, if any
Type of Entity (check one):
[_]Individual [_]Partnership [_]Corporation
[_]Trust [_]Other (specify)
____________________________________________
Nationality (check one):
[_]U.S. Citizen, Resident or Domestic Entity
[_]Non-resident Alien
[_]Foreign Corporation
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
COMPLETE EITHER A OR B:
A.Individual Interestholder
1.I am not a non-resident alien for purposes of U.S. income taxation.
2.My U.S. taxpayer identification number (Social Security Number) is _____ .
3.My home address is _____________________________________________________ .
A-77
<PAGE>
B.Partnership, Corporation or Other Interestholder
1._________________________________________________________ is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as
those terms are defined in the Code and Treasury Regulations).
2.The interestholder's U.S. employer identification number is ____________ .
3.The interestholder's office address and place of incorporation (if
applicable) is ___________________________________________________________ .
The interestholder agrees to notify the Partnership within sixty (60) days of
the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and belief it is true, correct and complete
and, if applicable, I further declare that I have authority to sign this
document on behalf of
_____________________________________
Name of Interestholder
_____________________________________
Signature and Date
_____________________________________
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and
is holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by
a registered representative who is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc., or, in the case of any other nominee holder, a person
performing a similar function. If the Assignee is a broker, dealer, bank,
trust company, clearing corporation, other nominee owner or an agent of
any of the foregoing, the above certification as to any person for whom
the Assignee will hold the Common Units shall be made to the best of the
Assignee's knowledge.
A-78
<PAGE>
APPENDIX B
No transfer of the Common Units evidenced hereby will be registered on the
books of the Company, unless the Certificate evidencing the Common Units to be
transferred is surrendered for registration or transfer and an Application for
Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Company will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer
application in order for such transferee to obtain registration of the
transfer of the Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of U.S. Timberlands Company, L.P.
(the "Company"), as amended, supplemented or restated to the date hereof (the
"Partnership Agreement"), (b) represents and warrants that the Assignee has
all right, power and authority and, if an individual, the capacity necessary
to enter into the Partnership Agreement, (c) appoints the General Partner and,
if a Liquidator shall be appointed, the Liquidator of the Company as the
Assignee's attorney-in-fact to execute, swear to, acknowledge and file any
document, including, without limitation, the Partnership Agreement and any
amendment thereto and the Certificate of Limited Partnership of the Company
and any amendment thereto, necessary or appropriate for the Assignee's
admission as a Substituted Limited Partner and as a party to the Partnership
Agreement, (d) gives the powers of attorney provided for in the Partnership
Agreement and (e) makes the waivers and gives the consents and approvals
contained in the Partnership Agreement. Capitalized terms not defined herein
have the meanings assigned to such terms in the Partnership Agreement.
Date: _______________________________
_____________________________________ _____________________________________
Social Security or other identifying Signature of Assignee
number of Assignee
_____________________________________ _____________________________________
Purchase Price including Name and Address of Assignee
commissions, if any
Type of Entity (check one):
[_]Individual [_]Partnership [_]Corporation
[_]Trust
[_]Other (specify) ________________________________________
Nationality (check one):
[_]U.S. Citizen, Resident or Domestic Entity
[_]Non-resident Alien
[_]Foreign Corporation
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Company must withhold tax with respect to certain transfers of
property if a holder of an interest in the Company is a foreign person. To
inform the Company that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
B-1
<PAGE>
COMPLETE EITHER A OR B:
A.Individual Interestholder
1.I am not a non-resident alien for purposes of U.S. income taxation.
2.My U.S. taxpayer identification number (Social Security Number) is _____ .
3.My home address is _____________________________________________________ .
B.Partnership, Corporation or Other Interestholder
1._________________________________________________________ is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as
those terms are defined in the Code and Treasury Regulations).
2.The interestholder's U.S. employer identification number is ____________ .
3.The interestholder's office address and place of incorporation (if
applicable) is ___________________________________________________________ .
The interestholder agrees to notify the Company within sixty (60) days of
the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Company and that any false statement contained
herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct
and complete and, if applicable, I further declare that I have authority to
sign this document on behalf of
_____________________________________
Name of Interestholder
_____________________________________
Signature and Date
_____________________________________
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing,
and is holding for the account of any other person, this application
should be completed by an officer thereof or, in the case of a broker or
dealer, by a registered representative who is a member of a registered
national securities exchange or a member of the National Association of
Securities Dealers, Inc., or, in the case of any other nominee holder, a
person performing a similar function. If the Assignee is a broker,
dealer, bank, trust company, clearing corporation, other nominee owner or
an agent of any of the foregoing, the above certification as to any
person for whom the Assignee will hold the Common Units shall be made to
the best of the Assignee's knowledge.
B-2
<PAGE>
APPENDIX C
GLOSSARY OF CERTAIN TERMS
Acquisition Facility: A $75.0 million revolving credit facility entered into
by the Operating Company to be used for acquisitions and improvements.
Adjusted Operating Surplus: With respect to any period, Operating Surplus
generated during such period (a) less (i) any net increase in working capital
borrowings during such period and (ii) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and (b) plus (i) any net decrease in
working capital borrowings during such period and (ii) any net increase in
cash reserves for Operating Expenditures during such period required by any
debt instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included
in clause (a)(i) of the definition of Operating Surplus.
Available Cash: With respect to any quarter prior to liquidation:
(a) the sum of (i) all cash and cash equivalents of the Partnership Group
on hand at the end of such quarter and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination
of Available Cash with respect to such quarter resulting from borrowings
for working capital purposes made subsequent to the end of such quarter,
less
(b) the amount of any cash reserves that is necessary or appropriate in
the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any member of the
Partnership Group is a party or by which it is bound or its assets are
subject, or (iii) provide funds for distributions under Section 6.4 or 6.5
of the Partnership Agreement in respect of any one or more of the next four
quarters; provided, however, that the General Partner may not establish
cash reserves pursuant to (iii) above if the effect of such reserves would
be that the Company is unable to distribute the Minimum Quarterly
Distribution on all Common Units with respect to such quarter; and,
provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such quarter
but on or before the date of determination of Available Cash with respect
to such quarter shall be deemed to have been made, established, increased
or reduced for purposes of determining Available Cash within such quarter
if the General Partner so determines. Notwithstanding the foregoing,
"Available Cash" with respect to the quarter in which the liquidation of
the Company occurs and any subsequent quarter shall equal zero.
Bank Credit Facility: The $75.0 million Acquisition Facility and the $25.0
million Working Capital Facility both entered into by the Operating Company.
BBF: One billion board feet.
BDT: Bone Dry Ton; a ton of residuals of lumber manufacturing that is free
of moisture.
BLM: The U.S. Department of Interior Bureau of Land Management.
Board Foot (BF): A unit of lumber measurement 1 foot square and 1 inch
thick.
Capital Account: The capital account maintained for a Partner pursuant to
the Partnership Agreement. The Capital Account of a Partner in respect of a
general partner interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such general partner interest, Common Unit,
Subordinated Unit, Incentive Distribution Right, or other Partnership Interest
were the only interest in the Company held by a Partner from and after the
date on which such general partner interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
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<PAGE>
Capital Surplus: All Available Cash distributed by the Company from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since the commencement of the Company equals
the Operating Surplus as of the end of the quarter prior to such distribution.
Any excess Available Cash will be deemed to be Capital Surplus.
Cause: Means a court of competent jurisdiction has entered a final, non-
appealable judgment finding the General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as a general
partner of the Company.
CERCLA and Superfund: Refer generally to the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended.
Chips: Wood generated either in a whole log chip mill or as a by-product of
the manufacture of lumber and plywood and used in the manufacture of pulp and
paper and various composite panel products such as medium density fiberboard,
particle board and oriented strand board.
Closing Date: The first date on which Common Units are sold by the Company
to the Underwriters pursuant to the provisions of the Underwriting Agreement.
Code: Internal Revenue Code of 1986, as amended.
Collins: Collins Products LLC.
Collins Supply Agreement: The 10-year log supply agreement that the Company
has entered into with Collins.
Commission: United States Securities and Exchange Commission.
Common Unit Arrearage: The amount by which the Minimum Quarterly
Distribution in respect of a quarter during the Subordination Period exceeds
the distribution of Available Cash from Operating Surplus actually made for
such quarter on a Common Unit, cumulative for such quarter and all prior
quarters during the Subordination Period.
Common Units: A Unit representing a fractional part of the Partnership
Interests of all limited partners and assignees and having the rights and
obligations specified with respect to Common Units in the Partnership
Agreement.
Company: U.S. Timberlands Company, L.P., a Delaware limited partnership, and
any successors thereto.
Compensation Committee: A committee of the board of directors of the General
Partner which will initially consist of five directors, including two
independent directors, which will determine the compensation of the officers
of the General Partner and administer its employee benefit plans.
Conflicts Committee: A committee of the board of directors of the General
Partner composed entirely of two or more directors who are neither officers,
employees or security holders of the General Partner nor officers, directors,
employees or security holders of any affiliate of the General Partner.
Contribution Agreement: The Contribution, Conveyance and Assumption
Agreement to be dated the Closing Date among the General Partner, the Company,
the Operating Company and certain other parties governing the Transactions
pursuant to which, among other things, the assets and operations of USTK will
be transferred and the liabilities will be assumed.
Counsel: Andrews & Kurth L.L.P., special counsel to the General Partner and
the Company.
Current Market Price: With respect to any class of Units listed or admitted
to trading on any national securities exchange as of any date, the average of
the daily Closing Prices (as hereinafter defined) for the 20 consecutive
Trading Days (as hereinafter defined) immediately prior to such date. "Closing
Price" for any day means the last sale price on such day, regular way, or in
case no such sale takes place on such day, the average of the closing bid and
asked prices on such day, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the principal national securities exchange
(other than the Nasdaq Stock Market) on which the Units of such class are
listed or admitted to trading or, if the Units of such class are not listed or
admitted to trading on any national securities exchange (other than the Nasdaq
Stock Market), the last quoted price on such day, or, if not so quoted, the
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<PAGE>
average of the high bid and low asked prices on such day in the over-the-
counter market, as reported by the Nasdaq Stock Market or such other system
then in use, or if on any such day the Units of such class are not quoted by
any such organization, the average of the closing bid and asked prices on such
day as furnished by a professional market maker making a market in the Units
of such class selected by the General Partner, or if on any such day no market
maker is making a market in the Units of such class, the fair value of such
Units on such day as determined reasonably and in good faith by the General
Partner. "Trading Day" means a day on which the principal national securities
exchange on which Units of any class are listed or admitted to trading is open
for the transaction of business or, if the Units of a class are not listed or
admitted to trading on any national securities exchange, a day on which
banking institutions in New York City generally are open.
Cutting Contract or Stumpage Contract: An agreement whereby a third party
purchases the right to harvest trees from a given tract of land within a given
time period, and title to the standing trees passes at the time of such
harvest. Total payment under such an agreement is tied to volume removed.
DBH: "Diameter at breast height," a term frequently used to describe a tree
measurement taken 4 1/2 feet above ground level.
DD&A: Depreciation, depletion and road amortization.
Delaware Act: The Delaware Revised Uniform Limited Partnership Act, 6 Del C.
(S)17-101, et seq., as amended, supplemented or restated from time to time,
and any successor to such statute.
Departing Partner: A former General Partner from and after the effective
date of any withdrawal or removal of such former General Partner pursuant to
the Partnership Agreement.
EBITDDA: Operating income plus depreciation, depletion and amortization and
cost of timber and property sales. EBITDDA should not be considered as an
alternative to net income, operating income, cash flows from operating
activities or any other measure of financial performance presented in
accordance with generally accepted accounting principles. EBITDDA is not
intended to represent cash flow and does not represent the measure of cash
available for distribution, but provides additional information for evaluating
the Company's ability to make the Minimum Quarterly Distribution.
ERISA: Employee Retirement Income Security Act of 1974, as amended.
Exchange Act: Securities Exchange Act of 1934, as amended.
Fee Timber: Timber which is located on property owned in fee, as opposed to
timber that is located on lands owned by other parties and is acquired
pursuant to cutting contracts.
General Partner or New Services: New Services, L.L.C., a Delaware limited
liability company, and its successors and permitted assigns as general partner
of the Company.
GIS: The Company's computerized geographic information system.
Holdings: U.S. Timberlands Holdings, L.L.C., a Delaware limited liability
company.
Holdings Debt: The $130.0 million of bank indebtedness incurred by Holdings
in connection with USTK's acquisition of the Klamath Falls Timberlands in
August 1996.
Incentive Distribution Right: A non-voting limited partner Partnership
Interest issued to the General Partner in connection with the transfer of
substantially all of its member interest in the Operating Company to the
Company pursuant to the Partnership Agreement, which Partnership Interest will
confer upon the holder thereof only the rights and obligations specifically
provided in the Partnership Agreement with respect to Incentive Distribution
Rights (and no other rights otherwise available to or other obligations of
holders of a Partnership Interest).
C-3
<PAGE>
Incentive Distributions: The distributions of Available Cash from Operating
Surplus initially made to the General Partner that are in excess of the
General Partner's aggregate 2% general partner interest.
Indenture: The indenture pursuant to which the Notes will be issued, a form
of which has been filed as an exhibit to the registration statement of which
this Prospectus is a part.
Initial Common Units: The Common Units sold in this offering.
Initial Unit Price: An amount per Unit equal to the initial public offering
price of the Common Units as set forth on the outside front cover page of this
Prospectus.
Interim Capital Transactions: The following transactions if they occur prior
to liquidation: (a) borrowings, refinancings and refundings of indebtedness
and sales of debt securities (other than for working capital purposes and
other than for items purchased on open account in the ordinary course of
business) by any Group Member; (b) sales of equity interests by any Group
Member (other than Common Units sold to the Underwriters pursuant to the
exercise of their over-allotment option); and (c) sales or other voluntary or
involuntary dispositions of any assets of any Group Member (other than (i)
sales or other dispositions of inventory, accounts receivable and other assets
in the ordinary course of business, including the exchange of timber or real
property for other timber or real property to the extent that the timber or
real property received in exchange is of equal or greater value, or the sale
of timber or real property, to the extent the proceeds are invested within 270
days in other timber or real property, and (ii) sales or other dispositions of
assets as a part of normal retirements or replacements), in each case prior to
the Liquidation Date. Notwithstanding anything herein to the contrary, Interim
Capital Transactions shall not include (A) the first $50.0 million in real
property (and related timber) sales made by the Partnership Group subsequent
to the Closing Date and (B) stumpage, timber deed and other bulk timber sales
(which, in the case of (A) and (B) would otherwise be deemed Interim Capital
Transactions) generally of the type described in the Partnership's strategic
plan approved by the Board of Directors of the General Partner prior to the
Closing Date.
IRS: Internal Revenue Service.
Klamath Falls Timberlands: The approximately 600,000 fee acres of timberland
acquired by USTK and Old Services in August 1996 from Weyerhaeuser.
Logs: The stem of the tree after it has been felled. The raw material from
which lumber, plywood and other wood products are processed.
Long-Term Incentive Plan: The U.S. Timberlands Company, L.P. 1997 Long-Term
Incentive Plan.
Management Incentive Plan: The U.S. Timberlands Company, L.P. Management
Incentive Plan.
MBF: One thousand board feet. A common unit of measure for pricing standing
timber as well as lumber.
MBG: Mason, Bruce & Girard, Inc., independent forest resource consultants.
MMBF: One million board feet.
Merchantable Timber: A tree that will produce a sound log 16 feet in length
and at least 5p in diameter, inside bark, at the small end. Timber may be
merchantable even if it has not reached its optimum sale value.
Minimum Quarterly Distribution: $0.50 per Unit with respect to each quarter
or $2.00 per Unit on an annualized basis, subject to adjustment as described
in "Cash Distribution Policy--Distributions from Capital Surplus" and "Cash
Distribution Policy--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
Nasdaq: Nasdaq National Market.
Non-citizen Assignee: A Limited Partner or assignee who (i) fails to furnish
information about nationality, citizenship, residency or other related status
within 30 days after a request by the General Partner for such information, or
(ii) the General Partner determines after receipt of such information is not
an eligible citizen.
C-4
<PAGE>
Notes: The $225.0 million aggregate principal amount of unsecured senior
notes due 2007 to be offered publicly by the Company.
Ochoco: Ochoco Lumber Company.
Ochoco Acquisition: The acquisition of the Ochoco Timberlands by USTK from
Ochoco on July 15, 1997.
Ochoco Timberlands: The approximately 42,000 fee acres of timberland and
cutting rights on approximately 3,000 acres of timberland acquired by USTK on
July 15, 1997 from Ochoco.
Old Services: U.S. Timberlands Management Company, L.L.C., formerly known as
U.S. Timberlands Services Company, L.L.C.
Operating Company: U.S. Timberlands Klamath Falls, L.L.C., a Delaware
limited liability company, and any successors thereto.
Operating Company Agreement: The Amended and Restated Operating Agreement of
the Operating Company, as it may be amended, supplemented or restated from
time to time (the form of which has been filed as an exhibit to the
registration statement of which this Prospectus is a part).
Operating Expenditures: All Partnership Group expenditures, including, but
not limited to, taxes, reimbursements of the General Partner, debt service
payments and capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal and premium on
indebtedness shall not be an Operating Expenditure if the payment is (i)
required in connection with the sale or other disposition of assets or (ii)
made in connection with the refinancing or refunding of indebtedness with
the proceeds from new indebtedness or from the sale of equity interests.
For purposes of the foregoing, at the election and in the reasonable
discretion of the General Partner, any payment of principal or premium
shall be deemed to be refunded or refinanced by any indebtedness incurred
or to be incurred by the Partnership Group within 180 days before or after
such payment to the extent of the principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or (iii)
distributions to partners. Where capital expenditures are made in part for
Acquisitions or Capital Improvements and in part for other purposes, the
General Partner's good faith allocation between the amounts paid for each
shall be conclusive.
Operating Surplus: As to any period prior to liquidation, on a cumulative
basis and without duplication:
(a) the sum of (i) $15.0 million plus all cash and cash equivalents of
the Partnership Group on hand as of the close of business on the Closing
Date, (ii) all cash receipts of the Partnership Group for the period
beginning on the Closing Date and ending with the last day of such period,
other than cash receipts from Interim Capital Transactions and (iii) all
cash receipts of the Partnership Group after the end of such period but on
or before the date of determination of Operating Surplus with respect to
such period resulting from borrowings for working capital purposes, less
(b) the sum of (i) Operating Expenditures for the period beginning on the
Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures, provided however, that disbursements made (including
contributions to a member of the Partnership Group or disbursements on
behalf of a member of the Partnership Group) or cash reserves established,
increased or reduced after the end of such period but on or before the date
of determination of Available Cash with respect to such period shall be
deemed to have been made, established, increased or reduced for purposes of
determining Operating Surplus, within such period if the General Partner so
determines. Notwithstanding the foregoing, "Operating Surplus" with respect
to the quarter in which the liquidation occurs and any subsequent quarter
shall equal zero.
C-5
<PAGE>
Opinion of Counsel: A written opinion of counsel, acceptable to the General
Partner in its reasonable discretion, to the effect that the taking of a
particular action will not result in the loss of the limited liability of the
limited partners of the Company or cause the Company to be treated as an
association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes.
OSHA: Federal Occupational Safety and Health Act.
Partnership Agreement: The Amended and Restated Agreement of Limited
Partnership of the Company (the form of which is included in this Prospectus
as Appendix A), as it may be amended, restated or supplemented from time to
time. Unless the context requires otherwise, references to the Partnership
Agreement constitute references to the Partnership Agreement of the Company
and to the Operating Company Agreement, collectively.
Partnership Group: The Company, the Operating Company and any subsidiary of
either such entity, treated as a single consolidated entity.
Partnership Interest: An ownership interest in the Company, which shall
include the general partner interests and limited partner interests.
Partnership Security: Means any class or series of equity interest in the
Company (but excluding any options, rights, warrants and appreciation rights
relating to any equity interest in the Company), including, without
limitation, Common Units, Subordinated Units and Incentive Distribution
Rights.
Plantations: The 184,000 acres of the Timberlands which are actively managed
tree farms.
Predecessor: The southern Oregon timberlands operations of Weyerhaeuser
acquired by the Company in the Weyerhaeuser Acquisition.
Public Note Offering: The public offering by the Company of the Notes.
Registration Statement: The Registration Statement on Form S-1, as amended
(No. 333-32811), filed by the Company with the Commission, relating to the
Common Units.
Restricted Activities: The (i) acquisition, exchange, operation or sale of
timber-producing real property or rights to harvest timber, a principal
purpose of which is producing logs or other forest products, (ii) harvesting
of timber other than harvesting which is incidental to the ownership or
operation of real property not owned or operated for a principal purpose of
producing logs or other forest products, (iii) sale, exchange or purchase of
logs other than sales, exchanges or purchases which are incidental to the
ownership or operation of real property not owned or operated for a principal
purpose of producing logs or other forest products, and (iv) any and all other
activities relating to the forest products industry to the extent such
activities compete with activities of the Company or the Operating Company.
RROW: Reciprocal right-of-way.
Seedling: A young tree generally less than three years of age used as
planting stock for reforestation.
Securities Act: The Securities Act of 1933, as amended.
C-6
<PAGE>
Silviculture: The practice of cultivating forest crops based on the
knowledge of forestry; more particularly, controlling the establishment,
composition and growth of forests.
Softwoods: Coniferous trees, usually evergreen and having needles or
scalelike leaves, such as Ponderosa pine, Douglas fir, white pine and spruce.
Stand: An area of trees possessing sufficient uniformity of age, size and
composition to be distinguished from adjacent areas so as to form a management
unit. The term is usually applied to forests of commercial value.
Stumpage: Standing timber (timber as it stands uncut in the woods).
Subordinated Unit: A Unit representing a fractional part of the Partnership
Interests of all limited partners and assignees (other than of holders of the
Incentive Distribution Rights) and having the rights and obligations specified
with respect to Subordinated Units in the Partnership Agreement. The term
"Subordinated Unit" as used herein does not include a Common Unit.
Subordination Period: The Subordination Period will generally extend from
the closing of this offering until the first to occur of: (a) the first day of
any quarter beginning after December 31, 2002 in respect of which (i)
distributions of Available Cash from Operating Surplus on each of the
outstanding Common Units and the Subordinated Units with respect to each of
the three consecutive, non-overlapping four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
during such periods, (ii) the Adjusted Operating Surplus generated during each
of the three consecutive, non-overlapping four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units,
plus the related distribution on the general partner interests in the Company
and in the Operating Company, and (iii) there are no outstanding Common Unit
Arrearages; and (b) the date on which the General Partner is removed as
general partner of the Company upon the requisite vote by holders of
Outstanding Units under circumstances where Cause does not exist and Units
held by the General Partner and its Affiliates are not voted in favor of such
removal. Prior to the end of the Subordination Period, a portion of the
Subordinated Units will convert into Common Units on a one-for-one basis on
the first day after the record date established by the General Partner for any
quarter ending on or after (a) December 31, 2000 with respect to one-quarter
of the Subordinated Units (1,101,851 Subordinated Units) and (b) December 31,
2001 with respect to an additional one-quarter of the Subordinated Units
(1,101,851 Subordinated Units), on a cumulative basis, in respect of which (i)
distributions of Available Cash from Operating Surplus on the Common Units and
the Subordinated Units with respect to each of the three consecutive, non-
overlapping four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the Common
Units and Subordinated Units during such periods, (ii) the Adjusted Operating
Surplus generated during each of the two consecutive, non-overlapping four-
quarter periods immediately preceding such date equaled or exceeded the sum of
the Minimum Quarterly Distribution on all of the Common Units and Subordinated
Units that were outstanding during such periods on a fully diluted basis (i.e,
taking into account for purposes of such determination all Outstanding Common
Units, all Outstanding Subordinated Units, all Common Units and Subordinated
Units issuable upon exercise of employee options that have, as of the date of
determination, already vested or are scheduled to vest prior to the end of the
quarter immediately following the quarter with respect to which such
determination is made, and all Common Units and Subordinated Units that have
as of the date of determination, been earned by but not yet issued to
management of the Partnership in respect of incentive compensation), plus the
related distribution on the general partner interests in the Company and in
the Operating Company, and (iii) there are no outstanding Common Unit
Arrearages; provided, however, that the early conversion of the second quarter
of Subordinated Units may not occur until at least one year following the
early conversion of the first quarter of Subordinated Units. In addition, if
the General Partner is removed as general partner of the Company under
circumstances where Cause does not exist and Units held by the General Partner
and its affiliates are not voted in favor of such removal (i) the
Subordination Period will end and all outstanding Subordinated Units will
immediately and automatically convert into Common Units on a one-for-one
basis, (ii) any existing Common Unit Arrearages will be extinguished and (iii)
the General Partner will have the right to convert their 2% general partner
interests (and all the rights to the Incentive Distribution) into Common Units
or to receive cash in exchange for such interests.
C-7
<PAGE>
Target Distribution Levels: See "Cash Distribution Policy--Incentive
Distributions--Hypothetical Annualized Yield."
Thinning: Removal of selected trees, usually to eliminate overcrowding, to
remove dead, dying, deformed or diseased trees and to promote more rapid
growth of desired trees. "Pre-commercial thinning" refers to thinning that
does not directly produce merchantable timber. "Commercial thinning" results
directly in merchantable timber.
Timber: Standing trees not yet harvested.
Timberlands: The timber properties of the Company.
TMG: U.S. Timberlands Management Group, L.L.C. an entity 100% owned and
controlled by Rudey Timber Company L.L.C.
Transactions: The transactions related to the formation of the Company, the
issuance of the Notes, the entering into of the Bank Credit Facility and the
other transactions to occur in connection with this offering.
Transfer Agent: American Stock Transfer Corporation serving as registrar and
transfer agent for the Common Units.
Transfer Application: An application for transfer of Units in the form set
forth on the back of a certificate, substantially in the form included in this
Prospectus as Appendix B, or in a form substantially to the same effect in a
separate instrument.
Unitholders: Holders of the Common Units and the Subordinated Units,
collectively.
Unit Majority: During the Subordination Period, at least a majority of the
outstanding Common Units, voting as a class, and at least a majority of the
outstanding Subordinated Units, voting as a class and, thereafter, at least a
majority of the outstanding Units.
Units: The Common Units and the Subordinated Units, collectively, but not
including the right to receive Incentive Distributions.
Unrecovered Capital: At any time, the Initial Unit Price, less the sum of
all distributions theretofore made in respect of an Initial Common Unit
constituting Capital Surplus and any distributions of cash (or the net agreed
value of any distributions in kind) in connection with the dissolution and
liquidation of the Company theretofore made in respect of such Unit, adjusted
as the General Partner determines to be appropriate to give effect to any
distribution, subdivision or combination of such Units.
USFS: United States Department of Agriculture--Forest Service.
USFWS: United States Fish and Wildlife Service.
USTK: U.S. Timberlands Klamath Falls, L.L.C., a Delaware limited liability
Company which, upon consummation of the Transactions, will become the
Company's Operating Company.
USTK Debt: The $285.0 million of bank indebtedness incurred by USTK in July
1997 to refinance indebtedness incurred in connection with the acquisition of
the Klamath Falls Timberlands and to finance the acquisition of the Ochoco
Timberlands.
Weyerhaeuser: Weyerhaeuser Company.
Weyerhaeuser Acquisition: The acquisition by USTK and Old Services in August
1996 of the Klamath Falls Timberlands from Weyerhaeuser.
Working Capital Facility: A $25.0 million revolving credit facility entered
into by the Operating Company to be used for working capital purposes.
C-8
<PAGE>
[PHOTOGRAPH OF THE COMPANY'S PROPERTIES]
<PAGE>
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- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Forward-Looking Statements............................................... 28
Risk Factors............................................................. 28
The Transactions......................................................... 40
Use of Proceeds.......................................................... 41
Capitalization........................................................... 42
Dilution................................................................. 43
Cash Distribution Policy................................................. 44
Cash Available for Distribution.......................................... 52
Selected Historical and Pro Forma Financial and Operating Data........... 54
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 57
Business and Properties.................................................. 66
Management............................................................... 78
Security Ownership of Certain Beneficial Owners and Management........... 85
Certain Relationships and Related Transactions........................... 86
Conflicts of Interest and Fiduciary Responsibilities..................... 87
Description of the Common Units.......................................... 91
The Partnership Agreement................................................ 93
Units Eligible for Future Sale........................................... 103
Tax Considerations....................................................... 105
Investment in the Company by Employee Benefit Plans...................... 122
Underwriting............................................................. 123
Validity of the Common Units............................................. 125
Experts.................................................................. 125
Available Information.................................................... 125
Index to Financial Statements............................................ F-1
Form of Amended and Restated Agreement of Limited Partnership of U.S.
Timberlands Company, L.P................................................ A-1
Form of Application of Transfer of Common Units.......................... B-1
Glossary of Certain Terms................................................ C-1
</TABLE>
-----------
UNTIL , 1997 (25 CALENDAR DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN COMMON UNITS, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN AD-
DITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UN-
DERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENT OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7,458,684
COMMON UNITS
U.S. TIMBERLANDS
COMPANY, L.P.
[LOGO OF U.S.TIMBERLANDS]
REPRESENTING
LIMITED PARTNER INTERESTS
-------
PROSPECTUS
, 1997
-------
SMITH BARNEY INC.
DEUTSCHE MORGAN GRENFELL
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are the expenses (other than underwriting discounts and
commissions) expected to be incurred in connection with the issuance and
distribution of the securities registered hereby. With the exception of the
Securities and Exchange Commission registration fee, the NASD filing fee and
the NYSE filing fee, the amounts set forth below are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 55,889
NASD filing fee............................................... 18,942
Nasdaq filing fee............................................. 34,580
Printing and engraving expenses............................... 375,000
Legal fees and expenses....................................... 1,325,000
Accounting fees and expenses.................................. 550,000
Other professional and appraisal fees......................... *
Transfer agent and registrar fees............................. 15,000
Miscellaneous expenses........................................ *
----------
Total..................................................... $2,800,000
==========
</TABLE>
- --------
* To be furnished by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Section of the Prospectus entitled "The Partnership Agreement--
Indemnification" is incorporated herein by this reference.
Reference is made to Section 7 of the Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement.
Subject to any terms, conditions or restrictions set forth in the
Partnership Agreement, Section 17-108 of the Delaware Revised Limited
Partnership Act empowers a Delaware limited partnership to indemnify and hold
harmless any partner or other person from and against all claims and demands
whatsoever.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
There has been no sale of securities of the Company within the past three
years.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
a. Exhibits
<TABLE>
<C> <S>
*1.1 --Form of Underwriting Agreement
3.1 --Form of Amended and Restated Agreement of Limited Partnership of
U.S. Timberlands Company, L.P. (included as Appendix A to the
Prospectus)
*3.2 --Form of Amended and Restated Operating Agreement of U.S.
Timberlands Klamath Falls, L.L.C.
*5.1 --Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered
*8.1 --Opinion of Andrews & Kurth L.L.P. relating to tax matters
*10.1 --Form of Credit Agreement among U.S. Timberlands Klamath Falls,
L.L.C. and certain banks
*10.2 --Form of Note Indenture between U.S. Timberlands Company, L.P.
and , as trustee
*10.3 --Form of Contribution, Conveyance and Assumption Agreement among
U.S. Timberlands Company, L.P. and certain other parties
*10.4 --Form of U.S. Timberlands Company, L.P. 1997 Long-Term Incentive
Plan
*10.5 --Form of Employment Agreements for Messrs. Rudey, Stephens, Kobacker
and Morgan
*21.1 --List of Subsidiaries
23.1 --Consent of Arthur Andersen LLP
23.2 --Consent of Mason, Bruce & Girard, Inc.
*23.3 --Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1 and 8.1)
**24.1 --Powers of Attorney
27.1 --Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
** Previously filed
b. Financial Statement Schedules
All financial statement schedules are omitted because the information is not
required, is not material or is otherwise included in the financial statements
or related notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and
II-2
<PAGE>
contained in a form of Prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be a part of this Registration Statement as of the time it was
declared effective.
(ii) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on October 16, 1997.
U.S. Timberlands Company, L.P.
By: New Services, L.L.C.*
As General Partner
By: /s/ John M. Rudey
----------------------------------
Name: John M. Rudey
Title: Chairman
- --------
* Upon the consummation of this offering, New Services, L.L.C. will change
its name to "U.S. Timberlands Services Company, L.L.C."
II-4
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND DATES INDICATED BELOW.
SIGNATURE TITLE DATE
/s/ John M. Rudey Chairman and October 16, 1997
- ------------------------------------- Director
JOHN M. RUDEY
/s/ John J. Stephens* President, Chief October 16, 1997
- ------------------------------------- Executive Officer
JOHN J. STEPHENS and Director
/s/ Edward J. Kobacker* Executive Vice October 16, 1997
- ------------------------------------- President, Chief
EDWARD J. KOBACKER Operating Officer
and Director
/s/ Michael J. Morgan* Vice President and October 16, 1997
- ------------------------------------- Chief Financial
MICHAEL J. MORGAN Officer
/s/ John H. Beuter* Director October 16, 1997
- -------------------------------------
JOHN H. BEUTER
/s/ Aubrey L. Cole* Director October 16, 1997
- -------------------------------------
AUBREY L. COLE
/s/ George R. Hornig* Director October 16, 1997
- -------------------------------------
GEORGE R. HORNIG
/s/ Robert F. Wright* Director October 16, 1997
- -------------------------------------
ROBERT F. WRIGHT
/s/ John M. Rudey October 16, 1997
By: ___________________________
JOHN M. RUDEY
ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
EXHIBITS
<TABLE>
<C> <S>
*1.1 --Form of Underwriting Agreement
3.1 --Form of Amended and Restated Agreement of Limited Partnership of U.S.
Timberlands Company, L.P. (included as Appendix A to the Prospectus)
*3.2 --Form of Amended and Restated Operating Agreement of U.S. Timberlands
Klamath Falls, L.L.C.
*5.1 --Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered
*8.1 --Opinion of Andrews & Kurth L.L.P. relating to tax matters
*10.1 --Form of Credit Agreement among U.S. Timberlands Klamath Falls, L.L.C.
and certain banks
*10.2 --Form of Note Indenture between U.S. Timberlands Company, L.P. and
, as trustee
*10.3 --Form of Contribution, Conveyance and Assumption Agreement among U.S.
Timberlands Company, L.P. and certain other parties
*10.4 --Form of U.S. Timberlands Company, L.P. 1997 Long-Term Incentive Plan
*10.5 --Form of Employment Agreements for Messrs. Rudey, Stephens, Kobacker
and Morgan
*21.1 --List of Subsidiaries
23.1 --Consent of Arthur Andersen LLP
23.2 --Consent of Mason, Bruce & Girard, Inc.
*23.3 --Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1 and 8.1)
**24.1 --Powers of Attorney
27.1 --Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
** Previously filed
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Portland, Oregon
October 15, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT FORESTERS
As independent forest resource consultants, we hereby consent to the use in
this Registration Statement of our reports relating to the Company's timber
inventory, acreage, age, growth rate, size and species and our appraisals
thereof included in or made a part of this Registration Statement and to all
references to our Firm included in this Registration Statement.
MASON, BRUCE & GIRARD, INC.
Portland, Oregon
October 15, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM U.S.
TIMBERLANDS COMPANY, L.P.'S JUNE 30, 1997 AND DECEMBER 31, 1996 COMBINED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS OTHER <F1>
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 AUG-30-1996
<PERIOD-END> JUN-30-1997 DEC-31-1996
<CASH> 30,387 16,613
<SECURITIES> 0 0
<RECEIVABLES> 3,697 1,563
<ALLOWANCES> 0 0
<INVENTORY> 0 78
<CURRENT-ASSETS> 35,105 29,586
<PP&E> 1,762 1,478
<DEPRECIATION> 164 58
<TOTAL-ASSETS> 313,637 310,191
<CURRENT-LIABILITIES> 18,538 8,127
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (9,901) (2,936)
<TOTAL-LIABILITY-AND-EQUITY> 313,637 310,191
<SALES> 23,796 14,019
<TOTAL-REVENUES> 23,796 14,019
<CGS> 9,002 6,179
<TOTAL-COSTS> 17,289 18,786
<OTHER-EXPENSES> (20) 36
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 12,300 8,233
<INCOME-PRETAX> (5,774) (13,036)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,774) (13,036)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,774) (13,036)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<FN>
<F1> The income statement data for the period ended December 31, 1996
represents only four months of operations as the Company was formed on August
30, 1996.
</FN>
</TABLE>
