<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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U.S. TIMBERLANDS COMPANY, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 0800 91-1842156
(Primary Standard Industrial (I.R.S. Employer
(State or other Classification Code Number) Identification Number)
jurisdiction of
incorporation or
organization)
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)
------------
U.S. TIMBERLANDS FINANCE CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 0800 [TO BE APPLIED FOR]
(Primary Standard Industrial (I.R.S. Employer
(State or other Classification Code Number) Identification Number)
jurisdiction of
incorporation or
organization)
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)
------------
AS TO BOTH REGISTRANTS:
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. 425 LEXINGTON BAKER & BOTTS, L.L.P. 910 LOUISIANA
AVENUE NEW YORK, NEW YORK 10017 HOUSTON, TEXAS 77002 (713) 229-1234
(212) 850-2800 ATTN: JOSHUA DAVIDSON
ATTN: JONATHAN P. CRAMER
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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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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<S> <C> <C>
% Senior Notes Due 2007.................. $100,000,000 $30,304
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
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THE 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 AUGUST 26, 1997
PROSPECTUS
$100,000,000
U.S. TIMBERLANDS COMPANY, L.P.
U.S. TIMBERLANDS FINANCE CORP.
% SENIOR NOTES DUE 2007
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The % Senior Notes due 2007 (the "Notes") offered hereby are being issued,
jointly and severally, by U.S. Timberlands Company, L.P., a recently formed
Delaware limited partnership (the "Company"), and U.S. Timberlands Finance
Corp. ("Finance Corp."), a wholly owned subsidiary of the Company. The Company
and Finance Corp. are collectively referred to as the "Issuers."
The Notes will bear interest from the date of issuance at the rate of % per
annum, payable semi-annually in arrears, on and of each year,
commencing , 1998, and will mature on , 2007, unless previously
redeemed. The Notes are redeemable at the option of the Issuers, in whole or in
part, on or after , 2002, at the redemption prices set forth herein, plus
accrued and unpaid interest to the redemption date. In addition, at any time on
or prior to , 2000, the Issuers may redeem Notes with the net cash
proceeds of a public offering of common units or other equity interests of the
Partnership, at % of the principal amount thereof, plus accrued interest to
the redemption date, provided that at least 65% of the principal amount of
Notes originally issued remain outstanding immediately following such
redemption. In the event of a Change of Control (as defined herein), holders of
the Notes will have the right to require the Issuers to purchase each such
holder's Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of purchase.
The Notes will be general unsecured obligations of the Issuers, and will rank
pari passu in right of payment with all existing and future senior indebtedness
of the Issuers and senior to all existing and future subordinated indebtedness
of the Issuers. However, the Notes will be subordinated, in effect, in right of
payment to claims of creditors (other than the Company) and preferred
securityholders of the Company's subsidiaries, including 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"). In connection with the Offering, the Operating Company intends to
complete a private placement of $150 million aggregate principal amount of
unsecured senior notes (the "Private Notes"). At March 31, 1997, after giving
pro forma effect to this offering and the other transactions described herein,
the Company's subsidiaries had outstanding liabilities to creditors other than
the Company of approximately $185.9 million, including $150.0 million
outstanding pursuant to the Private Notes and $32.6 million outstanding under
the Acquisition Facility (as defined below).
This offering is subject to, among other things, the completion by the
Operating Company of the private placement of the Private Notes, the completion
by the Company of a public offering of approximately 7,232,000 common units
representing limited partner interests in the Company (the "Common Units"), and
the closing by the Operating Company of a $25.0 million revolving credit
facility to be used for working capital and other partnership purposes (the
"Working Capital Facility") and a $100.0 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."
SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE
NOTES.
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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 THE 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 THE
PUBLIC (1) COMMISSIONS (2) ISSUERS (3)
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<S> <C> <C> <C>
Per Note % % %
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Total $ $ $
</TABLE>
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(1) Plus accrued interest, if any, from the date of issuance.
(2) The Issuers have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting estimated expenses of $250,000, payable by the Issuers.
-------
The Notes 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 delivery of the Notes will be made in book-
entry form through the facilities of The Depository Trust Company on or about
, 1997.
-------
SMITH BARNEY INC.
BANCAMERICA SECURITIES, INC.
DEUTSCHE MORGAN GRENFELL
, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
ii
<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. The transactions related
to the formation of the Company, the public offering of Common Units, the
issuance of the Private 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 A 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 643,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing an estimated total merchantable timber volume of 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 5 million genetically improved conifer seedlings annually from
its nursery, about 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 1970s and acreage has
been planted each year since then. Currently, the Plantations contain age
classes ranging generally from two to 25 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 601,000 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. On July 15, 1997, USTK acquired
approximately 42,000 fee acres of timberland and cutting rights on
approximately 3,000 acres of timberland (the "Ochoco Timberlands"), containing
an estimated
1
<PAGE>
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.
Prior to the sale of the Klamath Falls Timberlands to USTK, approximately 65%
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 approximately 55
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 several 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 Company's current Executive
Vice President and Chief Operating Officer, will become the President and Chief
Executive Officer of the Company and that John J. Stephens, the current
President and Chief Executive Officer, will become Vice Chairman 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 has
identified approximately 30,000 acres of small tracts that it intends to sell
for higher and better uses over the next ten years. In addition, the Company
has identified two tracts aggregating approximately 35,000 acres that it
intends to sell over 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 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
4
<PAGE>
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.
U.S. TIMBERLANDS FINANCE CORP.
Finance Corp., a wholly-owned subsidiary of the Company which has nominal
assets and will not conduct any operations, is acting as co-obligor for the
Notes. Certain institutional investors that might otherwise be limited in their
ability to invest in securities issued by partnerships, by reason of the legal
investment laws of their states of organization or their charter documents, may
be able to invest in the Notes because Finance Corp. is a co-obligor.
TRANSACTIONS AT CLOSING
Concurrently with the closing of this offering, Old Services will contribute
all of its assets, including its timber operations, to U.S. Timberlands
Services Company, L.L.C., a newly formed Delaware limited liability company
(the "General Partner" or "New Services"), 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 1,463,417 subordinated limited partner interests in the
Company ("Subordinated Units" and, collectively with the Common Units, the
"Units") and Holdings will contribute all of its interest in USTK to the
Company in exchange for 4,046,683 Subordinated Units. The General Partner will
then distribute the Subordinated Units to Old Services. Approximately 163,749
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 1,299,668 Subordinated Units; Holdings
will own 4,046,683 Subordinated Units; and Messrs. Stephens and Hornig will own
an aggregate of 163,749 Subordinated Units. The 5,510,100 Subordinated Units
owned by Old Services, Holdings and Messrs. Stephens and Hornig will represent
an aggregate 42.4% interest in the Company.
Concurrently with the closing of this offering, (i) the Company expects to
issue and sell approximately 7,232,000 Common Units through a public offering
(the "MLP Offering"), (ii) the Operating Company expects to issue $150.0
million aggregate principal amount of Private Notes to certain institutional
investors in a private placement (the "Private Note Placement"), (iii) the
Operating Company expects to enter into the Bank Credit Facility, which will
include a $25.0 million Working Capital Facility and a $100.0 million
Acquisition Facility, and (iv) the Company will contribute to the Operating
Company the proceeds from the sale of the Notes offered hereby (approximately
$97.0 million after deducting underwriting discounts and commissions but before
expenses associated with this offering) and the proceeds from the sale of the
Common Units (estimated to be approximately $138.5 million after deducting
underwriting discounts and commissions but before expenses associated with the
MLP Offering and assuming that the underwriters' over-allotment option with
respect to the MLP Offering is not exercised). Proceeds from the sale of the
Notes, together with the proceeds from the sale of Common Units, approximately
$17.9 million to be borrowed by the Operating Company under the Acquisition
5
<PAGE>
Facility and cash on hand (estimated to be approximately $35.4 million), will
be used by the Operating Company to repay approximately $434.3 million of
indebtedness of the Operating Company (including accrued interest) and to pay
expenses related to the Transactions (estimated to be approximately $17.3
million). See "The Transactions."
For additional information regarding the terms of the Private Notes and the
Bank Credit Facility, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Description of Indebtedness."
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
Proceeds from Notes offering................................... $100.0
Proceeds from MLP Offering..................................... 148.3
Proceeds from Private Note Placement........................... 150.0
Drawdown on Acquisition Facility............................... 17.9
Cash on hand................................................... 35.4
------
Total........................................................ $451.6
======
USES OF FUNDS
Repayment of outstanding bank indebtedness (a)................. $434.3
Payment of fees and expenses of the Transactions (b)........... 17.3
------
Total........................................................ $451.6
======
</TABLE>
- - - --------
(a) 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) $285.0
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 $6.4
million of accrued interest.
(b) Represents approximately $3.3 million in underwriting discounts and
commissions and expenses relating to this offering and approximately $14.0
million in underwriting discounts and commissions and expenses relating to
the MLP Offering and the Private Note Placement.
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 three
months ended March 31, 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 three months ended March 31, 1997 are derived from the historical
unaudited 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 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 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 5,779
------- ------- ------- ------- ------- -------- --------
Operating income
(loss)................ 13,149 15,094 10,082 11,061 2,696 (4,767) 38
Interest expense....... -- -- -- -- -- 7,316 23,592
Amortization of
deferred financing
fees and debt
guarantee fees........ -- -- -- -- -- 1,326 330
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) (23,512)
Minority interest(c)... -- -- -- -- -- -- 139
------- ------- ------- ------- ------- -------- --------
Net income (loss)(d)... $13,471 $14,797 $ 9,942 $11,616 $ 2,695 $(13,036) $(23,373)
======= ======= ======= ======= ======= ======== ========
Limited partners'
interests in net
loss.................. $(23,138)
========
</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)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS AND OTHER
DATA:
EBITDDA(e)............. $ 14,680 $16,595 $11,537 $12,547 $ 3,623 $ (1,444) $ 8,414
Capital expenditures--
Maintenance(f)........ 1,553 1,157 2,098 2,082 459 360
Cash flow from
operations............ 16,784 15,124 13,173 11,810 5,512 (2,984)
Ratio of earnings
(losses) to fixed
charges(g)............
Ratio of EBITDDA to
interest expense(h)...
BALANCE SHEET DATA (AT
PERIOD END):
Working capital........ $ 793 $ 2,068 $ 211 $ 1,304 $ 524 $ 21,459
Timber, timberlands and
logging roads......... 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(i)..... 70,982 69,291 69,311 63,235 32,398 27,389 59,787
Used in chip sales..... 33,012 18,996 10,224 18,315 5,195 -- 5,195
Total................. 103,994 88,287 79,535 81,550 37,593 27,389 64,982
Sales volumes:
Log and stumpage sales
(MBF)(i).............. 70,903 66,250 69,405 63,443 32,398 30,210 62,608
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>
8
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(A) FORMA(B)
----------- ----------- ------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
----------------------- 1997
------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenues:
Logs..................................... $ 3,417 $ 8,827 $ 8,827
Timberland and property sales............ -- 3,494 3,494
By-products and other.................... 616 13 13
------- -------- --------
Total revenues........................... 4,033 12,334 12,334
Operating costs:
Cost of products sold.................... 2,407 3,525 3,525
Cost of timber and property sales........ -- 1,191 1,191
Depreciation, depletion and road
amortization............................ 332 2,360 2,360
Selling, general and administrative
expenses................................ 941 1,190 1,565
------- -------- --------
Operating income......................... 353 4,068 3,693
Interest expense......................... -- 5,319 5,898
Amortization of deferred financing fees
and debt guarantee fees................. -- 999 82
Interest income.......................... -- (366) (366)
Other expense, net....................... 95 63 63
------- -------- --------
Net income (loss) before minority
interest................................ 258 (1,947) (1,984)
Minority interest(c)..................... -- -- (4)
------- -------- --------
Net income (loss)(d)..................... $ 258 $ (1,947) $ (1,988)
======= ======== ========
Limited partners' interests in net loss.. $ (1,968)
========
CASH FLOWS AND OTHER DATA:
EBITDDA(e)............................... $ 685 $ 7,619 $ 7,244
Capital expenditures--Maintenance(f)..... 126 199
Cash flow from operations................ 835 3,425
Ratio of earnings to fixed charges (g)...
Ratio of EBITDDA to interest expense(h).. 1.43x 1.23x
BALANCE SHEET DATA (AT PERIOD END):
Working capital.......................... $ 1,674 $ 20,728 $ 284
Timber, timberlands and logging roads.... 20,762 269,948 380,378
Total assets............................. 29,530 308,978 392,732
Long-term debt........................... -- 305,000 282,594
Excess of assets over liabilities........ 28,464 --
Members' deficit......................... (6,074)
Partners' capital........................ 105,722
OPERATING DATA (UNAUDITED):
Harvest volumes (MBF):
Used in log and stumpage sales(i)........ 7,850 21,373 21,373
Used in chip sales....................... 1,414 73 73
Total................................... 9,264 21,446 21,446
Sales volumes:
Log and stumpage sales (MBF)(i).......... 7,759 21,373 21,373
Timber and property sales (MBF).......... -- 11,045 11,045
Chip sales (BDT)......................... 9,225 217 217
</TABLE>
- - - --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial and
operating data for the period from August 30, 1996 through December 31,
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 consolidated pro forma financial statements of
the Company included elsewhere in this Prospectus.
(c) Reflects the General Partner's 1% minority interest in USTK's pro forma net
income (loss).
(d) Net 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.
(e) 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.
9
<PAGE>
(f) 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.
(g) For purposes of calculating the ratio of earnings (losses) to fixed
charges, "earnings (losses)" are net income (loss) plus fixed charges.
"Fixed charges" are composed of interest on indebtedness, amortization of
deferred financing costs and debt guarantee fees. Earnings were
insufficient to cover fixed charges by $13,036, $1,947, $23,373 and $1,988,
for the historical period from August 30, 1996 through December 31, 1996,
the historical period ended March 31, 1997 and for the pro forma year ended
December 31, 1996 and three months ended March 31, 1997, respectively. The
Predecessor participated in Weyerhaeuser's centralized cash management
system and therefore had no indebtedness or fixed charges.
(h) EBITDDA was insufficient to cover interest expense by $8,760 and $15,178
for the historical period from August 30, 1996 through December 31, 1996
and for the pro forma year ended December 31, 1996. The Predecessor
participated in Weyerhaeuser's centralized cash management system and
therefore had no indebtedness or interest expense.
(i) The Company had no stumpage sales prior to April 1997.
10
<PAGE>
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 and the MLP 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.
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 following chart depicts the organization and ownership of the Company and
the Operating Company immediately after giving effect to the consummation of
the Transactions, including the sale of the Common Units, and assumes that the
Underwriters' over-allotment option in connection therewith is not exercised.
The percentages reflected in the following 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 following 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.
11
<PAGE>
[ORGANIZATIONAL CHART APPEARS HERE]
Effective Aggregate Ownership
of the Company and the
Operating Company
Public Unitholders....................................55.6%
U.S. Timberlands Management Company, L.L.C............10.0%
Holdings..............................................31.1%
Management............................................ 1.3%
General Partner's Combined Interest ...................2.0%
Management 163,749 U.S. Timberlands Management Public Unitholders
Subordinated Units - Company, L.L.C. 7,232,000 Common
and Affiliates /1/ Units
("Old Services")
1,299,668 Subordinated Units
30% Member Interest 70% Member Interest 100% Ownership
U.S. Timberlands Services U. S. Timberlands
Company, L.L.C. Holdings, L.L.C.
("General Partner" or ("Holdings")
"New Services") 4,046,683 Subordinated Units
1.0% General 31.4% Limited
Partner Interest Partner Interest
1.3% Limited U.S. Timberlands 56.2% Limited
Partner Interest Company, L.P. Partner Interest
("Company")
1.0101% Managing 98.9899% Member Interest 100% Ownership
Member Interest
U.S. Timberlands U.S. Timberlands Finance Corp.
Klamath Falls, L.L.C. ("Finance Corp")
("USTK" or "Operating
Company")
/1/ 100% of the equity interests in Old Services are owned, directly or
indirectly, by John M. Rudey, the Chairman of the Board of the General Partner.
12
<PAGE>
THE OFFERING
Issuers..................... U.S. Timberlands Company, L.P. and U.S.
Timberlands Finance Corp.
Securities Offered.......... $100 million aggregate principal amount of %
Senior Notes due 2007 (the "Notes").
Maturity Date............... , 2007.
Payment Dates............... The Notes will bear interest from the date of
issuance at the rate of % per annum, payable
semi-annually in arrears on , and , of
each year, commencing on , 1998.
Ranking..................... The Notes will be senior unsecured joint and
several obligations of the Issuers. The Notes
will rank senior to all existing and future
subordinated indebtedness of the Issuers. The
Notes will rank pari passu in right of payment
with all future senior indebtedness of the
Issuers. The Notes will be effectively
subordinated to all secured and unsecured
indebtedness and other liabilities of the
Operating Company. At March 31, 1997, after
giving pro forma effect to this offering and the
other transactions described herein, the
Company's subsidiaries had outstanding
liabilities to creditors other than the Company
of approximately $185.9 million, including $150.0
million outstanding pursuant to the Private Notes
and $32.6 million outstanding under the
Acquisition Facility. The Notes will be non-
recourse to the General Partner of the Company.
Mandatory Redemption........ The Issuers are not required to make mandatory
redemption or sinking fund payments with respect
to the Notes.
Optional Redemption......... The Notes will be redeemable, in whole or in
part, at the option of the Issuers on or after
, 2002, at the redemption prices set forth
herein, plus accrued and unpaid interest thereon
to the redemption date. In addition, at any time
on or prior to , 2000, the Issuers may
redeem Notes with the net cash proceeds of a
public offering of Common Units or other equity
interests of the Company, at % of the
principal amount hereof, plus accrued and unpaid
interest thereon to the redemption date, provided
that at least 65% of the principal amount of
Notes originally issued remain outstanding
immediately following such redemption. See
"Description of the Notes--Optional Redemption."
Change of Control........... Upon a Change of Control (as defined herein),
each holder of the Notes will have the right to
require the Issuers to repurchase all or any part
of such holder's Notes at a purchase price equal
to 101% of the aggregate principal amount
thereof, plus accrued and unpaid
interest thereon to the date of purchase. There
can be no assurance that the Issuers will have
adequate funds available to repurchase the Notes.
See "Risk Factors--Inability to Fund Change of
Control Offer."
13
<PAGE>
Certain Covenants........... The Indenture contains covenants restricting or
limiting the ability of the Company and its
Restricted Subsidiaries (as defined herein) to,
among other things, (i) pay distributions or make
other restricted payments, (ii) incur additional
indebtedness and issue preferred stock, (iii)
enter into sale and leaseback transactions, (iv)
create liens, (v) incur dividend and other
payment restrictions affecting Subsidiaries, (vi)
sell assets or harvest timber in excess of
certain limitations, (vii) enter into mergers,
consolidations or sales of all or substantially
all assets, (viii) enter into transactions with
affiliates or (ix) engage in other lines of
business. However, these covenants are subject to
certain exceptions.
Use of Proceeds............. The proceeds to the Company from the sale of the
Notes offered hereby will be approximately $97.0
million, after deducting underwriting discounts
and commissions. The proceeds of this offering,
the MLP Offering, the Private Note Placement,
borrowings under the Acquisition Facility and
cash on hand, will be applied to repay
indebtedness of the Operating Company (including
accrued interest and the Guarantee Fees) upon
consummation of the Transactions and to pay
expenses. See "Use of Proceeds."
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the information
set forth in "Risk Factors" and elsewhere in this Prospectus in evaluating an
investment in the Notes.
14
<PAGE>
RISK FACTORS
Prospective purchasers of the Notes should consider the following risk
factors in evaluating an investment in the Notes. All statements other than
statements of historical facts included in this Prospectus, including, without
limitation, statements regarding the Company's business strategy, plans and
objectives of management of the Company for future operations are forward-
looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will be met. Important factors that could
cause actual results to differ materially from the Company's expectations are
disclosed below and elsewhere in this Prospectus.
RISKS INHERENT IN AN INVESTMENT IN THE COMPANY
Holding Company Structure and Ability to Repay the Notes; Effective
Subordination to Indebtedness and Liabilities of Operating Company
The Company is a holding company for its subsidiaries, with no material
operations and no substantial assets other than its approximate 99% member
interest in the Operating Company. Accordingly, the Company is dependent upon
the distribution of the cash flow generated by its subsidiaries, including the
Operating Company, to service its debt obligations. The actual amounts of cash
distributions from the Operating Company may fluctuate and will depend upon
numerous factors, including cash flow generated by operations, required
principal and interest payments on debt, including the Private Notes and the
Bank Credit Facility, the costs of acquisitions (including related debt service
payments), restrictions contained in the Operating Company's debt instruments,
issuances of debt and equity securities by the Operating 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 Operating Company and the Company.
In addition, the Notes will be effectively subordinated to claims of
creditors (other than the Company) and preferred stockholders of the Company's
subsidiaries that are not Subsidiary Guarantors. Claims of creditors (other
than the Company) of the Company's subsidiaries that are not Subsidiary
Guarantors, including trade creditors, secured creditors, taxing authorities
and creditors holding guarantees, and claims of holders of preferred stock of
such subsidiaries will generally have priority as to assets of such
subsidiaries over the claims and equity interest of the Company and, thereby
indirectly, the holders of indebtedness of the Company, including the Notes.
See "Description of Notes--General." At March 31, 1997, after giving pro forma
effect to this offering and the other transactions described herein, the
Company's subsidiaries had outstanding liabilities to creditors other than the
Company of approximately $185.9 million, including $150.0 million outstanding
pursuant to the Private Notes and $32.6 million outstanding under the
Acquisition Facility. See "Capitalization" and "U.S. Timberlands Company, L.P.
Pro Forma Consolidated Financial Statements."
Distributions of cash by the Operating Company will be subject to the
agreement governing the Private Notes (the "Private Note Agreement") and the
Bank Credit Facility, which permit quarterly distributions in an amount equal
to Available Cash for the immediately preceding quarter after reserves for
principal and interest payments thereon, only for so long as no default exists
or would result therefrom. The Private Note Agreement and the Bank Credit
Facility will each contain various restrictive and affirmative covenants
applicable to the Operating Company, the violation of which could result in a
default thereunder. Among other things, such restrictions include (i)
restrictions on the incurrence of additional indebtedness, (ii) restrictions on
certain liens, investments, guarantees, loans, advances, payments, mergers,
consolidations, sales of assets, engaging in new lines of business, entering
into transactions with affiliates and the ability of the Company to harvest
timber in excess of certain amounts and (iii) certain financial maintenance
tests. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Description of Indebtedness."
The Company's Indebtedness May Affect its Operations
On a pro forma basis at March 31, 1997, the Company's total indebtedness as a
percentage of its total capitalization would have been approximately 73%. As a
result, the Company will be significantly leveraged and
15
<PAGE>
will have indebtedness that is substantial in relation to its equity capital.
Upon consummation of the Transactions, the Company contemplates that it will
have outstanding $100.0 million in Notes, $150.0 million in Private Notes and
$17.9 million in borrowings under the Acquisition Facility. The Company
expects to have an additional $107.1 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 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 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."
Possible Insufficiency of Assets in the Event of a Fraudulent Conveyance
The incurrence by the Issuers of indebtedness such as the Notes for the
purposes described herein may be subject to review under relevant federal and
state fraudulent conveyance laws if a bankruptcy case or a lawsuit (including
in circumstances where bankruptcy is not involved) is commenced by or on
behalf of unpaid creditors of the Issuers. Under these laws, if a court were
to find that, at the time the Notes were issued, (a) the Issuers either
incurred indebtedness represented by the Notes with the intent of hindering,
delaying or defrauding creditors or received less than reasonably equivalent
value or fair consideration for incurring such indebtedness and (b) the
Issuers (i) were insolvent or were rendered insolvent by reason of such
transaction, (ii) were engaged in a business or transaction for which the
assets remaining with them constituted unreasonably small capital or (iii)
intended to incur, or believed that they would incur, debts beyond their
ability to pay such debts as they matured, such court may subordinate the
Notes to presently existing and future indebtedness of the Issuers, void the
issuance of the Notes and direct the repayment of any amounts paid thereunder
to the Issuers or to a fund for the benefit of the Issuers' creditors, or take
other action detrimental to the holders of the Notes. In such an event, the
Company might not have sufficient funds to satisfy its obligations to the
holders of the Notes because substantially all of the Company's assets are
held by, and substantially all of the Company's revenues are derived from, the
operations of the Operating Company, and the Notes are effectively
subordinated to all secured and unsecured indebtedness of the Operating
Company. See "--Holding Company Structure and Ability to Repay the Notes;
Effective Subordination to Indebtedness and Liabilities of Operating Company."
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the relevant jurisdiction. Generally, however, an entity would
be considered insolvent for purposes of the foregoing if the sum of its debts,
including contingent liabilities, were greater than the fair saleable value of
all of its assets at fair valuation, or if the present fair saleable value of
its assets were less than the amount that would be required to pay its
probable liability on its existing debts, including contingent liabilities, as
they become absolute and matured.
Fraudulent Conveyance Considerations Relating to Subsidiary Guarantees
The Indenture pursuant to which the Notes will be issued (the "Indenture")
will not require any subsidiary to guarantee the Notes unless such subsidiary
guarantees other indebtedness of the Company. On the date of the Indenture,
there are expected to be no Subsidiary Guarantors. The incurrence of any
Subsidiary Guarantees (as defined herein) in the future may be subject to
review under relevant federal and state fraudulent conveyance laws if a
bankruptcy case or a lawsuit (including in circumstances where bankruptcy is
not involved) is commenced by or on behalf of unpaid creditors of the
Subsidiary Guarantor. Under these laws, if a court were to find that, at the
time the Subsidiary Guarantee was incurred (a) the Subsidiary Guarantor either
incurred the Subsidiary Guarantee with the intent of hindering, delaying or
defrauding creditors or received less than reasonably equivalent value or fair
consideration for incurring such Subsidiary Guarantee and (b) the Subsidiary
Guarantor (i) was insolvent or was rendered insolvent by reason of such
transaction, (ii) was engaged in a business or transaction for which the
assets remaining with it constituted unreasonably small capital or
16
<PAGE>
(iii) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court may subordinate the
Subsidiary Guarantee to presently existing and future indebtedness of the
Subsidiary Guarantor, void the issuance of the Subsidiary Guarantee and direct
the repayment of any amounts paid thereunder to the Subsidiary Guarantor, or
to a fund for the benefit of the Subsidiary Guarantor's creditors, or take
other action detrimental to the holders of the Notes. Among other things, a
legal challenge of the Subsidiary Guarantee issued by such Subsidiary
Guarantor on fraudulent conveyance grounds may focus on the benefits, if any,
realized by such Subsidiary Guarantor as a result of the issuance by the
Issuers of the Notes. To the extent the Subsidiary Guarantee was avoided as a
fraudulent conveyance or held unenforceable for any other reason, the holders
of the Notes would cease to have any claim against such Subsidiary Guarantor
and would be creditors solely of the Company and any Subsidiary Guarantors
whose Subsidiary Guarantees were not avoided or held unenforceable. In such
event, the claims of the holders of the Notes against the issuer of an invalid
Subsidiary Guarantee would be subject to the prior payment of all liabilities
of such Subsidiary Guarantor and the Company might not have sufficient funds
to satisfy its obligations to the holders of the Notes because substantially
all of the Company assets are held by, and substantially all of the Company's
revenues are derived from, the operations of the Operating Company. See "--
Holding Company Structure and Ability to Repay the Notes; Effective
Subordination to Indebtedness and Liabilities of Operating Company" and
"Description of Notes--Subsidiary Guarantees of Notes."
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the relevant jurisdiction. Generally, however, a Subsidiary
Guarantor would be considered insolvent for purposes of the foregoing if the
sum of its debts, including contingent liabilities, were greater than the fair
saleable value of all of its assets at fair valuation, or if the present fair
saleable value of its assets were less than the amount that would be required
to pay its probable liability on its existing debts, including contingent
liabilities, as they become absolute and matured.
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
$1.9 million for the four-month period ended December 31, 1996 and the three
months ended March 31, 1997, respectively. On a pro forma basis, the Company
would have had net losses of $23.4 million and $2.0 million for the year ended
December 31, 1996 and the three months ended March 31, 1997, respectively.
Change of Management Provisions
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.
Absence of Trading Markets
The Notes will be a new issue of securities for which there currently is no
public market, and the Company does not intend to list the Notes on any
national securities exchange. Although the Underwriters have informed
17
<PAGE>
the Company that they currently intend to make a market in the Notes, the
Underwriters are not obliged to do so and may discontinue such market-making
at any time. In addition, such market-making activity will be subject to
limits imposed by the Securities Act of 1933, as amended (the "Securities
Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Accordingly, no assurance can be given as to the development or
liquidity of any market for the Notes.
Inability to Fund a Change of Control Offer or Asset Sale Offer
The Company must offer to purchase the Notes upon the occurrence of certain
events. The Indenture will provide that in the event of a Change of Control,
the Issuers will be required, subject to certain conditions, to offer to
purchase all outstanding Notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest thereon to the date of
purchase. On a pro forma basis after giving effect to the Transactions, the
Issuers will not have sufficient funds available to purchase all of the
outstanding Notes were they to be tendered in response to an offer made as a
result of a change of control. See "Description of Notes--Repurchase at the
Option of Holders--Change of Control."
In the event of certain asset dispositions or excess harvests, the Company
will be required to use the Net Proceeds (as defined herein) to offer to
purchase the Notes at 100% of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase. See "Description of Notes--Repurchase
at the Option of Holders--Asset Sales."
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. For instance, in July 1995, Congress passed the
Emergency Salvage Timber Sale Program (the "Salvage Act"), which authorized an
increased harvest of timber by December 31, 1996 from certain U.S. government
lands on which logging had been restricted because of environmental
limitations. Although to date only limited sales have been consummated under
the Salvage Act, substantial sales pursuant to the Salvage Act or an extension
of the time period available under the Salvage Act could have a material
adverse effect on prices of logs. 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.
18
<PAGE>
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 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
19
<PAGE>
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.
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 limited partner interests 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. Covenants in the Indenture, the Private Note
Agreement and the Bank Credit Facility 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 March 31, 1997, three of these customers,
Collins, WTD Lumber Company and Boise Cascade Corporation, purchased timber
representing approximately 42%, 15% and 15%, 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.
20
<PAGE>
THE TRANSACTIONS
Concurrently 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 1,463,417 Subordinated Units and Holdings will
contribute all of its interest in USTK to the Company in exchange for
4,046,683 Subordinated Units. The General Partner will then distribute the
Subordinated Units to Old Services. Approximately 163,749 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 1,299,668 Subordinated Units; Holdings will own 4,046,683
Subordinated Units; and Messrs. Stephens and Hornig will own an aggregate of
163,749 Subordinated Units. The 5,510,100 Subordinated Units owned by Old
Services, Holdings and Messrs. Stephens and Hornig will represent an aggregate
42.4% interest in the Company.
Concurrently with the closing of this offering, (i) the Company expects to
issue and sell approximately 7,232,000 Common Units through the MLP Offering,
(ii) the Operating Company expects to issue $150.0 million aggregate principal
amount of Private Notes to certain institutional investors in the Private Note
Placement, (iii) the Operating Company expects to enter into a $25.0 million
Working Capital Facility and a $100.0 million Acquisition Facility, and (iv)
the Company will contribute (to the Operating Company) the proceeds from the
sale of the Notes offered hereby (approximately $97.0 million after deducting
underwriting discounts and commissions but before expenses associated with
this offering) and the proceeds from the sale of the Common Units
(approximately $138.5 million after deducting underwriting discounts and
commissions but before expenses associated with the MLP Offering and assuming
that the underwriters' over-allotment option with respect to the MLP Offering
is not exercised). Proceeds from the sale of the Notes, together with the
proceeds from the sale of Common Units, approximately $17.9 million to be
borrowed by the Operating Company under the Acquisition Facility and cash on
hand (estimated to be approximately $35.4 million), will be used by the
Operating Company to repay approximately $434.3 million of indebtedness of the
Operating Company (including accrued interest) and to pay expenses related to
the Transactions (estimated to be approximately $17.3 million).
For additional information regarding the terms of the Private Notes and the
Bank Credit Facility, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Description of Indebtedness."
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
are expected to be approximately $97.0 million, after deducting estimated
underwriting discounts and commissions and before deducting expenses of this
offering (estimated to be approximately $0.25 million).
The Company will contribute such proceeds, together with the net proceeds
to the Company from the sale of Common Units (assuming an initial public
offering price of $20.50 per Common Unit and that the underwriters' over-
allotment option with respect to the MLP Offering is not exercised), estimated
to be approximately $138.5 million, after deducting underwriting discounts and
commissions and before deducting expenses of the MLP Offering (estimated to be
approximately $3.3 million) to the Operating Company and the Operating Company
will apply all such proceeds, together with the proceeds from the sale of the
Private Notes and approximately $17.9 million borrowed under the Acquisition
Facility, to repay the indebtedness assumed by the Operating Company in
connection with the Transactions and other indebtedness of the Company and to
pay the fees and expenses of the Transactions. 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) $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 (the "USTK Debt") and approximately $6.4
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 June
30, 1997). The USTK Debt consists of $85.0 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 (8.125% per annum at July 15, 1997). If the underwriters' over-allotment
option in connection with the MLP Offering is exercised in full, the Company
will issue 1,084,800 additional Common Units at an assumed offering price of
$20.50 per Common Unit. The Company will use the proceeds from any exercise of
the Underwriters' over-allotment option to repay a portion of the indebtedness
incurred by the Operating Company under the Acquisition Facility in connection
with the Transactions. No portion of the net proceeds of the Notes will be
received by, or used for the benefit of, Finance Corp.
22
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the combined capitalization of USTK and
Old Services (including the Holdings Debt) as of March 31, 1997, (ii) the pro
forma adjustments required to reflect the Transactions, including the sale of
the Notes offered hereby and the MLP Offering (assuming that the underwriters'
over-allotment option with respect thereto is not exercised) 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 March 31, 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 MARCH 31, 1997
--------------------------------------
USTK
AND OLD
SERVICES
COMBINED PRO FORMA CONSOLIDATED
HISTORICAL ADJUSTMENTS(A) PRO FORMA
---------- -------------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Long-term debt:
Acquisition Facility.................. $ -- $ 32,594 $ 32,594
Prior revolving credit facility(b).... 90,000 (90,000) --
Prior term loans(b)................... 215,000 (215,000) --
Notes................................. -- 100,000 100,000
Private Notes......................... -- 150,000 150,000
-------- -------- --------
Total indebtedness.................. 305,000 (22,406) 282,594
Minority interest....................... -- 1,068 1,068
Members' deficit........................ (6,074) 6,074 --
Partners' equity:
Common Units.......................... -- 104,654 104,654
Subordinated Units.................... -- -- --
General partner interests............. -- 1,068 1,068
-------- -------- --------
Total partners' and members' equity
(deficit).......................... (6,074) 111,796 105,722
-------- -------- --------
Total capitalization................ $298,926 $ 90,458 $389,384
======== ======== ========
</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 March 31, 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. This indebtedness will be paid in full at the
closing of this offering.
23
<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 three months ended March 31, 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 three months ended March 31, 1997
are derived from the historical unaudited 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 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 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 5,779
------- ------- ------- ------- ------- -------- --------
Operating income
(loss)................ 13,149 15,094 10,082 11,061 2,696 (4,767) 38
Interest expense....... -- -- -- -- -- 7,316 23,592
Amortization of
deferred financing
fees and debt
guarantee fees........ -- -- -- -- -- 1,326 330
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) (23,512)
Minority interest(c)... -- -- -- -- -- -- 139
------- ------- ------- ------- ------- -------- --------
Net income (loss)(d)... $13,471 $14,797 $ 9,942 $11,616 $ 2,695 $(13,036) $(23,373)
======= ======= ======= ======= ======= ======== ========
Limited partners'
interests in net
loss.................. $(23,138)
========
</TABLE>
24
<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)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS AND OTHER
DATA:
EBITDDA(e)............. $ 14,680 $16,595 $11,537 $12,547 $ 3,623 $ (1,444) $ 8,414
Capital expenditures--
Maintenance(f)........ 1,553 1,157 2,098 2,082 459 360
Cash flow from
operations............ 16,784 15,124 13,173 11,810 5,512 (2,984)
Ratio of earnings
(losses) to fixed
charges(g)............
Ratio of EBITDDA to
interest expense(h)...
BALANCE SHEET DATA (AT
PERIOD END):
Working capital........ $ 793 $ 2,068 $ 211 $ 1,304 $ 524 $ 21,459
Timber, timberlands and
logging roads......... 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(i)..... 70,982 69,291 69,311 63,235 32,398 27,389 59,787
Used in chip sales..... 33,012 18,996 10,224 18,315 5,195 -- 5,195
Total................. 103,994 88,287 79,535 81,550 37,593 27,389 64,982
Sales volumes:
Log and stumpage sales
(MBF)(i).............. 70,903 66,250 69,405 63,443 32,398 30,210 62,608
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>
25
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(A) FORMA(B)
----------- ----------- ------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
----------------------- 1997
------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING STATEMENT DATA:
Revenues:
Logs..................................... $ 3,417 $ 8,827 $ 8,827
Timberland and property sales............ -- 3,494 3,494
By-products and other.................... 616 13 13
------- -------- --------
Total revenues........................... 4,033 12,334 12,334
Operating costs:
Cost of products sold.................... 2,407 3,525 3,525
Cost of timber and property sales........ -- 1,191 1,191
Depreciation, depletion and road
amortization............................ 332 2,360 2,360
Selling, general and administrative
expenses................................ 941 1,190 1,565
------- -------- --------
Operating income......................... 353 4,068 3,693
Interest expense......................... -- 5,319 5,898
Amortization of deferred financing fees
and debt guarantee fees................. -- 999 82
Interest income.......................... -- (366) (366)
Other expense, net....................... 95 63 63
------- -------- --------
Net income (loss) before minority
interest................................ 258 (1,947) (1,984)
Minority interest(c)..................... -- -- (4)
------- -------- --------
Net income (loss)(d)..................... $ 258 $ (1,947) $ (1,988)
======= ======== ========
Limited partners' interests in net loss.. $ (1,968)
========
CASH FLOWS AND OTHER DATA:
EBITDDA(e)............................... $ 685 $ 7,619 $ 7,244
Capital expenditures--Maintenance(f)..... 126 199
Cash flow from operations................ 835 3,425
Ratio of earnings to fixed charges(g)....
Ratio of EBITDDA to interest expense(h).. 1.43x 1.23x
BALANCE SHEET DATA (AT PERIOD END):
Working capital.......................... $ 1,674 $ 20,728 $ 284
Timber, timberlands and logging roads.... 20,762 269,948 380,378
Total assets............................. 29,530 308,978 392,732
Long-term debt........................... -- 305,000 282,594
Excess of assets over liabilities........ 28,464 --
Members' deficit......................... (6,074)
Partners' capital........................ 105,722
OPERATING DATA (UNAUDITED):
Harvest volumes (MBF):
Used in log and stumpage sales(i)........ 7,850 21,373 21,373
Used in chip sales....................... 1,414 73 73
Total................................... 9,264 21,446 21,446
Sales volumes:
Log and stumpage sales (MBF)(i).......... 7,759 21,373 21,373
Timber and property sales (MBF).......... -- 11,045 11,045
Chip sales (BDT)......................... 9,225 217 217
</TABLE>
- - - -------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial and
operating data for the period from August 30, 1996 through December 31,
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 consolidated pro forma financial statements of
the Company included elsewhere in this Prospectus.
(c) Reflects the General Partner's 1% minority interest in USTK's pro forma
net income (loss).
(d) Net 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.
(e) 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.
(f) 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.
26
<PAGE>
(g) For purposes of calculating the ratio of earnings (losses) to fixed
charges, "earnings (losses)" are net income (loss) and fixed charges.
"Fixed charges" are composed of interest on indebtedness, amortization of
deferred financing costs and debt guarantee fees. Earnings were
insufficient to cover fixed charges by $13,036, $1,947, $23,373 and
$1,988, for the historical period from August 30, 1996 through December
31, 1996, the historical period ended March 31, 1997 and for the pro forma
year ended December 31, 1996 and three months ended March 31, 1997,
respectively. The Predecessor participated in Weyerhaeuser's centralized
cash management system and therefore had no indebtedness or fixed charges.
(h) EBITDDA was insufficient to cover interest expense by $8,760 and $15,178
for the historical period from August 30, 1996 through December 31, 1996
and for the pro forma year ended December 31, 1996. The Predecessor
participated in Weyerhaeuser's centralized cash management system and
therefore had no indebtedness or interest expense.
(i) The Company had no stumpage sales prior to April 1997.
27
<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 three-month period ended March 31, 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 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 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
28
<PAGE>
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
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996
Revenues. Revenues for the first three months of 1997 were $12.3 million, an
increase of 208% over revenues of $4.0 million for the first three months of
1996. This increase was primarily attributable to a $5.4 million increase in
revenues from the sale of logs and a $3.5 million increase in timber and
property sales, partially offset by a decrease of $0.6 million in by-products
and other revenues.
Log sales volumes for the first three months of 1997 were 21,400 MBF, an
increase of 174% over log sales volumes of 7,800 MBF for the first three
months of 1996. The significant increase in the volume harvested was mainly
due to the Company's aggressive harvesting through the winter months of 1997.
The increase in volume was partially offset by a 6% decrease in average log
prices, from $438 per MBF for the first three months of 1996 to $413 per MBF
for the first three months of 1997. A large percentage of the timber which was
harvestable during the winter months of 1997 was lower valued Lodgepole Pine.
The increase in the percentage of Lodgepole Pine harvested and the
corresponding decrease in the percentage of higher valued Douglas Fir and
Ponderosa Pine harvested were the primary reasons the Company's average log
prices declined for the first three months of 1997 as compared to the prior
year period. In addition, the Company experienced declines in the average
selling price of its Douglas Fir (due primarily to increased levels of
harvesting on privately owned timberlands) and its White Fir (due primarily to
a decline in the quality of the logs harvested and sold).
Revenues from a Lodgepole Pine timber deed sale were $3.5 million during the
first three months of 1997. There were no sales of tracts of timber or
timberlands during the first three months of 1996.
29
<PAGE>
The reduction in revenues from by-products and other was primarily
attributable to a 98% decrease in chip sales volume. Due to low demand in the
pulp and paper industry, by the first quarter 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 $8.3 million for the first three
months of 1997, an increase of 124% over operating costs of $3.7 million for
the first three months of 1996. This increase was the result of a $1.1 million
increase in cost of products sold, a $1.2 million increase in the cost of
timber and property sales, a $2.0 million increase in depreciation, depletion
and road amortization ("DD&A") expense and a $0.3 million increase in selling,
general and administrative expenses.
The increase in cost of products sold was the result of a $1.7 million
increase in logging costs offset by a $0.6 million decrease in wood fiber
processing costs. Logging costs increased primarily as a result of a 174%
increase in the level of merchantable grade logs harvested and sold, partially
offset by a 29% decrease in the Company's logging cost per MBF from $220 per
MBF during the first three months of 1996 to $157 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 three months of 1996 to the use of
outside contractors for all its logging operations during the 1997 period.
Wood fiber processing costs decreased to practically zero as a result of a 98%
decrease in volume of chips processed and sold. During the first three 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
three months of 1996. On a combined basis, costs of products sold and cost of
timber and property sales decreased from 60% of total revenues during the
first three months of 1996 to 38% of total revenues during the same period of
1997. This improvement was primarily due to the decrease in the Company's
logging cost per MBF, partially offset by lower average selling prices per
MBF.
DD&A expense was $2.4 million for the first three months of 1997, a $2.1
million increase over DD&A expense of $0.3 million in the 1996 period. This
increase was primarily due to the significant increase in the Company's
depletion rate combined with a 174% increase in the volume of logs harvested
and sold during the first three 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 $1.2 million for the first
quarter of 1997, an increase of 33% over comparable expenses of $0.9 million
for the first quarter of 1996, primarily as a result of an increase in
professional fees.
Interest Expense. Interest expense was $5.3 million during the first three
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 three 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 September 30, 1997. The amortization of deferred
financing fees and debt guarantee fee expense during the first three months of
1997 were $0.2 million and $0.8 million, respectively. There was no deferred
financing fee amortization or debt guarantee fee expense during the first
three months of 1996.
Interest Income. Interest income was $0.4 million during the first three
months of 1997. There was no interest income during the first three months of
1996, as the Predecessor participated in Weyerhaeuser's centralized cash
management system.
30
<PAGE>
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 63,400 MBF
in 1995 to 62,600 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 $459 in 1995 to
$442 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 27% decrease in chip sales revenue. Due to low demand in the
pulp and paper industry, average chip prices decreased by 30% 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 in 1996. 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 September 30, 1997. 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.
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.
31
<PAGE>
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 63,400 MBF, a decrease of 9% from log sales
volumes of 69,400 MBF in 1994. This decrease was largely attributable to a 37%
decrease in the volume of logs sold to unaffiliated customers from 35,800 MBF
in 1994 to 22,700 MBF in 1995, partially offset by a 21% increase in the
volume of logs sold to Weyerhaeuser facilities, from 33,600 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 $40 per MBF, or 9%, to $459
per MBF in 1995, as compared to $419 per MBF in 1994. This increase was
primarily attributable to an increase of 17% in the average price per MBF of
log sales to unaffiliated customers from $425 per MBF in 1994 to $498 per MBF
in 1995 and a 6% increase in the price per MBF of log sales to Weyerhaeuser
facilities from $413 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 30% of total unaffiliated customer
sales volume in 1994 to 58% in 1995. The average sales price per MBF for
Douglas Fir was $513 and $547 in 1994 and 1995, respectively, as compared to
an average of $406 and $439, 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 33% 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 March 31, 1997, the Company had a cash balance of $28.6
million and working capital of $20.7 million. As of March 31, 1997, the
Company had 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.
Operating Activities. Cash flows provided by operating activities for the
three months ended March 31, 1997 was $3.4 million as compared to $0.8 million
for the three months ended March 31, 1996. The $2.6 million increase in cash
flows is primarily attributable to an increase in the volume of log and timber
sales as previously
32
<PAGE>
discussed. The increase in the volume of log and timber sales was partially
offset by a $3.4 million increase in interest payments and a $1.2 million
decrease in cash resulting from fluctuations in the Company's accounts
receivable and accounts payable.
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 $9.8
million for the first three months of 1997, as compared to cash flows used by
investing activities of $0.1 million during the 1996 period. During the first
three 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 $1.2
million for the first three months of 1997, as compared to $0.7 million during
the 1996 period. During the first three months, the Company distributed $1.2
million to a member related to his 1997 estimated tax liability. Cash used in
financing activities of $0.7 million during the first three 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 USTK Debt pursuant to a loan
agreement with a commercial bank to refinance a portion of the debt incurred
in connection with the Weyerhaeuser Acquisition and on July 15, 1997,
increased the USTK Debt to finance the Ochoco Acquisition. As of July 15,
1997, the USTK Debt consists of a $200.0 million seven-year amortizing secured
facility and an $85.0 million revolving credit facility.
Concurrent with this offering the Company expects to issue 7,232,000 Common
Units in the MLP Offering for gross proceeds of $148.3 million (assuming an
initial public offering price of $20.50 per Common Unit and that the
underwriters' over-allotment option with respect to the MLP Offering is not
exercised) and the Operating Company expects to issue $150.0 million aggregate
principal amount of Private Notes in the Private Note Placement and to enter
into the Bank Credit Facility providing for the $25.0 million Working Capital
Facility and the $100.0 million Acquisition Facility. See "--Description of
Indebtedness--Description of Private Notes"
33
<PAGE>
and "--Description of Bank Credit Facility" and "Description of Notes". The
Company will use the net proceeds of this offering, the MLP Offering, the
Private Note Placement, approximately $17.9 million of borrowings under the
Acquisition Facility and cash on hand at the closing of the Transactions in
order to retire the Holdings Debt and the USTK Debt.
Capital expenditures for the seven months ended March 31, 1997 totaled
approximately $0.6 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.
DESCRIPTION OF INDEBTEDNESS
Description of Private Notes
Concurrently with this offering, the Operating Company expects to issue
$150.0 million aggregate principal amount of Private Notes in a private
placement to institutional investors. The proceeds of the sale of the Private
Notes will be used, together with the proceeds of the sale of the Notes
offered hereby, the proceeds of the sale of the Common Units, borrowings under
the Acquisition Facility and cash on hand, to repay indebtedness of the
Operating Company and transaction expenses. The sale of the Notes offered
hereby is subject to, among other things, the sale of the Private Notes.
The following is a summary of the terms of the Private Notes, each of which
will be issued pursuant to a Note Agreement (the "Note Agreement"), 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 Note Agreement. The Operating Company's obligations under the Note
Agreement and the Private Notes will be unsecured, and will be non-recourse to
the General Partner. The Private Notes will be issued in two tranches of $75.0
million, one maturing 12 years and one maturing 15 years from the date of
issuance. The Operating Company may, at its option, and under certain
circumstances following the disposition of assets may be required to, offer to
prepay the Private Notes and other pari passu indebtedness, in whole or in
part. Certain of these prepayments may be at a premium as described in the
Note Agreement.
The Note Agreement is expected to require the Operating Company to invest
the net cash proceeds from any harvest in excess of:
150% of a specified Planned Volume in any one year
140% of a specified Planned Volume over any consecutive two-year period
130% of a specified Planned Volume over any consecutive three-year period
120% of a specified Planned Volume over any consecutive four-year period
in certain short-term investments, and use such proceeds either (i) for
repayment within 180 days of senior indebtedness of the Operating Company
(other than the Working Capital Facility) pro rata among all such indebtedness
or (ii) for the purchase or commitment to purchase within 180 days of
additional productive assets in the same line of business as the Company's
business. If a principal payment on the Private Notes is made under this
provision on a date other than on a scheduled repayment date or on a scheduled
repayment date in excess of the amount then due on such repayment date, then a
make-whole will apply to such payment or excess. The Planned Volume initially
will be 125 MMBF, as adjusted to reflect acquisitions and dispositions of
timberlands.
The Note Agreement contains various restrictive and affirmative covenants
applicable to the Operating Company, including (i) restrictions on the
incurrence of additional indebtedness other than (a) borrowings
34
<PAGE>
under the Working Capital Facility not to exceed $25 million principal amount
at any time outstanding (adjusted annually for changes in the Consumer Price
Index), (b) additional indebtedness, if after giving effect to the incurrence
thereof and the repayment of any debt being refinanced or repaid (x) the pro
forma EBITDDA Coverage of pro forma Interest Expense (each as defined in the
Note Agreement) is greater than 2.5 to 1 during the four fiscal quarters (or
three fiscal quarters for indebtedness incurred prior to February 15, 1998)
immediately preceding the date of such incurrence, and (y) the pro forma
EBITDDA Coverage of pro forma Maximum Debt Service (each as defined in the
Note Agreement) is greater than 1.25 to 1 during the four fiscal quarters (or
three fiscal quarters for indebtedness incurred prior to February 15, 1998)
immediately preceding the date of such incurrence, (c) certain intercompany
indebtedness, and (d) additional unsecured indebtedness of the Company up to
$10 million owing to the General Partner or an affiliate of a General Partner,
provided that such indebtedness is expressly subordinated to the Private
Notes, and (ii) restrictions on certain liens, investments, guarantees, loans,
advances, lines of business, mergers, consolidations, sales of assets, and
entering into transactions with affiliates.
Under the Note Agreement, so long as no Event of Default (as defined in the
Note Agreement) exists or would result, the Operating Company will be
permitted to make cash distributions to the Company in an amount not to exceed
Available Cash (as defined in the Note Agreement) for the immediately
preceding calendar quarter. The Note Agreement requires that in the quarter
preceding a quarter in which an interest payment is to be made on the Notes,
Available Cash reflects a reserve equal to 50% of the interest to be paid on
the Private Notes. In addition, in the third, second and first quarters
preceding a quarter in which a scheduled principal payment is to be made on
the Private Notes, Available Cash will be required to reflect a reserve equal
to 25%, 50% and 75%, respectively, of the principal amount to be repaid on
such payment.
If an Event of Default exists on the Private Notes, the holders of the
Private Notes may accelerate the maturity of the Private Notes and exercise
other rights and remedies. In the case of an event of default referred to in
(f) below, the acceleration of the maturity of the Private Notes will occur
automatically. Events of Default include (a) failure to pay any principal or
premium when due, or interest within five business days of when due, on the
Private Notes, (b) a material misrepresentation in the Note Agreement, (c)
failure to perform or otherwise comply with covenants, (d) default by the
Operating Company or restricted subsidiaries of the Operating Company in the
payment of any interest on or principal of, or default by any such entity in
the performance of any agreement if the effect is to permit the acceleration
of, any indebtedness the aggregate principal amount of which exceeds $5
million, (e) certain unsatisfied final judgments in excess of $5 million, and
(f) various bankruptcy or insolvency events involving the Operating Company or
certain restricted subsidiaries of the Operating Company.
Description of Bank Credit Facility
Concurrently with this offering, the Operating Company expects to 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 is expected to consist of a $100.0
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.
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.
35
<PAGE>
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 643,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing an estimated total merchantable timber volume of 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 5 million genetically improved conifer
seedlings annually from its nursery, about 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 were first established by
Weyerhaeuser in the early 1970s and acreage has been planted each year since
then. Currently, the Plantations contain age classes ranging generally from
two to 25 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, which included approximately $5.5 million of working
capital. Most of the Klamath Falls Timberlands had been owned by Weyerhaeuser
for more than 50 years. 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.
Prior to the sale of the Klamath Falls Timberlands to USTK, approximately
65% 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 in the area
surrounding the Timberlands and
36
<PAGE>
operated by third parties. There are currently approximately 55 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, which 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 over the next several 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
37
<PAGE>
timberlands located in areas, and containing timber suitable for export. By
early January 1998, it is expected that Edward J. Kobacker, the Company's
current Executive Vice President and Chief Operating Officer, will become the
President and Chief Executive Officer of the Company and that John J.
Stephens, the current President and Chief Executive Officer, will become Vice
Chairman 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 has
identified approximately 30,000 acres of small tracts that it intends to sell
for higher and better uses over the next ten years. In addition, the Company
has identified two tracts aggregating approximately 35,000 acres that it
intends to sell over 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.
THE TIMBERLANDS
Timber Inventory
The Company currently owns and manages approximately 643,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing an estimated total merchantable timber volume of 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 643,000 acre total consist of actively managed pine Plantations
with stands ranging in age from two to 25 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):
38
<PAGE>
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% 221.8 80% 954.5 42%
Lodgepole Pine................ 451.4 23% -- 0% 451.4 20%
White Fir..................... 424.1 21% 11.5 4% 435.6 19%
Douglas Fir................... 266.9 14% 43.0(a) 15% 309.9 14%
Other Species(b).............. 102.9 5% 3.1 1% 106.0 5%
------- ---- --------- -------- ------- ------
Total....................... 1,978.0 100% 279.4 100% 2,257.4 100.0%
======= ==== ========= ======== ======= ======
</TABLE>
- - - --------
(a) Includes Grand Fir
(b) Includes Cedar, Sugar Pine and Western Larch
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 generally reaches merchantable size between
40 and 50 years on natural stands (between 25 and 35 years on the
Plantations). The following table describes the estimated volume distribution
of merchantable timber on the Timberlands by species and by size classes of 6"
diameter breast height ("DBH") or greater (as verified by MBG) as of January
1, 1997. Lodgepole Pine having a DBH of 6" is generally considered
merchantable, while the other timber species are generally considered
merchantable at a DBH of 7 1/2". Such other species, to the extent their DBH
is less than 7 1/2", 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
===== ===== ===== ===== ===== =======
<CAPTION>
OCHOCO TIMBERLANDS
-------------------------------------------------
PONDEROSA LODGEPOLE WHITE DOUGLAS OTHER
DBH PINE PINE FIR FIR SPECIES TOTAL
--- --------- --------- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
6"-10"........................ 29.3 -- 1.5 5.8 0.2 36.8
11"-15"....................... 56.8 -- 4.1 17.8 1.3 80.0
16"-19"....................... 36.4 -- 2.8 10.8 0.8 50.8
20"-23"....................... 32.6 -- 1.6 5.8 0.4 40.4
24"+.......................... 66.7 -- 1.5 2.8 0.4 71.4
----- ----- ----- ----- ----- -------
Total....................... 221.8 -- 11.5 43.0 3.1 279.4
===== ===== ===== ===== ===== =======
</TABLE>
39
<PAGE>
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 rate is an important variable for a forest products company as
it ultimately determines how much timber can be harvested over the long term.
In addition, the Company's use of selective harvesting, among other methods,
opens up the timber stand allowing for more vigorous growth of the remaining
trees. Growth rates vary depending on species, location, weather conditions,
age and forestry practice. The annual growth rate for the Company's naturally
regenerated stands which include young, vibrant growth Ponderosa and Lodgepole
Pine, is estimated by MBG at approximately 160 board feet per acre per annum.
The comparable rate for the Company's Plantation stands is estimated by MBG to
be approximately 315 board feet per acre per annum. 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.
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, 128 MMBF in 1998, 136 MMBF in 1999 and 129 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. After 2000,
the harvest level is expected to decline to an average of approximately 116
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
40
<PAGE>
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."
Access
The Timberlands are accessible by a system of 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 March 31, 1997, timber sales to Collins, WTD
Lumber Company and Boise Cascade Corporation accounted for approximately 42%,
15% and 15%, 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
41
<PAGE>
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 Company's Business--Dependence on Certain
Key Customers." There are currently approximately 55 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.
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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 60 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 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 acres of natural stands to Plantations annually.
During 1996, the Company planted more than two 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 1974. 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 their
relatively high 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 has
identified
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approximately 30,000 acres of small tracts that it intends to sell for higher
and better uses over the next ten years. In addition, the Company has
identified two tracts aggregating approximately 35,000 acres that it intends
to sell for a higher and better use over 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.
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 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 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.
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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. 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
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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
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 March 31, 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.
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 a conflicts committee (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 interest 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.
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 form of Employment Agreement,
which has been filed as an exhibit 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, $120,000 and $92,000 for each of Messrs. Rudey, Stephens, Kobacker,
Morgan and Lugus, 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 of the General
Partner as described below. The Executives will also be entitled to
participate in such other benefit
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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 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.
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 723,200 Common
Units (831,680 Common Units if the over-allotment option granted to the
underwriters in connection with the MLP Offering is exercised in full).
Unit Option Plan. Initially, the Unit Option Plan will permit the grant of
options ("Unit Options") covering Common Units. From these, 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 Common Units will be granted to Mr. Rudey, (ii) Unit Options
covering Common Units will be granted to Mr. Stephens, (iii) Unit Options
covering Common Units will be granted to Mr. Kobacker, (iv) Unit Options
covering Common Units will be granted to Mr. Hornig, (v) Unit Options
covering Common Units will be granted to Mr. Morgan and (vi) Unit Options
covering Common Units will be granted to Mr. Lugus. Unit Options covering
Common Units will be allocated among five 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
Common Units under 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 % of the Common Units issued
upon any exercise of the underwriters' over-allotment option in the MLP
Offering.
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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
NYSE, 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 Company 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.
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 non-employee 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)............. - -% 4,006,216 72.7% 30.8%
U.S. Timberlands
Management Company,
L.L.C.(2).............. - - 1,299,668 23.6 10.0
U.S. Timberlands
Holdings, L.L.C.(3).... - - 4,046,683 73.4 31.1
John M. Rudey(4)........ - - 5,346,351 97.0 41.1
John J. Stephens(5)(7).. - - 97,561 1.8 *
Edward J. Kobacker...... - - - - -
Michael J. Morgan....... - - - - -
George R. Hornig(6)(7).. - - 66,188 1.2 *
Robert F. Wright........ - - - - -
Aubrey L. Cole.......... - - - - -
John H. Beuter.......... - - - - -
All directors and
executive officers as a
group (8 persons)(7)... - -% 163,749 3.0% 1.3%
</TABLE>
- - - --------
* Less than 1% of class.
(1) Current address is 625 Madison Avenue, Suite 10-B, New York, New York
10022. Includes 4,006,216 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 163,749 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 1,299,668 Subordinated Units owned by Old Services and
4,046,683 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 only interests directly 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 the Common Units offering, Old Services will own 1,299,668
Subordinated Units, Holdings, an affiliate of the General Partner, will own
4,046,683 Subordinated Units, and Messrs. Stephens and Hornig, founding
directors and members of the General Partner, will own an aggregate of 163,749
Subordinated Units. The 5,510,100 Subordinated Units owned by Old Services,
Holdings and Messrs. Stephens and Hornig will represent an aggregate 42.4%
limited partner interest in the Company (39.1% if the over-allotment option
granted to the underwriters in connection with the MLP Offering 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, USTK, 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 the MLP 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 the MLP Offering.
CONSULTING AGREEMENTS
The Company 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 Company. 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 other than those with consulting
agreements.
RELATED PARTY TRANSACTIONS
In connection with the Weyerhaeuser Acquisition, USTK paid a fee of $4.1
million to Timberlands Management Group ("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, during 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 97,561 Subordinated Units and
$1.0 million. Of such amounts, the 97,561 Subordinated Units will be paid upon
the consummation of the Transactions and $1.0 million is 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 66,188 Subordinated Units.
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<PAGE>
THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of the material provisions of the
Partnership Agreement. 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.
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, 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.
CASH DISTRIBUTIONS
The Operating Company will distribute to the Company, as non-managing
member, and the General Partner, on a quarterly basis, all of its available
cash. Distributions will be made 1.0101% to the General Partner and 98.9899%
to the Company.
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, as adjusted for
reserves. The General Partner has broad discretion in making cash
disbursements and establishing reserves, thereby affecting the amount of
Available Cash that will be distributed with respect to any quarter. With
respect to each quarter during the Subordination Period (which will generally
extend to at least December 31, 2002 and which is defined in the Glossary), 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
arrearages on the Common Units, 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-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 50%
of the Subordinated Units may convert into Common Units prior to the end of
the Subordination Period.
Distributions by the Company of Available Cash from Operating Surplus (as
defined in the Glossary) 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 of $.50
per Unit 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 arrearages on the Common Units accrued
and unpaid with respect to any prior quarters during the Subordination
Period;
55
<PAGE>
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
fourth, 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 arrearages on the Common Units) a total of
$0.550 for such quarter in respect of each outstanding Unit (the "First
Target Distribution");
fifth, 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 arrearages on the Common Units) a total of
$0.633 for such quarter in respect of each outstanding Unit (the "Second
Target Distribution");
sixth, 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 arrearages on the Common Units) 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.
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;
second, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until the Unitholders have received the First Target Distribution;
third, 85% to all Unitholders, pro rata, and 15% to the General Partner,
until the Unitholders have received the Second Target Distribution;
fourth, 75% to all Unitholders, pro rata, and 25% to the General Partner,
until the Unitholders have received the Third Target Distribution; and
thereafter, 50% to all Unitholders, pro rata, and 50% to the General
Partner.
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 (as defined in the Glossary), (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.
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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 follows: (i) first towards the payment
of creditors of the Company in the order of priority provided in the
Partnership Agreement and by law and (ii) then to the Unitholders and the
General Partner in accordance with their respective capital account balances as
so adjusted. 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.
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. The ownership of the Subordinated Units by certain affiliates of the
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).
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DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") among
the Issuers and , as trustee (the "Trustee"). The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Notes are subject to all such terms, and holders of Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of certain provisions of the Notes and the Indenture
does not purport to be complete and is qualified in its entirety by reference
to the Notes and the Indenture, including the definitions therein of certain
terms used below. A copy of the proposed form of Indenture has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part
and is available from the Company upon request as set forth under "Available
Information." The definitions of certain terms used in the following summary
are set forth below under "--Certain Definitions."
The Notes will be unsecured general joint and several obligations of the
Issuers and will rank senior in right of payment to all existing and future
subordinated indebtedness of the Issuers and pari passu in right of payment
with all existing and future senior indebtedness of the Issuers.
The Company is a holding company for its subsidiaries, with no material
operations and no substantial assets other than its approximate 99% member
interest in the Operating Company. Accordingly, the Company is dependent upon
the distribution of the earnings of its subsidiaries, including the Operating
Company, to service its debt obligations. In addition, the Notes will be
effectively subordinated to any secured indebtedness of the Company to the
extent of the value of the assets securing such Indebtedness and to claims of
creditors (other than the Company) and preferred stockholders of the Company's
Subsidiaries that are not Subsidiary Guarantors. Claims of creditors (other
than the Company) of the Company's Subsidiaries that are not Subsidiary
Guarantors, including trade creditors, secured creditors, taxing authorities
and creditors holding guarantees, and claims of holders of preferred stock of
such Subsidiaries will generally have priority as to assets of such
Subsidiaries over the claims and equity interest of the Company and, thereby
indirectly, the holders of indebtedness of the Company, including the Notes.
At March 31, 1997, after giving pro forma effect to the offering and the other
transactions described herein, the Company's Subsidiaries had outstanding
liabilities to creditors other than the Company of approximately $185.9
million, including $150.0 million outstanding pursuant to the Private Notes
and $32.6 million outstanding under the Bank Credit Facility. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Description of Indebtedness."
As a result of the structural subordination discussed above, the holders of
the Notes will not have any recourse to the Operating Company or any of its
Subsidiaries (other than Subsidiary Guarantors, if any) or any of their
respective assets in respect of the payment of the principal, premium (if any)
and interest on, the Notes, except, indirectly, to the extent the Company has
rights as a holder of equity interests in the Operating Company and its
subsidiaries. In addition, neither the Company nor the holders of Notes will
have any right to require the Operating Company to make distributions to the
Company. The Operating Company LLC Agreement will require, subject to the
restrictions imposed by the Private Note Agreements and Bank Credit Facility,
the Operating Company to distribute all Available Cash to its members,
including the Company.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $100 million and
will mature on , 2007. Interest on the Notes will accrue at the rate of %
per annum and will be payable semi-annually in arrears on and ,
commencing on , 1998, to holders of record on the immediately preceding
and . Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date
of original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
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Principal, premium, if any, and interest on the Notes will be payable at the
office or agency of the Issuers maintained for such purpose within the City
and State of New York or, at the option of the Issuers, payment of interest
may be made by check mailed to the holders of the Notes at their respective
addresses set forth in the register of holders of Notes; provided that all
payments with respect to Global Notes will be required to be made by wire
transfer of immediately available funds to the accounts specified by the
holders thereof. Until otherwise designated by the Issuers, the Issuers'
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Notes will be issued in registered form, without coupons,
and in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Notes are not redeemable prior to , 2002. Thereafter, the Notes will
be subject to redemption at the option of the Issuers, in whole or in part,
upon not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest thereon to the applicable redemption date, if redeemed
during the 12-month period beginning on of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.............................. %
2003.............................. %
2004.............................. %
2005 and thereafter............... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or before , 2000, the
Company may redeem up to 35% of the original aggregate principal amount of the
Notes at a redemption price of % of the principal amount thereof, plus
accrued and unpaid interest thereon to the redemption date, with the net
proceeds of a Public Equity Offering made by the Company; provided that at
least 65% of the aggregate principal amount of Notes originally issued remain
outstanding immediately after the occurrence of such redemption; provided,
further, that such redemption shall occur within 120 days of the date of the
closing of such Public Equity Offering.
If less than all the Notes are to be redeemed pursuant to the optional
redemption provisions of the Indenture, the Trustee shall select the Notes to
be redeemed among the holders of Notes pro rata, by lot or in accordance with
a method which the Trustee considers to be fair and appropriate (and in such
manner as complies with applicable legal and stock exchange requirements, if
any). Notices of redemption shall be mailed by first class mail at least 30
but not more than 60 days before the redemption date to each holder of Notes
to be redeemed at its registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Note. On and
after the redemption date, interest ceases to accrue on Notes or portions
thereof called for redemption.
SUBSIDIARY GUARANTEES OF NOTES
Under the circumstances described below, the Company's payment obligations
under the Notes may in the future be jointly and severally guaranteed by
existing or future Restricted Subsidiaries of the Company as Subsidiary
Guarantors. Although the Indenture does not contain any requirement that any
Restricted Subsidiary execute and deliver a Subsidiary Guarantee, a covenant
described below requires a Restricted Subsidiary in the future to execute and
deliver a Subsidiary Guarantee prior to its guarantee of other Indebtedness of
the Company. See "Certain Covenants--Limitation on Non-Guarantor
Subsidiaries."
Each Subsidiary Guarantor will guarantee, jointly and severally, to each
holder of Notes and the Trustee, the full and prompt performance of the
Company's obligations under the Indenture and the Notes, including the payment
of principal of (or premium, if any, on) and interest on the Notes pursuant to
its Subsidiary Guarantee.
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Each of the Subsidiary Guarantees will be an unsecured general obligation of
the Subsidiary Guarantor and will rank senior in right of payment to all
existing and future subordinated indebtedness of the Subsidiary Guarantor and
pari passu in right of payment with all existing and future senior
indebtedness of the Subsidiary Guarantor. The Subsidiary Guarantees will be
effectively subordinated to any secured indebtedness of the Subsidiary
Guarantors to the extent of the value of the assets securing such
Indebtedness.
The obligations of each Subsidiary Guarantor will be limited to the maximum
amount, after giving effect to all other contingent and fixed liabilities of
such Subsidiary Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Subsidiary Guarantor in respect of
the obligations of such other Subsidiary Guarantor under its Subsidiary
Guarantee or pursuant to its contribution obligations under the Indenture, as
will result in the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. Each Subsidiary Guarantor that makes a
payment or distribution under a Subsidiary Guarantee shall be entitled to a
contribution from each other Subsidiary Guarantor in a pro rata amount based
on the Adjusted Net Assets of each Subsidiary Guarantor.
Each Subsidiary Guarantor may consolidate with or merge into or sell or
otherwise dispose of all or substantially all of its assets to the Company or
another Subsidiary Guarantor without limitation. Each Subsidiary Guarantor may
consolidate with or merge into or sell all or substantially all of its assets
to a Person other than the Company or another Subsidiary Guarantor (whether or
not Affiliated with the Subsidiary Guarantor), provided that (a) if the
surviving Person is not the Company or a Subsidiary Guarantor, the surviving
Person agrees to assume such Subsidiary Guarantor's Subsidiary Guarantee and
all its obligations pursuant to the Indenture (except to the extent the
following paragraph would result in the release of such Subsidiary Guarantee
and obligations) and (b) such transaction does not result in a Default or
Event of Default immediately thereafter that is continuing.
Upon (a) the sale or other disposition (by merger or otherwise) of a
Subsidiary Guarantor (or all or substantially all of its assets) to a Person
other than the Company or another Subsidiary Guarantor and pursuant to a
transaction that is otherwise in compliance with the Indenture (including as
described in the foregoing paragraph) or (b) the release of all guarantees by
a Subsidiary Guarantor of Indebtedness of the Company, such Subsidiary
Guarantor shall be unconditionally released and discharged from its Subsidiary
Guarantee and all of its obligations in respect of the Indenture.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders," the
Issuers are not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Issuers to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase (the "Change of Control
Payment"). Within 30 days following any Change of Control, the Issuers will
mail a notice to each holder stating: (a) that the Change of Control Offer is
being made pursuant to the covenant entitled "Change of Control" and that all
Notes tendered will be accepted for payment; (b) the purchase price and the
purchase date, which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date");
(c) that any Note not tendered will continue to accrue interest; (d) that,
unless the Issuers default in the payment of the Change of Control Payment,
all Notes accepted for payment pursuant to the Change of Control Offer will
cease to accrue interest after the Change of Control Payment Date; (e) that
holders electing to have any Notes purchased pursuant to a Change of Control
Offer will be required to surrender the
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Notes, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Notes completed, to the Paying Agent at the address specified
in the notice prior to the close of business on the third Business Day
preceding the Change of Control Payment Date; (f) that holders will be
entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the Second Business Day preceding the Change of
Control Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal amount of Notes delivered
for purchase, and a statement that such holder is withdrawing his election to
have such Notes purchased; (g) that holders whose Notes are being purchased
only in part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered, which unpurchased portion must
be equal to $1,000 in principal amount or an integral multiple thereof; and
(h) the material circumstances and material facts regarding such Change of
Control. The Issuers will comply with the requirements of Rule l4e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws and regulations are applicable in connection with the repurchase of the
Notes in connection with a Change of Control.
The Company will not be required to make a change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful, (a) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer, (b) deposit with the Paying Agent therefor an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (c) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an officers' certificate stating
the aggregate amount of the Notes or portions thereof tendered to the Issuers.
The Paying Agent will promptly mail to each holder of Notes so accepted the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail to each holder a new Note equal in principal amount to
the unpurchased portion of the Notes surrendered, if any; provided that each
such new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Issuers will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
"Change of Control" means (a) any "person" or "group" (as such terms are
used in Sections 13(d) and 14(d) of the Exchange Act), excluding Permitted
Holders or any Person of which one or more Permitted Holders beneficially own
in the aggregate at least a majority of the Voting Stock, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, of more than 50% of the total voting power with
respect to the total Voting Stock of the Company, (b) the sale, lease,
conveyance or other disposition of all or substantially all of the assets of
the Company to any Person or group (as such term is used in Section 13(d)(3)
of the Exchange Act) other than Permitted Holders or any Person of which one
or more Permitted Holders beneficially own in the aggregate at least a
majority of the Voting Stock, (c) the merger or consolidation of the Company
with another partnership, limited liability company or corporation other than
a Permitted Holder or any Person of which one or more Permitted Holders
beneficially own in the aggregate at least a majority of the Voting Stock, in
any such event pursuant to a transaction in which the outstanding Voting Stock
of the Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where the Voting Stock of the
Company outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock of the surviving or transferee Person constituting
a majority of the outstanding shares of such Voting Stock of such surviving or
transferee person (immediately after giving effect to such issuance), (d) the
liquidation or dissolution of the Company, the Operating Company or the
General Partner, or (e) the occurrence of any transaction, the result of which
is that Permitted Holders beneficially own in the aggregate, directly or
indirectly, less than a majority of the Voting Stock of the General Partner.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Notes to require
that the Issuers repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.
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With respect to the sale of assets referred to in the definition of "Change
of Control" above, the phrase "all or substantially all" as used in the
Indenture varies according to the facts and circumstances of the subject
transaction, has no clearly established meaning under New York law (which
governs the Indenture) and is subject to judicial interpretation. Accordingly,
in certain circumstances there may be a degree of uncertainty in ascertaining
whether a particular transaction would involve a disposition of "all or
substantially all" of the assets of a Person and therefore it may be unclear
whether a Change of Control has occurred and whether the Notes are subject to
a Change of Control Offer.
The Company's ability to pay cash to the holders of Notes upon a repurchase
may be limited by the Company's then existing financial resources including
the limitations on the Operating Company's ability to make distributions to
the Company contained in the Private Note Agreements and the Credit Agreement.
If the Company does not have sufficient financial resources (including as a
result of limitations on the Operating Company's ability to make
distributions) to repurchase the Notes, the failure of the Company to
repurchase the Notes upon a Change of Control Offer would constitute an Event
of Default under the Indenture. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Description of Indebtedness."
Asset Sales
The Company will not, and will not permit any of its Restricted Subsidiaries
to, (a) sell, lease, convey or otherwise dispose of any assets (including by
way of a Sale and Leaseback Transaction) other than sales of inventory in the
ordinary course of business and consistent with past practice (provided, that
the sale, lease, conveyance or other disposition of all or substantially all
of the assets of the Company shall be governed by the provisions of the
Indenture described above under the caption "Change of Control" or the
provisions described below under the caption "Merger, Consolidation or Sale of
Assets" and not by the provisions of this covenant) or (b) issue or sell
Capital Stock of any of its Restricted Subsidiaries, in the case of either
clause (a) or (b) above, whether in a single transaction or a series of
related transactions that has a fair market value (as determined in good faith
by the Board of Directors of the General Partner) in excess of $1.0 million or
for net cash proceeds of $1.0 million (each of the foregoing, an "Asset
Sale"), unless (i) the Company (or the Restricted Subsidiary, as the case may
be) receives consideration at the time of such Asset Sale at least equal to
the fair market value (as determined in good faith by the General Partner) of
the assets sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary
is in the form of cash; provided, however, that the amount of (A) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet or in the notes thereto) of the Company or any Restricted
Subsidiary that are assumed by the transferee of any such assets and (B) any
notes or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are immediately converted by the Company
or such Restricted Subsidiary into cash (to the extent of the cash received),
shall be deemed to be cash for purposes of this provision; and provided
further, that the 75% limitation referred to in this clause (ii) shall not
apply to any Asset Sale in which the cash portion of the consideration
received therefrom, determined in accordance with the foregoing proviso, is
equal to or greater than what the after-tax proceeds would have been had such
Asset Sale complied with the aforementioned 75% limitation. Notwithstanding
the foregoing, Asset Sales shall not be deemed to include (a) any transfer of
assets or Capital Stock by the Company or any of its Restricted Subsidiaries
to a Wholly-Owned Restricted Subsidiary of the Company, (b) any transfer of
assets pursuant to a Permitted Investment, (c) the sale of timberlands in a
like-kind exchange for a like interest in other timberlands having a fair
market value (as determined in good faith by the General Partner) at least
equal to the fair market value (as determined in good faith by the General
Partner) of the timberlands sold, (d) the sale of not more than 10,000 acres
in the aggregate of timberlands designated in good faith by the General
Partner for a higher and better use, (e) a disposition of obsolete equipment
in the ordinary course of business, and (f) any sale of Capital Stock of, or
Indebtedness or other securities of, an Unrestricted Subsidiary.
In the event that the aggregate Net Proceeds received by the Company or any
of its Restricted Subsidiaries from one or more Asset Sales exceed $ million
since the Issue Date, within 270 days after the date such aggregate Net
Proceeds exceed such amount (or such longer period as may be required to
comply with any
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agreement in effect on the Issue Date), the Company, at its option, shall
apply the amount of such aggregate Net Proceeds (less the amount of any such
Net Proceeds previously applied during such fiscal year for the purposes set
forth in clauses (a) or (b) below) to (a) reduce senior Indebtedness of the
Company or Indebtedness of a Restricted Subsidiary (with a permanent reduction
of availability in the case of the Working Capital Facility) or (b) make, or
commit, pursuant to a binding written contract (provided that the contract is
consummated substantially in accordance with the terms thereof within 30 days
after the end of the 270-day period), to make, an investment in assets in the
same Business. Pending the final application of any such Net Proceeds, the
Company or any Restricted Subsidiary may temporarily reduce borrowings under
the Bank Credit Facility or otherwise invest such Net Proceeds in any manner
that is not prohibited by the Indenture. Any such Net Proceeds that are not
applied or invested as provided in the first sentence of this paragraph will
be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $10 million, the Issuers shall make an offer to all holders
of Notes (an "Asset Sale Offer") to purchase the maximum principal amount of
Notes that may be purchased out of the Excess Proceeds, at an offer price in
cash in an amount equal to 100% of the principal amount thereof plus accrued
and unpaid interest, if any, to the date of purchase, in accordance with the
procedures set forth in the Indenture. The Issuers will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations to the extent such laws and regulations are applicable in
connection with the repurchase of the Notes in connection with an Asset Sale
Offer. To the extent that the aggregate amount of Notes tendered pursuant to
an Asset Sale Offer is less than the Excess Proceeds, the Company or any
Restricted Subsidiary may use such deficiency for general business purposes.
If the aggregate principal amount of Notes surrendered by holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to
be purchased on a pro rata basis. Upon completion of such Asset Sale Offer,
the amount of Excess Proceeds shall be reset at zero.
Limitation on Harvesting
In the event that the Company or any of its Restricted Subsidiaries receive
any Net Proceeds from an Excess Harvest, within 270 days after the date such
aggregate Net Proceeds exceed such amount (or such longer period as may be
required to comply with any agreement in effect on the Issue Date), the
Company, at its option, shall apply the amount of such aggregate Net Proceeds
(less the amount of any such Net Proceeds previously applied during such
fiscal year for the purposes set forth in clauses (a) or (b) below) to (a)
reduce senior Indebtedness of the Company or Indebtedness of a Restricted
Subsidiary (with a permanent reduction of availability in the case of the
Working Capital Facility) or (b) make, or commit, pursuant to a binding
written contract (provided that the contract is consummated substantially in
accordance with the terms thereof within 30 days after the end of the 270-day
period), to make, an investment in assets in the same Business. Pending the
final application of any such Net Proceeds, the Company or any Restricted
Subsidiary may temporarily reduce borrowings under the Bank Credit Facility or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any such Net Proceeds that are not applied or invested as provided
in the first sentence of this paragraph will be deemed to constitute "Excess
Harvest Proceeds." When the aggregate amount of Excess Harvest Proceeds
exceeds $5 million, the Issuers shall make an offer to all holders of Notes
(an "Excess Harvest Offer") to purchase the maximum principal amount of Notes
that may be purchased out of the Excess Harvest Proceeds, at an offer price in
cash in an amount equal to 100% of the principal amount thereof plus accrued
and unpaid interest, if any, to the date of purchase, in accordance with the
procedures set forth in the Indenture. The Issuers will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations to the extent such laws and regulations are applicable in
connection with the repurchase of the Notes in connection with an Excess
Harvest Offer. To the extent that the aggregate amount of Notes tendered
pursuant to an Excess Harvest Offer is less than the Excess Harvest Proceeds,
the Company or any Restricted Subsidiary may use such deficiency for general
business purposes. If the aggregate principal amount of Notes surrendered by
holders thereof exceeds the amount of Excess Harvest Proceeds, the Trustee
shall select the Notes to be purchased on a pro rata basis. Upon completion of
such Excess Harvest Offer, the amount of Excess Harvest Proceeds shall be
reset at zero.
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CERTAIN COVENANTS
Limitation on Additional Indebtedness
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or in any
manner become directly or indirectly liable, contingently or otherwise, for
the payment of (in each case, to "incur"), any Indebtedness (including,
without limitation, any Redeemable Capital Stock and Acquired Indebtedness),
unless at the time of such incurrence, and after giving pro forma effect to
the receipt and application of the proceeds of such Indebtedness, the
Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.25
to 1.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may incur Permitted Indebtedness.
Limitation on Restricted Payments
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(a) declare or pay any dividend or make any other distribution or payment
on or in respect of Capital Stock of the Company or any of its Restricted
Subsidiaries or any payment made to the direct or indirect holders (in
their capacities as such) of Capital Stock of the Company or any of its
Restricted Subsidiaries (other than (i) dividends or distributions payable
solely in Capital Stock of the Company (other than Redeemable Capital
Stock) or in options, warrants or other rights to purchase Capital Stock of
the Company (other than Redeemable Capital Stock), (ii) the declaration or
payment of dividends or other distributions to the extent declared or paid
to the Company or any Restricted Subsidiary of the Company and (iii) the
declaration or payment of dividends or other distributions by any
Restricted Subsidiary of the Company to all holders of Capital Stock of
such Restricted Subsidiary on a pro rata basis (including, in the case of
the Operating Company, to the General Partner)),
(b) purchase, redeem, defease or otherwise acquire or retire for value
any Capital Stock of the Company or any of its Restricted Subsidiaries
(other than any such Capital Stock owned by a Wholly-Owned Restricted
Subsidiary of the Company),
(c) make any principal payment on, or purchase, defease, repurchase,
redeem or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Subordinated Indebtedness (other than any such
Indebtedness owned by the Company or a Wholly-Owned Restricted Subsidiary
of the Company), or
(d) make any Investment (other than any Permitted Investment) in any
Person
(such payments or Investments described in the preceding clauses (a), (b), (c)
and (d) are collectively referred to as "Restricted Payments"), unless, at the
time of and after giving effect to the proposed Restricted Payment, (A) no
Default or Event of Default shall have occurred and be continuing and (B) such
Restricted Payment, together with the aggregate of all other Restricted
Payments made by the Company and its Restricted Subsidiaries during the fiscal
quarter during which such Restricted Payment is made, shall not exceed (1) if
the Consolidated Fixed Charge Coverage Ratio of the Company shall be greater
than 1.75 to 1, an amount equal to Available Cash for the immediately
preceding fiscal quarter or (2) if the Consolidated Fixed Charge Coverage
Ratio of the Company shall be equal to or less than 1.75 to 1, an amount equal
to the sum of (x) $ 7.5 million less the aggregate amount of all Restricted
Payments made by the Company and its Restricted Subsidiaries pursuant to this
clause (2) (x) during the period ending on the last day of the fiscal quarter
of the Company immediately preceding the date of such Restricted Payment and
beginning on the later of (I) the Issue Date and (II) the first day of the
sixteenth full fiscal quarter immediately preceding the date of such
Restricted Payment, plus (y) the aggregate net cash proceeds of any
substantially concurrent (I) capital contribution to the Company from any
Person (other than a Restricted Subsidiary of the Company) or (II) issuance
and sale of shares of Capital Stock (other than Redeemable Capital Stock) of
the Company to any Person (other than to a Restricted Subsidiary of the
Company) (excluding any cash proceeds received pursuant to any transaction
occurring on or
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prior to the Issue Date). The amount of any such Restricted Payment, if other
than cash, shall be the fair market value (as determined in good faith by the
General Partner) on the date of such Restricted Payment of the asset(s)
proposed to be transferred by the Company or such Restricted Subsidiary, as
the case may be, pursuant to such Restricted Payment.
None of the foregoing provisions will prohibit: (a) the payment of any
dividend or distribution within 60 days after the date of its declaration, if
at the date of declaration such payment would be permitted by the foregoing
paragraph; (b) the redemption, repurchase or other acquisition or retirement
of any shares of any class of Capital Stock of the Company or any Restricted
Subsidiary of the Company in exchange for, or out of the net cash proceeds of,
a substantially concurrent (i) capital contribution to the Company from any
Person (other than a Restricted Subsidiary of the Company) or (ii) issue and
sale of other shares of Capital Stock (other than Redeemable Capital Stock) of
the Company to any Person (other than to a Restricted Subsidiary of the
Company); provided, however, that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase or other acquisition or
retirement shall be excluded from the calculation of Available Cash; or (c)
any redemption, repurchase or other acquisition or retirement of Subordinated
Indebtedness by exchange for, or out of the net cash proceeds of, a
substantially concurrent (i) capital contribution to the Company from any
Person (other than a Restricted Subsidiary of the Company) or (ii) issue and
sale of (A) Capital Stock (other than Redeemable Capital Stock) of the Company
to any Person (other than to a Restricted Subsidiary of the Company) or (B)
Indebtedness of the Company issued to any Person (other than a Restricted
Subsidiary of the Company), so long as such Indebtedness is Permitted
Refinancing Indebtedness; provided, however, in each case, that the amount of
any such net cash proceeds that are utilized for any such redemption,
repurchase or other acquisition or retirement shall be excluded from the
calculation of Available Cash. In computing the amount of Restricted Payments
previously made for purposes of the preceding paragraph, Restricted Payments
made under clause (a) shall be included and Restricted Payments made under
clauses (b) and (c) shall not be so included.
Limitation on Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create, incur, assume or suffer to exist any Liens, other than Permitted
Liens, upon any of its respective property or assets, whether owned on the
Issue Date or thereafter acquired, unless the Notes are secured equally and
ratably with (or prior to, in the case of Subordinated Indebtedness) the
obligations secured by such Lien.
Limitation on Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into or suffer to exist any transaction or
series of related transactions (including, without limitation, the sale,
transfer, disposition, purchase, exchange or lease of assets, property or
services), with, or for the benefit of, any Affiliate of the Company, unless
(a) such transaction or series of related transactions is between the Company
and its Restricted Subsidiaries or between two Restricted Subsidiaries or
(b)(i) such transaction or series of related transactions is on terms that are
no less favorable to the Company or such Restricted Subsidiary, as the case
may be, than those which would have been obtained in a comparable transaction
at such time from Persons who are not Affiliates of the Company or a
Restricted Subsidiary and (ii) with respect to (A) a transaction or series of
transactions involving aggregate payments or value equal to or greater than $5
million, the Company shall have delivered an Officers' Certificate to the
Trustee certifying that such transaction or series of transactions complies
with the preceding clause (a) and that such transaction or series of
transactions has been approved by a majority of the Board of Directors of the
General Partner (including a majority of the Disinterested Directors) and (B)
a transaction or series of transactions involving aggregate payments or value
equal to or greater than $10 million, the Company delivers to the Trustee an
opinion as to the fairness to the Company or such Restricted Subsidiary from a
financial point of view issued by an accounting or investment banking firm of
national standing; provided, however, that this covenant will not restrict the
Company, any Restricted Subsidiary or the General Partner from (i) entering
into any employment agreement, stock option agreement, restricted stock
agreement or similar agreement in the ordinary course of business, (ii)
entering into transactions permitted by
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the provisions of the Indenture described under the covenant "Restricted
Payments," (iii) entering into any agreement in effect on the Issue Date or
any amendment thereto (so long as such amendment is no less favorable to the
holders of the Notes than the original agreement as in effect on the Issue
Date) and any transactions contemplated thereby, and (iv) paying reasonable
fees to, and indemnities provided on behalf of, officers, directors or
employees of the Company or any Restricted Subsidiary in the ordinary course
of business.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or consensual restriction on the ability of any
Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any
other distributions on or in respect of its Capital Stock, (b) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make
loans or advances to, or any investment in, the Company or any other
Restricted Subsidiary, or (d) transfer any of its properties or assets to the
Company or any other Restricted Subsidiary (collectively, "Payment
Restrictions"), except for such encumbrances or restrictions existing under or
by reason of (i) applicable law, (ii) any agreement in effect at or entered
into on the Issue Date (including, without limitation, the Private Note
Agreement and the Credit Agreement) or any agreement relating to any Permitted
Indebtedness; provided, however, that the encumbrances and restrictions
contained in the agreements governing such Permitted Indebtedness are no more
restrictive with respect to such Payment Restrictions than those set forth in
the Private Note Agreement and the Credit Agreement as in effect on the Issue
Date, (iii) customary non-assignment provisions of any contract, license or
any lease governing a leasehold interest of the Company or any Restricted
Subsidiary, (iv) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described
in clause (d) above on the property so acquired, (v) contracts for the sale of
assets, including, without limitation, customary restrictions with respect to
a Restricted Subsidiary pursuant to an agreement that has been entered into
for the sale of all or substantially all of the Capital Stock or assets of
such Restricted Subsidiary, (vi) any agreement or other instrument governing
Indebtedness of a Person acquired by the Company or any Restricted Subsidiary
(or of a Restricted Subsidiary of such Person) in existence at the time of
such acquisition (but not created in contemplation thereof), which encumbrance
or restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the properties, assets or Subsidiaries
of the Person, so acquired; provided that the Consolidated Cash Flow Available
for Fixed Charges of such Person to the extent that dividends, distributions,
loans, advances or transfers thereof is limited by such encumbrance or
restriction on the date of acquisition is not taken into account in
determining whether such acquisition was permitted by the terms of the
Indenture, (vii) provisions contained in agreements or instruments relating to
Indebtedness which prohibit the transfer of all or substantially all of the
assets of the obligor thereunder unless the transferee shall assume the
obligations of the obligor under such agreement or instrument, or (viii)
Permitted Refinancing Indebtedness, provided that the restrictions contained
in agreements governing such Permitted Indebtedness are no more restrictive
than those contained in the agreement governing the Indebtedness being
refinanced.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries
to, enter into any Sale and Leaseback Transaction with respect to any property
of the Company or any of its Restricted Subsidiaries. Notwithstanding the
foregoing, the Company and its Restricted Subsidiaries may enter into Sale and
Leaseback Transactions with respect to property acquired or constructed after
the Issue Date; provided that (a) the Company or such Restricted Subsidiary
would be permitted under the Indenture to incur Indebtedness secured by a Lien
on such property in an amount equal to the Attributable Debt with respect to
such Sale and Leaseback Transaction, or (b) the lease in such Sale and
Leaseback Transaction is for a term not in excess of the lesser of (i) three
years and (ii) 60% of the remaining useful life of such property.
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Limitation on Finance Corp.
In addition to the restrictions set forth under "Limitation on Additional
Indebtedness" above, Finance Corp. may not incur any Indebtedness unless (a)
the Company is a co-obligor and guarantor of such Indebtedness or (b) the net
proceeds of such Indebtedness are lent to the Company, used to acquire
outstanding debt securities issued by the Company or used directly or
indirectly to refinance or discharge Indebtedness permitted under the
limitation of this paragraph. Finance Corp. may not engage in any business not
related directly or indirectly to obtaining money or arranging financing for
the Company.
Merger, Consolidation or Sale of Assets
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving Person), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions to,
another Person unless (a) the Company is the surviving Person, or the Person
formed by or surviving such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation, partnership or
limited liability company organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (b) the Person formed
by or surviving any such consolidation or merger (if other than the Company)
or the Person to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made assumes all the obligations of the
Company pursuant to a supplemental indenture in a form reasonably satisfactory
to the Trustee, under the Notes and the Indenture; (c) immediately after such
transaction no Default or Event of Default exists; and (d) the Company or such
other Person formed by or surviving any such consolidation or merger, or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (A) will have Consolidated Net Worth (immediately after
the transaction but prior to any purchase accounting adjustments resulting
from the transaction) equal to or greater than the Consolidated Net Worth of
the Company immediately preceding the transaction and (B) will, at the time of
such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Consolidated Fixed Charge Coverage Ratio test set forth in the
covenant entitled "Incurrence of Additional Indebtedness." Notwithstanding the
foregoing clause (d), any Restricted Subsidiary may consolidate or merge with
or into, or dispose of all or any part of its properties and assets to, the
Company.
The Indenture will also provide that Finance Corp. may not consolidate or
merge with or into (whether or not Finance Corp. is the surviving Person), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions to, another Person unless (a) Finance Corp. is the surviving
Person, or the Person formed by or surviving such consolidation or merger (if
other than Finance Corp.) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state thereof
or the District of Columbia and a Wholly-Owned Restricted Subsidiary of the
Company; (b) the Person formed by or surviving any such consolidation or
merger (if other than Finance Corp.) or the Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of Finance Corp., pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee, under the Notes
and the Indenture; and (c) immediately after such transaction no Default or
Event of Default exists.
Line of Business
The Company and its Restricted Subsidiaries will not engage in any business
other than the Business.
Limitation on Non-Guarantor Restricted Subsidiaries
The Indenture will provide that the Company will not permit any Restricted
Subsidiary that is not a Subsidiary Guarantor to guarantee the payment of any
Indebtedness of the Company unless: (i) (A) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Subsidiary Guarantee of the Notes by such Restricted
Subsidiary and (B), with respect to any guarantee of
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Subordinated Indebtedness by a Subsidiary, any such guarantee shall be
subordinated to such Restricted Subsidiary's Subsidiary Guarantee at least to
the same extent as such Subordinated Indebtedness is subordinated to the
Notes; [and] (ii) such Subsidiary waives, and agrees not to exercise any right
or claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Subsidiary as a result of any payment by such Subsidiary under its Subsidiary
Guarantee until such time as the obligations guaranteed thereby are paid in
full; [and (iii) such Subsidiary shall deliver to the Trustee an opinion of
independent legal counsel to the effect that such Subsidiary Guarantee has
been duly executed and authorized and constitutes a valid, binding and
enforceable obligation of such Subsidiary, except insofar as enforcement
thereof may be limited by bankruptcy, insolvency or similar laws (including,
without limitation, all laws relating to fraudulent transfers) and except
insofar as enforcement thereof is subject to general principles of equity;]
provided that this covenant shall not be applicable to any guarantee of any
Subsidiary that (x) existed at the time such Person became a Subsidiary of the
Company and (y) was not incurred in connection with, or in contemplation of,
such Person becoming a Subsidiary of the Company. Further, a pledge of assets
to secure any Indebtedness for which the pledgor is not otherwise liable shall
not be considered a guarantee.
Reports
Whether or not required by the rules and regulations of the Securities and
Exchange Commission (the "Commission"), so long as any Notes are outstanding,
the Issuers will furnish to the holders of Notes (a) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Issuers were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Issuers' certified independent
accountants and (b) all reports that would be required to be filed with the
Commission on Form 8-K if the Issuers were required to file such reports. In
addition, whether or not required by the rules and regulations of the
Commission, the Issuers will file a copy of all such information with the
Commission for public availability (unless the Commission will not accept such
a filing) and make such information available to investors who request it in
writing.
EVENTS OF DEFAULT AND REMEDIES
The following will be "Events of Default" under the Indenture:
(a) default by the Company or any Subsidiary Guarantor in the payment of
the principal of or premium, if any, on any Note when the same becomes due
and payable (upon Stated Maturity, acceleration, optional redemption,
required purchase or otherwise); or
(b) default by the Company or any Subsidiary Guarantor in the payment of
an installment of interest on any of the Notes, when the same becomes due
and payable, which default continues for a period of 30 days; or
(c) failure to perform or observe any other term, covenant or agreement
contained in the Notes, any Subsidiary Guarantee or the Indenture (other
than a default specified in clause (a) or (b) above) and such default
continues for a period of 45 days after written notice of such default
requiring the Issuers to remedy the same shall have been given (i) to the
Company or such Subsidiary Guarantor by the Trustee or (ii) to the Issuers
and the Trustee by holders of 25% in aggregate principal amount of the
Notes then outstanding; or
(d) default or defaults under one or more agreements, instruments,
mortgages, bonds, debentures or other evidences of Indebtedness under which
the Company or any Restricted Subsidiary of the Company then has
outstanding Indebtedness, which default (i) is caused by a failure to pay
at its Stated Maturity or within the applicable grace period, if any,
provided with respect to such Indebtedness, principal, premium or interest
with respect to Indebtedness of the Company or a Restricted Subsidiary
(collectively, a "Payment Default") or (ii) results in the acceleration of
such Indebtedness prior to its Stated Maturity and, in each case, the
principal amount of any such Indebtedness, together with the principal
amount of any other such
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Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $10 million or more; or
(e) a final judgment or judgments (which is or are non-appealable and
non-reviewable or which has or have not been stayed pending appeal or
review or as to which all rights to appeal or review have expired or been
exhausted) shall be rendered against the Company, any Restricted
Subsidiary, the General Partner or any Significant Subsidiary for the
payment of money in excess of $10 million in the aggregate (other than that
portion of a final judgment as to which a reputable insurance company has
accepted full liability) and such judgments shall not be discharged or
execution thereon stayed pending appeal or review within 60 days after
entry of such judgment, or, in the event of such a stay, such judgment
shall not be discharged within 30 days after such stay expires; or
(f) any Subsidiary Guarantee shall for any reason cease to be, or be
asserted by the Company or any Subsidiary Guarantor, as applicable, not to
be, in full force and effect (except pursuant to the release of any such
Subsidiary Guarantee in accordance with the Indenture); or
(g) certain events of bankruptcy, insolvency or reorganization with
respect to the Issuers or any of their respective Significant Subsidiaries
that are Restricted Subsidiaries shall have occurred.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to any Issuer, any Significant
Subsidiary that is a Restricted Subsidiary or any group of Subsidiaries that
are Restricted Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
immediately without further action or notice. Holders of the Notes may not
enforce the Indenture or the Notes except as provided in the Indenture.
Subject to certain limitations, holders of a majority in principal amount of
the then outstanding Notes may direct the Trustee in its exercise of any trust
or power. The Trustee may withhold from holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines in good
faith that withholding notice is in their interest.
[In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Issuers or a
Subsidiary Guarantor with the intention of avoiding payment of the premium
that the Issuers or a Subsidiary Guarantor would have had to pay if the
Issuers then had elected to redeem the Notes pursuant to the optional
redemption provisions of the Indenture, an equivalent premium shall also
become and be immediately due and payable to the extent permitted by law upon
the acceleration of the Notes. If an Event of Default occurs prior to ,
2002, by reason of any willful action (or inaction) taken (or not taken) by or
on behalf of the Issuers or a Subsidiary Guarantor with the intention of
avoiding the prohibition on redemption of the Notes prior to such date, then
the premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Notes.]
The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of principal of, premium, if any, or interest on the Notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuers are required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF LIMITED PARTNERS, DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS
No limited partner of the Company or director, officer, employee,
incorporator or stockholder of the General Partner or Finance Corp., as such,
shall have any liability for any obligations of the Issuers under the Notes or
the Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each
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holder of Notes by accepting a Note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the
Notes. Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
NON-RECOURSE
Except as provided for in any Subsidiary Guarantee, the obligations of the
Issuers under the Indenture and the Notes will be non-recourse to the General
Partner and the Operating Company (and their respective Affiliates (other than
the Issuers)), and payable only out of the cash flow and assets of the
Issuers. The Trustee has, and each holder of a Note, by accepting a Note, will
be deemed to have, agreed in the Indenture that neither the General Partner
nor its assets nor the Operating Company nor its assets (nor any of their
respective Affiliates (other than the Issuers) nor their respective assets)
shall be liable for any of the obligations of the Issuers under the Indenture
or the Notes (except as provided for by any Subsidiary Guarantee).
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuers may, at their option and at any time, elect to have all of their
obligations and the obligations of any Subsidiary Guarantors discharged with
respect to the outstanding Notes and any Subsidiary Guarantees ("Legal
Defeasance") except for (a) the rights of holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due, (b) the Issuers' obligations with
respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(c) the rights, powers, trusts, duties and immunities of the Trustee, and the
Issuers' obligations in connection therewith and (d) the Legal Defeasance
provisions of the Indenture. In addition, the Issuers may, at their option and
at any time, elect to have the obligations of the Issuers and all Subsidiary
Guarantors released with respect to certain covenants that are described in
the Indenture ("Covenant Defeasance") and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the Notes. In the event Covenant Defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (a) the
Issuers or any Subsidiary Guarantor must irrevocably deposit with the Trustee,
in trust, for the benefit of the holders of the Notes, cash in U.S. dollars,
non-callable Government Securities (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of
a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding Notes on the
stated maturity or on the applicable redemption date, as the case may be, of
such principal or installment of principal of, premium, if any, or interest on
the outstanding Notes; (b) in the case of Legal Defeasance, the Issuers shall
have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (i) the Issuers shall
have received from, or there shall have been published by, the Internal
Revenue Service a ruling or (ii) since the date of the Indenture, there shall
have been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the holders of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will
be subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Legal Defeasance had not
occurred; (c) in the case of Covenant Defeasance, the Issuers shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred; (d) no Event of
Default shall have occurred and be continuing on the date of such deposit or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (e) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under any material agreement
or
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instrument (other than the Indenture) to which the Issuers or any of their
Restricted Subsidiaries or Subsidiary Guarantors is a party or by which the
Issuers or any of their Restricted Subsidiaries or Subsidiary Guarantors is
bound; (f) the Issuers shall have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (g) the Issuers shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Issuers or the
Subsidiary Guarantor with the intent of preferring the holders of Notes over
the other creditors of the Issuers or the Subsidiary Guarantor with the intent
of defeating, hindering, delaying or defrauding creditors of the Issuers or
the Subsidiary Guarantor or others; and (h) the Issuers shall have delivered
to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraphs, the Indenture or the
Notes may be amended or supplemented with the consent of the holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder): (a) reduce the
principal amount of Notes whose holders must consent to an amendment,
supplement or waiver, (b) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the
Notes (other than provisions relating to the covenants described above under
the caption "Repurchase at the Option of Holders"), (c) reduce the rate of or
change the time for payment of interest on any Note, (d) waive a Default or
Event of Default in the payment of principal of or premium, if any, or
interest on the Notes (except a rescission of acceleration of the Notes by the
holders of at least a majority in aggregate principal amount of the Notes and
a waiver of the payment default that resulted from such acceleration), (e)
make any Note payable in money other than that stated in the Notes, (f) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of holders of Notes to receive payments of principal
of, premium, if any, or interest on the Notes, (g) waive a redemption payment
with respect to any Note (other than provisions relating to the covenants
described above under the caption "Repurchase at the Option of Holders"), or
(h) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Issuers, the Subsidiary Guarantors and the Trustee may amend or supplement
the Indenture, any Subsidiary Guarantee or the Notes to cure any ambiguity,
defect or inconsistency, to provide for uncertificated Notes in addition to or
in place of certificated Notes, to provide for the assumption of the Issuers'
obligations to holders of the Notes in the case of a merger or consolidation,
to make any change that could provide any additional rights or benefits to the
holders of the Notes or that does not adversely affect the legal rights under
the Indenture of any such holder, to add or release any Subsidiary Guarantor
pursuant to the terms of the Indenture (provided that such addition or release
will not adversely affect the interests of the holders in any material
respect), or to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act.
THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Issuers, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
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The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full definition of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (a)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person
and (b) Indebtedness encumbering any asset acquired by such specified Person.
"Acquisition Facility" means the loan facility of the Operating Company
provided for in the Credit Agreement for the purpose of financing
acquisitions.
"Acquisition Principal Amount" means $ million.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the
amount by which the fair value of the properties and assets of such Subsidiary
Guarantor exceeds the total amount of liabilities, including, without
limitation, contingent liabilities (after giving effect to all other fixed and
contingent liabilities incurred or assumed on such date), but excluding
liabilities under its Subsidiary Guarantee, of such Subsidiary Guarantor at
such date.
"Affiliate" means, with respect to any specified Person, (a) any other
Person directly or indirectly controlling or controlled by, or under direct or
indirect common control with, such specified Person or (b) any other Person
who is a director or executive officer of (i) such specified Person or (ii)
any other Person described in the preceding clause (a). For purposes of this
definition, control shall mean the power to direct the management and
policies, whether through the ownership of voting securities, by contract or
otherwise; provided, that beneficial ownership of 10% or more of any class, or
any series of any class, of Capital Stock of a Person, whether or not Voting
Stock, shall be deemed to be control. Notwithstanding the foregoing, the term
"Affiliate" shall not include any Wholly-Owned Restricted Subsidiary.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company, or shall be merged with
or into the Company or any Restricted Subsidiary of the Company, (b) the
acquisition by the Company or any Restricted Subsidiary of the Company of the
assets of any Person (other than a Restricted Subsidiary of the Company) which
constitute all or substantially all of the assets of such Person, (c) the
acquisition by the Company or any Restricted Subsidiary of the Company of
merchantable timber or timberlands outside the ordinary course of business, or
(d) the acquisition by the Company or any Restricted Subsidiary of the Company
of any division or line of business of any Person (other than a Restricted
Subsidiary of the Company).
"Attributable Debt" means, with respect to any Sale and Leaseback
Transaction not involving a Capital Lease, as of any date of determination,
the total obligation (discounted to present value at the rate of interest
implicit in the lease included in such transaction) of the lessee for rental
payments (other than amounts required
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to be paid on account of property taxes, maintenance, repairs, insurance,
assessments, utilities, operating and labor costs and other items which do not
constitute payments for property rights) during the remaining portion of the
term (including extensions which are at the sole option of the lessor) of the
lease included in such transaction (in the case of any lease which is
terminable by the lessee upon the payment of a penalty, such rental obligation
shall also include the amount of such penalty, but no rent shall be considered
as required to be paid under such lease subsequent to the first date upon
which it may be so terminated).
"Available Cash," as to any quarter means: (a) the sum of (i) all cash and
cash equivalents of the Company, the Operating Company and any Subsidiary of
either such entity, treated as a single consolidated entity (together 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 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 Sections 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 (ii) above if the effect of such reserves would be that the
Company is unable to distribute the Minimum Quarterly Distribution (as defined
in the Partnership Agreement) on all Common Units (as defined in the
Partnership Agreement) with respect to such Quarter; provided, further, that
disbursements made by a member of the Partnership Group or cash reserves
established, increased or reduced after the end of such quarter but 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; provided, further, that Available Cash attributable to any
Restricted Subsidiary or the Company shall be excluded to the extent dividends
or distributions of such Available Cash by such Restricted Subsidiary 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.
"Bank Credit Facility" means the Acquisition Facility and the Working
Capital Facility.
"Business" means the acquisition, ownership, management and harvesting of
Timber and activities reasonably related or incidental thereto.
"Capital Lease" means, as applied to any Person, any lease of any property
(whether real, personal or mixed) by such Person (as lessee or guarantor or
other surety) which would, in accordance with GAAP, be required to be
classified and accounted for as a capital lease on a balance sheet of such
Person.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, units representing interests, participations, rights in or other
equivalents (however designated) of such Person's capital stock, including,
with respect to partnerships, partnership interests (whether general or
limited) and any other interest or participation that confers upon a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, such partnership, and any rights (other than debt securities
convertible into capital stock), warrants or options exchangeable for or
convertible into such capital stock.
"Consolidated Cash Flow Available for Fixed Charges" means, with respect to
the Company and its Restricted 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 but
excluding any such items attributable to an Excess Harvest.
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"Consolidated Fixed Charge Coverage Ratio" means, with respect to the
Company and its Restricted 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 the Company or any of its Restricted 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 (including, without limitation, any Asset Acquisition giving rise
to the need to make such calculation as a result of the Company or one of its
Restricted Subsidiaries (including any Person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness) 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 timberland by the Company or a Restricted 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 Company for
comparable timber sold during such period; and (y) in all the cases 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 Company and its Restricted 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 Company and its Restricted Subsidiaries in the operation of the acquired
business or asset and non-personnel costs and expenses incurred by the Company
and its Restricted Subsidiaries in the operation of the Company'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 date of the Indenture, 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
Company on a pro forma basis for such portion of the reference period prior to
the Issue Date, giving effect to the transactions occurring on the Issue 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 Issue Date, giving pro forma effect, as described in the two
foregoing sentences, to all applicable transactions occurring on the Issue
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
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payments associated with Indebtedness incurred in accordance with clause (e)
of the definition of Permitted Indebtedness and all Permitted Refinancing
Indebtedness in respect 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 Company and its
Restricted 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 Company and its Restricted 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.
"Consolidated Income Tax Expense" means, with respect to the Company and its
Restricted Subsidiaries for any period, the provision for federal, state,
local and foreign income taxes of the Company and its Restricted Subsidiaries
for such period as determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the Company and its
Restricted Subsidiaries for any period, without duplication, the sum of (a)
the interest expense of the Company and its Restricted Subsidiaries for such
period as determined on a consolidated basis in accordance with 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 Company
and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means the net income of the Company and its
Restricted Subsidiaries, as determined on a consolidated basis in accordance
with 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, (c) the
net income or loss of any Person which is not a Restricted 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 Company or any Restricted Subsidiary, (d) the net income
or loss prior to the date of acquisition of any Person combined with the
Company or any Restricted Subsidiary in a pooling of interest, (e) the net
income of any Restricted 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 Net Worth" means, with respect to the Company and its
Restricted Subsidiaries at any date, the consolidated stockholders' equity or
partners' capital of the Company and its Restricted Subsidiaries less the
amount of such stockholders' equity or partners' capital attributable to
Redeemable Capital Stock as determined in accordance with GAAP.
"Consolidated Non-cash Charges" means, with respect to the Company and its
Restricted Subsidiaries for any period, the aggregate depreciation, depletion,
amortization and any other non-cash charges resulting from write downs of non-
current assets, in each case reducing Consolidated Net Income of the Company
and its Restricted Subsidiaries for such period, determined on a consolidated
basis in accordance with GAAP.
"Contribution Agreement" means the Contribution, Conveyance and Assumption
Agreement, dated as of the Issue Date, among the Company, the Operating
Company, the General Partner and certain other parties together with the
additional conveyance documents and instruments contemplated or referenced
thereunder.
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"Credit Agreement" means the Credit Agreement, dated as of , 1997, among
the Operating Company, the General Partner and , in its individual
capacity and as agent, and the other banks which are or become parties from
time to time thereto, evidencing the Bank Credit Facility, and as it may be
amended, supplemented or otherwise modified from time to time, including all
exhibits and schedules thereto, and any successor or replacement facility
entered into in compliance with the Indenture.
"Default" means any event that is, or after notice or passage of time or both
would be, an Event of Default.
"Designation Amount" means, with respect to the designation of a Restricted
Subsidiary or a newly acquired or formed Subsidiary as an Unrestricted
Subsidiary, an amount equal to (a) the net book value of all assets of such
Subsidiary at the time of such designation in the case of a Restricted
Subsidiary and (b) the cost of acquisition or formation in the case of a newly
acquired or formed Subsidiary.
"Disinterested Director" means, with respect to any transaction or series of
transactions with Affiliates, a member of the Board of Directors of the General
Partner who has no financial interest, and whose employer has no financial
interest, in such transaction or series of transactions.
"ERISA" means the Employee Retirement Income Security Act of 1974, as the
same may be amended from time to time.
"Event of Default" has the meaning set forth under "Events of Default"
herein.
"Excess Harvest" means a harvest of timber (including timber deed, bulk, pay-
as-cut and stumpage sales) in excess in the aggregate of the following
limitations: (a) 150% of the Planned Volume during any fiscal year of the
Company, (b) 140% of the Planned Volume during any period of two consecutive
fiscal years of the Company, (c) 130% of the Planned Volume during any period
of three consecutive fiscal years of the Company and (d) 120% of the Planned
Volume during any period of four consecutive fiscal years of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States of America, which are applicable from time to
time.
"General Partner" means U.S. Timberlands Services Company, L.L.C., a Delaware
limited liability company and any successors in the capacity of general partner
of the Company or managing member of the Operating Company (including, if
applicable, more than one successor in any such capacity at the same time).
"Guaranty" as applied to any Person, any direct or indirect liability,
contingent or otherwise, of such Person with respect to any Indebtedness,
lease, cash dividend or other obligation of another, including, without
limitation (a) any such obligation directly or indirectly guaranteed or
endorsed (otherwise than for collection or deposit in the ordinary course of
business) by such Person, or in respect of which such Person is otherwise
directly or indirectly liable, (b) any other obligation under any contract
which, in economic effect, is substantially equivalent to a guaranty,
including, without limitation, any such obligation of a Company in which such
Person is a general partner or of a joint venture in which such Person is a
joint venturer, or (c) any obligation in effect guaranteed by such Person
through any agreement (contingent or otherwise) to purchase, repurchase or
otherwise acquire such obligation or any security therefor, or to provide funds
for the payment or discharge of such obligation (whether in the form of loans,
advances, stock purchases, capital contributions or otherwise), or to maintain
the solvency or any balance sheet or other financial condition of the obligor
of such obligation, or to make payment for any products, materials or supplies
or for any transportation or services regardless of the non-delivery or
nonfurnishing thereof, in any such case if the purpose or intent of such
agreement is to provide
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assurance that such obligation will be paid or discharged, or that any
agreements relating thereto will be complied with, or that the holders of such
obligation will be protected against loss in respect thereof.
"Indebtedness" means as applied to any Person (without duplication):
(a) any indebtedness for borrowed money and all obligations evidenced by
any bond, note, debenture or other similar instrument or letter of credit
(or reimbursement agreements in respect thereof) which such Person has
directly or indirectly created, incurred or assumed [(other than
obligations with respect to letters of credit securing obligations (other
than obligations described in paragraphs (a) through (c) of this
definition) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon, or, if and to the
extent drawn upon, such drawing is reimbursed no later than the tenth
Business Day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit)];
(b) any indebtedness for borrowed money and all obligations evidenced by
any bond, note, debenture or other similar instrument secured by any Lien
in respect of property owned by such Person, whether or not such Person has
assumed or become liable for the payment of such indebtedness, provided
that the amount of such Indebtedness, if such Person has not assumed the
same or become liable therefor, shall in no event be deemed to be greater
than the fair market value from time to time (as determined in good faith
by such Person) of the property subject to such Lien;
(c) any indebtedness, whether or not for borrowed money (excluding trade
payables and accrued expenses arising in the ordinary course of business),
with respect to which such Person has become directly or indirectly liable
and which represents the deferred purchase price (or a portion thereof) or
has been incurred to finance the purchase price (or a portion thereof) of
any property or service or business acquired by such Person, whether by
purchase, consolidation, merger or otherwise;
(d) the principal component of any obligations under Capital Leases to
the extent such obligations would, in accordance with GAAP, appear on a
balance sheet of such Person;
(e) all Attributable Debt of such Person in respect of Sale and Lease-
Back Transactions not involving a Capital Lease;
(f) any indebtedness of any other Person of the character referred to in
clause (a), (b), (c), (d) or (e) of this definition with respect to which
the Person whose Indebtedness is being determined has become liable by way
of a Guaranty;
(g) all Redeemable Capital Stock of such Person valued at the greater of
its voluntary or involuntary maximum fixed repurchase price;
(h) any Preferred Stock of any Restricted Subsidiary of such Person
valued at the liquidation preference thereof or any mandatory redemption
payment obligations in respect thereof; and
(i) any amendment, supplement, modification, deferral, renewal, extension
or refunding of any liability of the types referred to in clauses (a)
through (h) above.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Capital Stock as if such
Redeemable Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such
price is based upon, or measured by, the fair market value of such Redeemable
Capital Stock, such fair market value shall be determined in good faith by the
board of directors of the issuer of such Redeemable Capital Stock.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, interest rate collar agreement or other similar agreement
or arrangement designed to protect the Company or any Restricted Subsidiary
from fluctuations in interest rates.
"Investment" means as applied to any Person, any direct or indirect purchase
or other acquisition by such Person of stock or other securities of any other
Person, or any direct, or indirect loan, advance or capital
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contribution by such Person to any other Person, and any other item which
would be classified as an "investment" on a balance sheet of such Person
prepared in accordance with GAAP, including, without limitation, any direct or
indirect contribution by such Person of property or assets to a joint venture,
partnership or other business entity in which such Person retains an interest
(it being understood that a direct or indirect purchase or other acquisition
by such Person of assets of any other Person (other than stock or other
securities) shall not constitute an "Investment" for purposes of the
Indenture). The amount involved in Investments made during any period shall be
the aggregate cost to the Company and its Restricted Subsidiaries of all such
Investments made during such period, determined in accordance with GAAP, but
without regard to unrealized increases or decreases in value, or write-ups,
write-downs or write-offs, of such Investments and without regard to the
existence of any undistributed earnings or accrued interest with respect
thereto accrued after the respective dates on which such Investments were
made, less any net return of capital realized during such period upon the
sale, repayment or other liquidation of such Investments (determined in
accordance with GAAP, but without regard to any amounts received during such
period as earnings (in the form of dividends not constituting a return of
capital, interest or otherwise) on such Investments or as loans from any
Person in whom such Investments have been made).
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any
property of any kind. A Person shall be deemed to own subject to a Lien any
property which such Person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, Capital Lease or other
title retention agreement.
"Maturity Date" means, with respect to any Note, the date on which any
principal of such Note becomes due and payable as therein or herein provided,
whether at the Stated Maturity with respect to such principal or by
declaration of acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Amount of Unrestricted Investment" means, without duplication, the sum
of (a) the aggregate amount of all Investments made after the Issue Date
pursuant to subdivision (h) of the definition of Permitted Investment
(computed as provided in the last sentence of the definition of Investment)
and (b) the aggregate of all Designation Amounts in connection with the
designation of Unrestricted Subsidiaries less all Designation Amounts in
respect of Unrestricted Subsidiaries which have been designated as Restricted
Subsidiaries and otherwise reduced in a manner consistent with the provisions
of the last sentence of the definition of Investment.
"Net Proceeds" means, with respect to any Asset Sale or Excess Harvest or
sale of Capital Stock, the proceeds thereof in the form of cash or cash
equivalents including payments in respect of deferred payment obligations when
received in the form of cash or cash equivalents (except to the extent that
such deferred payment obligations are financed or sold with recourse to the
Company or any Restricted Subsidiary of the Company) net of (a) brokerage
commissions and other fees and expenses (including, without limitation, fees
and expenses of legal counsel and accountants and fees, expenses, discounts or
commissions of underwriters, placement agents and investment bankers) related
to such Asset Sale, (b) provisions for all taxes payable as a result of such
Asset Sale, or Excess Harvest, (c) amounts required to be paid to any Person
(other than the Company or any Restricted Subsidiary of the Company) owning a
beneficial interest in the assets subject to such Asset Sale, (d) appropriate
amounts to be provided by the Company or any Restricted Subsidiary of the
Company, as the case may be, as a reserve required in accordance with GAAP
against any liabilities associated with such Asset Sale and retained by the
Company or any Restricted Subsidiary of the Company, as the case may be, after
such Asset Sale, including, without limitation, pension and other post-
employment benefit liabilities, liabilities related to environmental matters
and liabilities under any indemnification obligations associated with such
Asset Sale and (e) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets sold in such Asset Sale
or Excess Harvest.
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"Operating Company" means U.S. Timberlands Klamath Falls, L.L.C., a Delaware
limited liability company, and its successors.
"Operating Company LLC Agreement" means the Amended and Restated Operating
Agreement of the Operating Company, as in effect on the Issue Date, and as the
same may from time to time be amended, supplemented or otherwise modified in
accordance with the terms thereof.
"Operative Agreements" means the Contribution Agreement, the Partnership
Agreement, the Operating Company LLC Agreement and the other agreements entered
into between the Company or the Operating Company and any of their respective
affiliates (including the General Partner) on the Issue Date.
"Partnership Agreement" means the Amended and Restated Agreement of Limited
Partnership of the Company, as in effect on the Issue Date, and as the same may
from time to time be amended, supplemented or otherwise modified in accordance
with the terms thereof.
"Permitted Holders" means (x) John M. Rudey, any member of Mr. Rudey's
immediate family, any of Mr. Rudey's lineal descendants and any member of such
lineal descendent's immediate family, (y) any trust (to the extent that it is
for the benefit of any of the foregoing) and (z) any of the Rudey Timber
Company, L.L.C., U.S. Timberlands Management Company, L.L.C. and U.S.
Timberlands Holdings, L.L.C.
"Permitted Indebtedness" means any of the following:
(a) Indebtedness of the Company evidenced by the Notes;
(b) Indebtedness outstanding on the Issue Date;
(c) Indebtedness of the Operating Company evidenced by the Private Notes,
provided that the aggregate principal amount (exclusive of any unamortized
premium) of such Indebtedness outstanding at any time may not exceed $150
million less the principal amount of Private Notes that have been repaid in
accordance with the required amortization schedule provided for therein;
(d) Indebtedness of the Company or a Restricted Subsidiary incurred for
any purpose permitted under the Acquisition Facility, provided that the
aggregate principal amount of such Indebtedness outstanding at any time may
not exceed the Acquisition Principal Amount;
(e) Indebtedness of the Company or a Restricted Subsidiary incurred for
any purpose permitted under the Working Capital Facility, provided that the
aggregate principal amount of such Indebtedness outstanding at any time may
not exceed the Working Capital Principal Amount;
(f) Indebtedness of the Company owing to the General Partner or an
Affiliate of the General Partner that is unsecured and that is Subordinated
Indebtedness; provided that the aggregate principal amount of such
Indebtedness outstanding at any time may not exceed $10 million;
(g) Indebtedness owed by the Company or any Restricted Subsidiary to any
Restricted Subsidiary;
(h) Indebtedness under Interest Rate Agreements;
(i) Permitted Refinancing Indebtedness;
(j) Indebtedness of the Company and its Restricted Subsidiaries
represented by letters of credit supporting (i) obligations under workmen's
compensation laws and (ii) the repayment of Permitted Indebtedness;
(k) surety bonds and appeal bonds required in the ordinary course of
business or in connection with the enforcement of rights or claims of the
Company or any of its Subsidiaries or in connection with judgments that do
not result in a Default or Event of Default;
(l) the Subsidiary Guarantees of the Notes (and any assumption of the
obligations guaranteed thereby);
(m) the incurrence by the Company or any Restricted Subsidiary of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for
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the purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount which, when aggregated with the principal amount of all
other Indebtedness then outstanding and incurred pursuant to this clause
(m) (together with any Permitted Refinancing Indebtedness with respect
thereto) does not exceed $5 million at any time outstanding;
(n) the incurrence by the Company or any Restricted Subsidiary of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (n), not to exceed $10
million.
For purposes of determining compliance with the covenant captioned "--
Limitation on Additional Indebtedness," in the event that an item of
Indebtedness meets the criteria of more than one of the categories of
Permitted Indebtedness described in clauses (a) through (n) above or is
entitled to be incurred pursuant to the first paragraph of such covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in
any manner that complies with this covenant and such item of Indebtedness will
be treated as having been incurred pursuant to only one of such clauses or
pursuant to the first paragraph of such covenant.
"Permitted Investments" means any of the following:
(a) Investments made or owned by the Company or any Restricted Subsidiary
in (i) marketable obligations issued or unconditionally guaranteed by the
United States of America, or issued by any agency thereof and backed by the
full faith and credit of the United States, in each case maturing one year
or less from the date of acquisition thereof, (ii) marketable direct
obligations issued by any state of the United States of America or any
political subdivision of any such state or any public instrumentality
thereof maturing within one year from the date of acquisition thereof and
having as at such date the highest rating obtainable from either S&P or
Moody's, (iii) commercial paper maturing no more than 270 days from the
date of creation thereof and having as at the date of acquisition thereof
one of the two highest ratings obtainable from either S&P or Moody's, (iv)
certificates of deposit maturing one year or less from the date of
acquisition thereof issued by commercial banks incorporated under the laws
of the United States of America or any state thereof or the District of
Columbia, (A) the commercial paper or other short term unsecured debt
obligations of which are as at such date rated either A-2 or better (or
comparably if the rating system is changed) by S&P or Prime-2 or better (or
comparably if the rating system is changed) by Moody's or (B) the long-term
debt obligations of which are as at such date rated either A or better (or
comparably if the rating system is changed) by either S&P or Moody's
("Permitted Banks"), (v) Eurodollar time deposits having a maturity of less
than 270 days from the date of acquisition thereof purchased directly from
any Permitted Bank, (vi) bankers' acceptances eligible for rediscount under
requirements of The Board of Governors of the Federal Reserve System and
accepted by Permitted Banks, and (vii) obligations of the type described in
clause (i), (ii), (iii), (iv) or (v) above purchased from a securities
dealer designated as a "primary dealer" by the Federal Reserve Bank of New
York or from a Permitted Bank as counterparty to a written repurchase
agreement obligating such counterparty to repurchase such obligations not
later than 14 days after the purchase thereof and which provides that the
obligations which are the subject thereof are held for the benefit of the
Company or a Restricted Subsidiary by a custodian which is a Permitted Bank
and which is not a counterparty to the repurchase agreement in question;
(b) the acquisition by the Company or any Restricted Subsidiary of
Capital Stock or other ownership interests, whether in a single transaction
or in a series of related transactions, of a Person engaged in
substantially the same business as the Company such that upon the
completion of such transaction or series of transactions, such Person
becomes a Restricted Subsidiary;
(c) subject to the provisions of subdivision (h) below, the making or
ownership by the Company or any Restricted Subsidiary of Investments (in
addition to Investments permitted by subdivisions (a), (b), (d), (e), (f)
and (g)) in any Person which is engaged in substantially the same business
as the Company, provided that the aggregate amount of all such Investments
made by the Company and its Restricted Subsidiaries
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following the Issue Date and outstanding pursuant to this subdivision (c)
and subdivision (h) below shall not at any date of determination exceed
$ million in the aggregate;
(d) the making or ownership by the Company or any Restricted Subsidiary
of Investments (i) arising out of loans and advances to employees incurred
in the ordinary course of business, (ii) arising out of extensions of trade
credit or advances to third parties in the ordinary course of business and
(iii) acquired by reason of the exercise of customary creditors' rights
upon default or pursuant to the bankruptcy, insolvency or reorganization of
a debtor;
(e) the creation or incurrence of liability by the Company or any
Restricted Subsidiary with respect to any Guaranty constituting an
obligation, warranty or indemnity, not guaranteeing Indebtedness of any
Person, which is undertaken or made in the ordinary course of business;
(f) the creation or incurrence of liability by the Company or any
Restricted Subsidiary with respect to any Interest Rate Agreements;
(g) the making by any Restricted Subsidiary of Investments in the Company
or another Restricted Subsidiary;
(h) the making or ownership by the Company or any Restricted Subsidiary
of Investments in Unrestricted Subsidiaries; provided that the Net Amount
of Unrestricted Investment shall not at any time exceed $5 million (and
subject to the limitations specified in subdivision (c) above); and
(i) the making or ownership by the Company or any Restricted Subsidiary
of Investments in the Operating Company or in Finance Corp.
"Permitted Liens" means any of the following:
(a) Liens for taxes, assessments or other governmental charges the
payment of which is not yet due and is being contested in good faith by
appropriate proceedings promptly initiated and diligently conducted and as
to which reserves or other appropriate provision, if any, as shall be
required by GAAP shall have been made therefor and be adequate in the good
faith judgment of the obligor;
(b) Liens of lessors, landlords and carriers, vendors, warehousemen,
mechanics, materialmen, repairmen and other like Liens incurred in the
ordinary course of business for sums not yet due or the payment of which is
being contested in good faith by appropriate proceedings promptly initiated
and diligently conducted and as to which reserves or other appropriate
provision, if any, as shall be required by GAAP shall have been made
therefor and be adequate in the good faith judgment of the obligor, in each
case (i) not incurred or made in connection with the borrowing of money,
the obtaining of advances or credit or the payment of the deferred purchase
price of property or (ii) incurred in the ordinary course of business
securing the unpaid purchase price of property or services constituting
current accounts payable;
(c) Liens (other than any Lien imposed by ERISA) incurred or deposits
made in the ordinary course of business (i) in connection with workers'
compensation, unemployment insurance and other types of social security, or
(ii) to secure (or to obtain letters of credit that secure) the performance
of tenders, statutory obligations, surety and appeal bonds, bids, leases,
performance bonds, purchase, construction or sales contracts and other
similar obligations, in each case not incurred or made in connection with
the borrowing of money;
(d) other deposits made to secure liability to insurance carriers under
insurance or self insurance arrangements;
(e) Liens securing reimbursement obligations under letters of credit,
provided in each case that such Liens cover only the title documents and
related goods (and any proceeds thereof) covered by the related letter of
credit;
(f) any attachment or judgment Lien, unless if either (i) the judgment it
secures shall, within 60 days after the entry thereof, have been discharged
or execution thereof stayed pending appeal or review, or shall have been
discharged within 60 days after expiration of any such stay or (ii) a
reputable insurance company has accepted full liability in respect thereof;
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(g) leases or subleases granted to others, easements, rights-of-way,
restrictions and other similar charges or encumbrances, which, in each case
either (i) are granted, entered into or created in the ordinary course of
the business of the Company or any Restricted Subsidiary or (ii) do not
materially impair the value or intended use of the property covered
thereby;
(h) Liens on property or assets of any Restricted Subsidiary securing
Indebtedness of such Restricted Subsidiary owing to the Company or a
Restricted Subsidiary;
(i) Liens on assets of the Company or any Restricted Subsidiary existing
on the Issue Date;
(j) Liens existing on any property of any Person at the time it becomes a
Subsidiary of the Company, or existing at the time of acquisition upon any
property acquired by the Company or any such Subsidiary through purchase,
merger or consolidation or otherwise, whether or not assumed by the Company
or such Subsidiary, or created to secure Indebtedness incurred to pay all
or any part of the purchase price or cost of construction or improvement (a
"Purchase Money Lien") of property (including, without limitation, Capital
Stock and other securities) acquired by the Company or a Restricted
Subsidiary; provided that (i) any such Lien shall be confined solely to
such item or items of property and other property which is an improvement
to or is acquired for use specifically in connection with such acquired
property, or, in the case of construction, related unimproved land, (ii) in
the case of a Purchase Money Lien, the principal amount of the Indebtedness
secured by such Purchase Money Lien shall at no time exceed an amount equal
to the lesser of (A) 100% of the cost to the Company and the Restricted
Subsidiaries of such property and (B) the fair market value of such
property at the time of the acquisition thereof (as determined in good
faith by the General Partner), (iii) any such Purchase Money Lien shall be
created not later than 120 days after the acquisition of such property and
(iv) any such Lien (other than a Purchase Money Lien) shall not have been
created or assumed in contemplation of such Person's becoming a Subsidiary
of the Company or such acquisition of property by the Company or any
Subsidiary;
(k) easements, exceptions or reservations in any property of the Company
or any Restricted Subsidiary granted or reserved for the purpose of
pipelines, roads, the removal of oil, gas, coal or other minerals, and
other like purposes, or for the joint or common use of real property,
facilities and equipment, which are incidental to, and do not materially
interfere with, the ordinary conduct of the business of the Company or any
Restricted Subsidiary; or
(l) any Lien renewing or extending any Lien permitted by subdivision (i)
or (j), provided that (i) the principal amount of the Indebtedness secured
by any such Lien shall not exceed the principal amount of such Indebtedness
outstanding immediately prior to the renewal or extension of such Lien, and
(ii) no assets encumbered by any such Lien other than the assets encumbered
immediately prior to such renewal or extension shall be encumbered thereby.
"Permitted Refinancing Indebtedness" means Indebtedness incurred by the
Company or any Restricted Subsidiary to substantially concurrently (excluding
any notice period on redemptions) repay, refund, renew, replace, extend or
refinance, in whole or in part, any Permitted Indebtedness of the Company or
any Restricted Subsidiary or any other Indebtedness incurred by the Company or
any Restricted Subsidiary pursuant to the "Limitation on Additional
Indebtedness" covenant, to the extent (a) the principal amount of such
Permitted Refinancing Indebtedness does not exceed the principal or accreted
amount plus the amount of accrued and unpaid interest of the Indebtedness so
repaid, refunded or refinanced (except that, in the case of the Notes, such
Permitted Refinancing Indebtedness may include the redemption premiums set
forth above under "Optional Redemption" and, in the case of the Private Notes,
such Permitted Refinancing Indebtedness may include the amount of any
unamortized premium), (b) with respect to the repayment, refunding or
refinancing of Indebtedness of the Issuers, the Permitted Refinancing
Indebtedness ranks no more favorably in right of payment with respect to the
Notes than the Indebtedness so repaid, refunded, renewed, replaced, extended
or refinanced, and (c) with respect to the repayment, refunding, renewal,
replacement, extension or refinancing of Indebtedness of the Issuers, the
Permitted Refinancing Indebtedness has a Weighted Average Life to Stated
Maturity and Stated Maturity equal to, or greater than, and has no fixed
mandatory redemption or sinking fund requirement in an amount greater than or
at a time prior to the amounts set forth in, the Indebtedness so repaid,
refunded,
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renewed, replaced, extended or refinanced; provided, however, that Permitted
Refinancing Indebtedness shall not include Indebtedness incurred by a
Restricted Subsidiary to repay, refund, renew, replace, extend or refinance
Indebtedness of the Company.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
charitable foundation, unincorporated organization, government or any agency
or political subdivision thereof or any other entity.
"Planned Volume" means as of the Closing Date 125 million board feet per
annum of timber. In the event of the acquisition of merchantable timber or
timberlands (other than in a like-kind exchange of timber or timberlands for
other timber or timberlands and other than timber or timberlands acquired with
the Net Proceeds of an Excess Harvest) constituting an Asset Acquisition,
Planned Volume will be increased for 10 years by 10% of the volume of
merchantable timber so acquired; provided that if such Asset Acquisition is
made under a cutting contract with a term of less than 10 years, Planned
Volume will be increased for each year during the term of the cutting contract
by a number of board feet equal to the number of board feet so acquired
multiplied by the quotient of 100% divided by the number of years in the
cutting contract. In the event of a disposition of merchantable timber or
timberlands constituting an Asset Sale, Planned Volume will be reduced by 10%
of the volume of merchantable timber sold in such Asset Sale. In the event of
an Excess Harvest, Planned Volume will be reduced by 10% of the amount of the
Excess Harvest.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock (other than the Common Units) of any class or classes (however
designated), which is preferred as to the payment of distributions, dividends,
or upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares or units of Capital Stock of any other class of such
Person.
"Private Notes" means the notes evidencing Indebtedness under the Private
Note Agreements, as such Private Notes may be extended, renewed, refunded or
refinanced from time to time.
"Private Note Agreement" means that certain Note Agreement, dated as of the
Issue Date, by and among the Operating Company, the General Partner and each
of the purchasers listed on Schedule I attached thereto, as such Private Note
Agreement may be amended, supplemented or otherwise modified from time to
time, including all exhibits and schedules thereto, and as the Indebtedness
evidenced thereby may be extended, renewed, refunded or refinanced from time
to time.
"Public Equity Offering" means a public offering by the Company of its
Capital Stock (other than Redeemable Capital Stock) pursuant to a registration
statement declared effective under the Securities Act.
"Redeemable Capital Stock" means any shares of any class or series of
Capital Stock, that, either by the terms thereof, by the terms of any security
into which it is convertible or exchangeable or by contract or otherwise, is
or upon the happening of an event or passage of time would be, required to be
redeemed prior to the Stated Maturity with respect to the principal of any
Note or is redeemable at the option of the holder thereof at any time prior to
the Stated Maturity of the Notes, or is convertible into or exchangeable for
debt securities at any time prior to the Stated Maturity of the Notes.
"Restricted Subsidiary" means a Subsidiary of the Company, which, as of the
date of determination, is not an Unrestricted Subsidiary of the Company.
"Sale and Leaseback Transaction" of any Person (a "Transferor") means any
arrangement (other than between the Company and a Wholly-Owned Restricted
Subsidiary or between Wholly-Owned Restricted Subsidiaries) whereby (a)
property (the "Subject Property") has been or is to be disposed of by such
Transferor to any other Person with the intention on the part of such
Transferor of taking back a lease of such Subject Property pursuant to which
the rental payments are calculated to amortize the purchase price of such
Subject Property substantially over the useful life of such Subject Property,
and (b) such Subject Property is in fact so leased by such Transferor or an
Affiliate of such Transferor.
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"Significant Subsidiary" shall have the same meaning as in Rule 1.02(v) of
Regulation S-X under the Securities Act.
"S&P" means Standard & Poor's Ratings Group, and its successors.
"Stated Maturity" means, (a) when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable, and (b) when used with respect to any other Indebtedness,
means the date or dates specified in the instrument governing such
Indebtedness as the fixed date or dates on which each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect of such
Indebtedness, or any installment of interest thereon, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or any
Subsidiary Guarantor which is expressly subordinated in right of payment to
the Notes or the Subsidiary Guarantee, respectively.
"Subsidiary" means, with respect to any Person, (a) a corporation a majority
of whose Voting Stock (or, in the case of a partnership, a majority of the
partners' Capital Stock, considering all partners' Capital Stock as a single
class) is at the time, directly or indirectly, owned by such Person, by one or
more Subsidiaries of such Person or by such Person and one or more
Subsidiaries thereof and (b) any other Person, including, without limitation,
a joint venture, in which such Person, one or more Subsidiaries thereof or
such Person and one or more Subsidiaries thereof, directly or indirectly, at
the date of determination thereof, has at least majority ownership interest
entitled to vote in the election of directors, managers, general partners or
trustees thereof (or other Person performing similar functions) or, if such
Persons are not elected, to vote on any matter that is submitted to the vote
of all Persons holding ownership interests in such entity. For purposes of
this definition, any directors' qualifying shares or investments by foreign
nationals mandated by applicable law shall be disregarded in determining the
ownership of a Subsidiary.
"Subsidiary Guarantee" means any guarantee of the Notes by any Subsidiary
Guarantor in accordance with the provisions described under "--Subsidiary
Guarantees of Notes."
"Subsidiary Guarantor" means (i) each of the Company's Subsidiaries, if any,
executing a supplemental indenture in which such Subsidiary agrees to be bound
by the terms of the Indenture and (ii) any Person that becomes a successor
guarantor of the Notes in compliance with the provisions described under "--
Subsidiary Guarantees of Notes."
"Timber" means all crops and all trees, timber, whether severed or unsevered
and including standing and down timber, stumps and cut timber, and logs, wood
chips and other forest products, whether now located on or hereafter planted
or growing in or on the Timberlands or otherwise or now or hereafter removed
from the Timberlands or otherwise for sale or other disposition.
"Timberlands" means, at any date of determination, all real property owned
by or leased to the Company that is suitable for timber production.
"Total Assets" means as of any date of determination, the consolidated total
assets of the Company and the Restricted Subsidiaries as would be shown on a
consolidated balance sheet of the Company and the Restricted Subsidiaries
prepared in accordance with GAAP as of that date.
"Unrestricted Subsidiary" means any Subsidiary of the Company or a
Restricted Subsidiary that is designated as such by the General Partner,
provided that no portion of the Indebtedness or any other obligation
(contingent or otherwise) of such Subsidiary (a) is guaranteed by the Company
or any Restricted Subsidiary, (b) is recourse to or obligates the Company or
any Restricted Subsidiary in any way or (c) subjects any property or assets of
the Company or any Restricted Subsidiary, directly or indirectly, contingently
or otherwise, to the satisfaction thereof. Notwithstanding the foregoing, the
Company or a Restricted Subsidiary may Guaranty or agree to provide funds for
the payment or maintenance of, or otherwise become liable with respect to
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Indebtedness of an Unrestricted Subsidiary, but only to the extent that the
Company or a Restricted Subsidiary would be permitted to (a) make an
Investment in such Unrestricted Subsidiary pursuant to subdivision (h) of the
definition of Permitted Investments and (b) incur the Indebtedness represented
by such Guaranty or agreement pursuant to the covenant captioned "Limitation
on Additional Indebtedness." The Board of Directors may designate an
Unrestricted Subsidiary to be a Restricted Subsidiary, provided that
immediately after giving effect to such designation, (a) there exists no Event
of Default or event which after notice or lapse of time or both would become
an Event of Default and (b) if such Unrestricted Subsidiary has, as of the
date of such designation, outstanding Indebtedness (other than Permitted
Indebtedness), the Company could incur at least $1.00 of Indebtedness (other
than Permitted Indebtedness). Notwithstanding the foregoing, (a) no Subsidiary
may be designated an Unrestricted Subsidiary if such Subsidiary, directly or
indirectly, holds Capital Stock of a Restricted Subsidiary and (b) neither the
Operating Company nor Finance Corp. may be designated an Unrestricted
Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect a least a majority of the board of directors, managers, general
partners or trustees of any Person (irrespective of whether or not, at the
time, Capital Stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency) or, with respect
to a partnership (whether general or limited), any general partner interest in
such partnership.
"Weighted Average Life to Stated Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the sum
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness; provided, however, that with respect to
any revolving Indebtedness, the foregoing calculation of Weighted Average Life
to Stated Maturity shall be determined based upon the total available
commitments and the required reductions of commitments in lieu of the
outstanding principal amount and the required payments of principal,
respectively.
"Wholly-Owned Restricted Subsidiary" means the Operating Company or any
Subsidiary of the Company of which 98% of the outstanding Capital Stock is
owned by the Company or by one or more Wholly-Owned Restricted Subsidiaries of
the Company or by the Company and one or more Wholly-Owned Restricted
Subsidiaries of the Company. For purposes of this definition, any directors'
qualifying shares or investments by foreign nationals mandated by applicable
law shall be disregarded in determining the ownership of a Subsidiary.
"Working Capital Facility" means the working capital facility of the
Operating Company provided for in the Credit Agreement.
"Working Capital Principal Amount" means $ million.
DEPOSITARY
Upon issuance, all Notes will be represented by one or more fully registered
Global Notes. Each such Global Note will be deposited with, or on behalf of,
The Depository Trust Company, as depositary (the "Depositary"), and registered
in the name of the Depositary or a nominee thereof. Unless and until it is
exchanged in whole or in part for Notes in definitive form, no Global Note may
be transferred except as a whole by the Depositary to a nominee of such
Depositary or by a nominee of such Depositary to such Depositary or to another
nominee of such Depositary or by such Depositary or any such nominee to a
successor of such Depositary or a nominee of such successor.
The Depositary has advised the Company as follows: the Depositary is a
limited-purpose trust company organized under the Banking Law of the State of
New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
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agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary was created to hold securities of its participants
("Participants") and to facilitate the clearance and settlement of securities
transactions among its Participants in such securities through electronic
book-entry changes in accounts of the Participants, thereby eliminating the
need for physical movement of securities certificates. The Depositary's
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations, and certain other organizations. The Depositary is
owned by a number of Participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depositary's book-entry system is also available
to others, such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Purchases of Notes must be made by or through Participants, which will
receive a credit on the records of the Depositary. The ownership interest of
each actual purchaser of a Note (the "Beneficial Owner") is in turn to be
recorded on the Participants' or Indirect Participants' records. Beneficial
Owners will not receive written confirmation from the Depositary of their
purchase, but Beneficial Owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the Participant or Indirect Participant through which the
Beneficial Owner entered into the transaction. Ownership of beneficial
interests in Global Notes will be shown on, and the transfer of such ownership
interests will be effected only through, records maintained by the Depositary
(with respect to interests of Participants) and on the records of Participants
(with respect to interests of persons held through Participants). The laws of
some states may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to own, transfer or pledge beneficial interests in Global
Notes.
So long as the Depositary, or its nominee, is the registered owner of a
Global Note, the Depositary or its nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by such Global
Note for all purposes under the Indenture. Except as provided below,
Beneficial Owners of a Global Note will not be entitled to have the Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of the Notes in definitive form and
will not be considered the owners or holders thereof under the Indenture.
Accordingly, each person owning a beneficial interest in a Global Note must
rely on the procedures of the Depositary and, if such person is not a
Participant, on the procedures of the Participant through which such person
owns its interest, to exercise any rights of a holder under the Indenture. The
Company understands that under existing industry practices in the event that
the Company requests any action of holders of Notes or an owner of a
beneficial interest in a Global Note desires to give or take any action which
the holder of a Note is entitled to give or take under the Indenture, the
Depositary would authorize the Participants holding the relevant beneficial
interests to give or take such action, and such Participants would authorize
Beneficial Owners owning through such Participants to give or take such action
or would otherwise act upon the instructions of Beneficial Owners. Conveyance
of notices and other communications by the Depositary to Participants, by
Participants to Indirect Participants, and by Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Payment of the principal of, premium, if any, and interest on Notes
registered in the name of the Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the holder of the Global
Note or Global Notes representing such Notes. None of the Company, the Trustee
or any other agent of the Company or agent of the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests or for supervising
or reviewing any records relating to such beneficial ownership interests. The
Company expects that the Depositary, upon receipt of any payment of principal,
premium, if any, or interest in respect of a Global Note will credit the
accounts of the Participants with payment in amounts proportionate to their
respective holdings in principal amount of beneficial interest in such Global
Note as shown on the records of the Depositary. The Company also expects that
payments by Participants to Beneficial Owners will be governed by standing
customer instructions and customary practices,
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as is now the case with securities held for the accounts of customers in
bearer form or registered in "street name," and will be the responsibility of
such Participants.
If (x) the Depositary is at any time unwilling, unable or ineligible to
continue as Depositary and a successor depositary is not appointed by the
Company within 60 days after the Company is so informed in writing or becomes
aware of the same, or (y) an Event of Default has occurred and is continuing,
the Global Notes will be exchanged for Notes in definitive form of like tenor
and of an equal aggregate principal amount, in denominations of $1,000 and
integral multiples thereof. Such definitive Notes shall be registered in such
name or names as the Depositary shall instruct the Trustee. It is expected
that such instructions may be based upon directions received by the Depositary
from Participants with respect to ownership of beneficial interests in Global
Notes.
No service charge will be made for the registration of transfer or exchange
of Notes, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. Principal
of, premium, if any, and interest on definitive Notes (if issued) will be
payable and such Notes may be surrendered for registration of transfer or
exchange at the office or agency of the Company maintained for such purpose in
The City of New York, located initially at the corporate trust office of the
Trustee. At the option of the Company, payment of interest on definitive Notes
(if issued) may be made by check mailed to the addresses of the persons
entitled thereto as they appear on the securities register.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal of, premium, if any and interest on
the Notes will be made by the Company in immediately available funds, so long
as the Notes are maintained in book-entry form and the procedures of the
Depositary permit such payments to be made in immediately available funds.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code, prohibit certain transactions, including
extensions of credit, between persons who are "parties in interest" under
ERISA or "disqualified persons" under the Code and a plan subject to ERISA or
the Code (a "Plan"). Any person proposing to purchase the Notes using the
assets of a Plan should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and to whether any
exemption would be applicable and determine on its own whether all conditions
have been satisfied.
Accordingly, each purchaser of Notes from the Underwriters, by its
acceptance thereof, will be deemed to certify to the Company and the
Underwriters that (i) no part of the funds used to purchase the Notes
constitutes assets of an employee benefit plan or (ii) the acquisition and
continued holding of the Notes will be covered by a U.S. Department of Labor
class exemption (with respect to prohibited transactions set forth under
Section 406(a) of ERISA). Any transferee of the Notes shall also be deemed to
have made one of such representations.
Moreover, each person investing on behalf of a Plan should determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Notes in appropriate, taking into
account the overall investment policy of the Plan and the composition of the
Plan's portfolio.
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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 Issuers
have agreed to sell to each of the Underwriters named below, and each of the
Underwriters has severally agreed to purchase from the Issuers, the respective
principal amount of Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
<S> <C>
Smith Barney Inc. .........................................
BancAmerica Securities, Inc. ..............................
Deutsche Morgan Grenfell Inc. .............................
------------
Total.................................................... $100,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes 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 Notes
offered hereby if any such Notes are taken.
Smith Barney Inc. ("Smith Barney"), BancAmerica Securities, Inc.
("BancAmerica Securities") and Deutsche Morgan Grenfell Inc. ("DMG") (the
"Underwriters") propose to offer part of the Notes directly to the public at
the offering price set forth on the cover page of this Prospectus and part of
such Notes to certain dealers at such price less a concession not in excess of
% of the principal amount. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of % of the principal amount to other
Underwriters or to certain other dealers. After the initial offering of the
Notes to the public, the offering price and other selling terms may from time
to time be varied by the Underwriters. The Underwriters have informed the
Issuers that they 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.
In connection with this offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Notes 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 Notes at
levels above those that might otherwise prevail in the open market. Such
transactions may include placing bids for the Notes or effecting purchases of
the Notes for the purposes of pegging, fixing or maintaining the price of the
Notes or for the purpose of reducing a syndicate short position created in
connection with this offering. In addition, the contractual arrangements among
the Underwriters include a provision whereby, if the Underwriters purchase
Notes in the open market for the account of the underwriting syndicate and the
Notes 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 Notes 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 Notes 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 Notes will be a new issue of securities for which there currently is no
public market, and the Issuers do not intend to list the Notes on any national
securities exchange. Although the Underwriters have informed the Issuers that
they currently intend to make a market in the Notes, the Underwriters are not
obligated to do so and may discontinue such market-making at any time. In
addition, such market-making activity will be subject to limits imposed by the
Securities Act and the Exchange Act. Accordingly, no assurance can be given as
to the development or liquidity of any market for the Notes.
89
<PAGE>
Smith Barney, BancAmerica Securities and DMG are acting as placement agents
in connection with the Private Note Placement, for which they will receive
customary compensation. Smith Barney and DMG will act as underwriters in the
MLP 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. On July 14, 1997, USTK entered into a long-term financing
arrangement (the "Credit Agreement") with certain banks, including Bank of
America NT & SA, an affiliate of BancAmerica Securities ("Bank of America"), to
finance the Ochoco Acquisition and to refinance borrowings under USTK's
revolving credit facility and term loan. Bank of America is entitled to
customary compensation for its involvement in the Credit Agreement.
On August 6, 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 the MLP 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 Issuers and the General Partner have agreed to indemnify the Underwriters
against certain civil liabilities, including liabilities under the Securities
Act.
VALIDITY OF THE NOTES
The validity of the Notes will be passed upon for the Issuers by Andrews &
Kurth L.L.P., New York, New York. Certain legal matters in connection with the
Notes 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, acreage, and 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.
90
<PAGE>
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 with respect to the
Notes 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 Notes 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.
91
<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--March 31, 1997.................... F-2
Pro Forma Consolidated Statement of Operations--Year Ended December 31,
1996................................................................... F-4
Pro Forma Consolidated Statement of Operations--Three Months Ended March
31, 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 March 31, 1997
(Unaudited)............................................................ 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 (Unaudited)--Three Months Ended March
31, 1996 and 1997...................................................... F-25
Combined Statement of Changes in Members' Deficit (Unaudited)--Three
Months Ended March 31, 1997............................................ F-26
Combined Statements of Cash Flows (Unaudited)--Three Months Ended March
31, 1996 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
Notes 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
Notes to Balance Sheet.................................................. F-33
U.S. Timberlands Finance Corp. Financial Statements:
Report of Independent Public Accountants................................ F-34
Balance Sheet--August 26, 1997.......................................... F-35
Notes to Balance Sheet.................................................. F-36
</TABLE>
F-1
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
AS OF MARCH 31, 1997
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
COMBINED CONSOLIDATED
ASSETS AS OF ASSETS AS OF
MARCH 31, 1997 ADJUSTMENTS MARCH 31, 1997
-------------- ----------- --------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...... $ 28,648 $ (430)(A) $
(4,988)(A)
135,134 (B)
147,525 (C)
98,350 (D)
(418,575)(E)
(15,758)(E)
32,594 (E)
(1,000)(F) 1,500
Other receivables.............. 1,134 -- 1,134
Inventories.................... 78 -- 78
Prepaid expenses............... 520 -- 520
Logging equipment held for
resale........................ 400 -- 400
-------- --------- --------
Total current assets......... 30,780 (27,148) 3,632
TIMBER, TIMBERLANDS AND LOGGING
ROADS, net...................... 269,948 110,430 (A) 380,378
SEED ORCHARD AND NURSERY STOCK... 1,965 -- 1,965
PROPERTY, PLANT AND EQUIPMENT, at
cost:
Equipment...................... 894 -- 894
Buildings and land
improvements.................. 677 -- 677
Less- Accumulated
depreciation.................. (108) -- (108)
-------- --------- --------
Total property, plant and
equipment................... 1,463 -- 1,463
LONG-TERM RECEIVABLE............. 1,169 -- 1,169
DEFERRED FINANCING FEES.......... 3,653 4,988 (A)
(3,653)(A)
2,475 (C)
1,650 (D)
(4,988)(D) 4,125
-------- --------- --------
Total assets..................... $308,978 $ 83,754 $392,732
======== ========= ========
</TABLE>
The accompanying notes are an integral part of this pro forma balance sheet.
F-2
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
AS OF MARCH 31, 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
MARCH 31, 1997 ADJUSTMENTS MARCH 31, 1997
---------------- ----------- --------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable............... $ 239 $ -- $ 239
Accrued liabilities............ 9,813 --
(1,925)(E)
10,979 (E)
(15,758)(E) 3,109
-------- -------- --------
Total current liabilities.... 10,052 (6,704) 3,348
ACQUISITION FACILITY............. -- 32,594 (E) 32,594
BORROWINGS UNDER REVOLVING CREDIT
FACILITIES...................... 90,000 (90,000)(A)
85,000 (A)
(85,000)(E) --
LONG-TERM DEBT................... 215,000 (85,000)(A)
200,000 (A)
(130,000)(E)
(200,000)(E) --
PUBLIC NOTES..................... -- 100,000 (D) 100,000
PRIVATE NOTES.................... -- 150,000 (C) 150,000
MINORITY INTEREST................ -- 1,068 (G) 1,068
MEMBERS' DEFICIT................. (6,074) (3,653)(A)
(1,650)(E)
(10,979)(E)
(4,988)(E)
(1,000)(F)
28,344 (G) --
PARTNERS' EQUITY:
Common Units (7,232 units)..... -- 135,134 (B) --
(30,480)(G) 104,654
Subordinated Units (5,510
units)........................ -- -- --
General partner interests (260
units)........................ -- 1,068 (G) 1,068
-------- -------- --------
Total partners' and members'
equity (deficit)............ (6,074) 111,796 105,722
-------- -------- --------
Total liabilities and
partners' and members'
equity (deficit)............ $308,978 $ 83,754 $392,732
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this pro forma 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) 1,500 (H)
(2,800)(I) 5,779
------- -------- -------- ------ --------
Operating income
(loss)............. 2,696 (4,767) 809 1,300 38
INTEREST EXPENSE........ -- 7,316 13,664 (iii) 2,612 (J) 23,592
AMORTIZATION OF DEFERRED
FINANCING FEES AND DEBT
GUARANTEE FEES......... -- 1,326 2,649 (iv) (3,645)(K) 330
INTEREST INCOME......... -- (409) (409)
OTHER EXPENSE, net...... 1 36 -- -- 37
------- -------- -------- ------ --------
NET INCOME (LOSS) BEFORE
MINORITY INTEREST...... 2,695 (13,036) (15,504) 2,333 (23,512)
MINORITY INTEREST....... -- -- -- 139 (L) 139
------- -------- -------- ------ --------
Net income (loss)... $ 2,695 $(13,036) $(15,504) $2,472 (23,373)
======= ======== ======== ======
GENERAL PARTNERS'
INTERESTS IN NET LOSS.. 235
--------
LIMITED PARTNERS'
INTERESTS IN NET LOSS.. $(23,138)
========
LOSS PER UNIT........... $ (1.82)
========
WEIGHTED AVERAGE LIMITED
PARTNERS' UNITS
OUTSTANDING (M)........ 12,742
========
</TABLE>
The accompanying notes are an integral part of this pro forma financial
statement.
F-4
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS) (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
HISTORICAL COMBINED PRO FORMA CONSOLIDATED
STATEMENT OF STATEMENT OF
OPERATIONS FOR THE OPERATIONS FOR THE
THREE MONTHS TRANSACTION THREE MONTHS
ENDED MARCH 31, 1997 ADJUSTMENTS ENDED MARCH 31, 1997
-------------------- ----------- ----------------------
<S> <C> <C> <C>
REVENUES:
Logs.................. $ 8,827 $-- $ 8,827
Timber and property
sales................ 3,494 -- 3,494
By-products and
other................ 13 -- 13
------- ---- --------
Total revenues...... 12,334 -- 12,334
OPERATING COSTS:
Cost of products
sold................. 3,525 -- 3,525
Cost of timber and
property sales....... 1,191 -- 1,191
Depreciation,
depletion and road
amortization......... 2,360 -- 2,360
Selling, general and
administrative
expenses............. 1,190 375 (H) 1,565
------- ---- --------
Operating income.... 4,068 (375) 3,693
INTEREST EXPENSE........ 5,319 579 (J) 5,898
AMORTIZATION OF DEFERRED
FINANCING FEES AND DEBT
GUARANTEE FEES......... 999 (917)(K) 82
INTEREST INCOME......... (366) -- (366)
OTHER EXPENSE, net...... 63 -- 63
------- ---- --------
NET INCOME (LOSS) BEFORE
MINORITY INTEREST...... (1,947) (37) (1,984)
MINORITY INTEREST....... -- (4)(L) (4)
------- ---- --------
Net income (loss)... $(1,947) (41) (1,988)
======= ====
GENERAL PARTNERS'
INTERESTS IN NET LOSS.. 20
--------
LIMITED PARTNERS'
INTERESTS IN NET LOSS.. $ (1,968)
========
LOSS PER UNIT........... $ (0.15)
========
WEIGHTED AVERAGE LIMITED
PARTNERS' UNITS
OUTSTANDING (M)........ 12,742
========
</TABLE>
The accompanying notes are an integral part of this pro forma financial
statement.
F-5
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND MARCH 31, 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 7,232 Common Units at an assumed initial public offering price
of $20.50 per Common Unit resulting in aggregate gross proceeds to the Company
of $148,300 (the "Common Units Offering"), (ii) the issuance by the Company of
5,510 Subordinated Units to the General Partner and its affiliates, (iii) the
issuance by the Operating Company of $150,000 of senior, unsecured notes to
institutional investors in a private placement (the "Private Note Placement"),
(iv) the public offering by the Company of $100,000 of senior, unsecured notes
(the "Public Note Offering"), (v) the entering into by the Operating Company
of a $25,000 Working Capital Facility and a $100,000 Acquisition Facility and
a drawdown under the Acquisition Facility of $32,594, (vi) 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 (vii) 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.
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 601,000 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.
F-6
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
March 31, 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 March 31, 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 three month period ended March 31, 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.
(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>
F-7
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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
========
<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 ($3,653
as of March 31, 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.
F-8
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $135,134 from the issuance
and sale of 7,232 Common Units at $20.50 per Unit in the Common Units
Offering, net of the underwriters' discounts and commissions of approximately
$9,822 and offering expenses of approximately $3,300.
(C) Reflects the net proceeds to the Company of $147,525 from the issuance
by the Company of $150,000 of Private Notes at 7.7% concurrent with the Common
Units Offering and the incurrence of $2,475 of financing costs.
(D) Reflects the net proceeds to the Company of $98,350 from the issuance by
the Company of $100,000 of the Public Notes at 9.6% concurrent with the Common
Units Offering and the incurrence of $1,650 of financing costs.
(E) The Company intends to use the net proceeds from the Common Units
Offering, the Private Note Placement, the Public Note Offering, and a $32,594
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>
The Holdings term loan guarantee fee is payable to Weyerhaeuser Company upon
retirement of the Holdings term loan. As of March 31, 1997, $1,925 of such
loan guarantee fees had been accrued. An additional $1,650 will be accreted
between April 1, 1997 and October 31, 1997 (the estimated date of the Holdings
debt extinguishment) on the debt guarantee fee.
Concurrent with the retirement of debt, the Company expects to pay accrued
interest of $15,758 related to the Holdings term loan, of which $4,779 is
accrued at March 31, 1997. The balance of $10,979 is the estimated amount of
additional interest expense expected to be incurred but not paid from April 1,
1997 through the expected debt retirement date (October 31, 1997).
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.
(F) 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 97,600 Subordinated Units to be issued concurrent
with the Common Units Offering.
F-9
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(G) 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)................ $135,134
Write-off of existing deferred financing fees (E).............. (3,653)
Accretion of debt guarantee fees (E)........................... (1,650)
Accrual of Holdings interest expense (E)....................... (10,979)
Write-off of deferred financing fees--Ochoco Acquisition and
related debt refinancing (E).................................. (4,988)
Redemption of John J. Stephens' interest (F)................... (1,000)
Assumption of members' deficit................................. (6,074)
--------
106,790
Pro forma allocation to 1% minority interest in USTK........... 1,068
Pro forma allocation to 1% general partner interest in the
Company....................................................... 1,068
--------
Pro forma allocation to new investors.......................... $104,654
========
</TABLE>
TRANSACTION ADJUSTMENTS--STATEMENTS OF OPERATIONS
(H) Reflects estimated incremental general and administrative costs (e.g.
costs of tax return preparation and annual and quarterly reports to
unitholders, investor relations and registrar and transfer agent fees)
associated with the Company at an annual rate of approximately $1,500 per year
($375 per quarter).
(I) As discussed in Note 7 to the footnotes to the historical combined
financial statements, U.S. Timberlands provided an affiliate with certain
payments for management services. The Company does not intend to provide such
management fees subsequent to completion of the Common Units Offering. Thus,
the amount of these fees paid in 1996, $2,800, is shown as a reduction to
selling, general and administrative expenses.
(J) Reflects the effect on interest expense for the year ended December 31,
1996 and the three months ended March 31, 1997 as if the Private and Public
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>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Pro Forma Interest Expense
Public Notes ($100,000 principal balance), at an
annual interest rate of 9.6%...................... $9,630 $2,408
Private Notes ($150,000 principal balance), at an
annual interest rate of 7.7%...................... 11,550 2,887
Acquisition Facility ($32,594 principal balance),
at an annual interest rate of 7.4%................ 2,412 603
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 5,319
------ ------
Pro forma increase in interest expense............. $2,612 $ 579
====== ======
</TABLE>
F-10
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(K) Reflects the effect on amortization of deferred financing and debt
guarantee fees for the year ended December 31, 1996 and the three months ended
March 31, 1997 as if the Private and Public 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>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Pro Forma Amortization Expense
Amortization of $1,650 deferred financing fees over
10 year term (D).................................. $ 165 $ 41
Amortization of $2,475 deferred financing fees over
15 year term (C).................................. 165 41
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))............................... 3,975 999
------- -----
Pro forma decrease in amortization of deferred
financing and debt guarantee fees................. $(3,645) $(917)
======= =====
</TABLE>
(L) Reflects the General Partner's 1% minority interest in USTK's pro forma
net income (loss).
(M) 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 sheet of U.S. Timberlands,
as described in Note 1, as of December 31, 1996, 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. 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 the results of its operations and its cash flows for
the period from inception (August 30, 1996) through December 31, 1996, 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,
June 10, 1997 (except for the
matters discussed in Note 6 and
Note 9, for which our date is
July 15, 1997)
F-12
<PAGE>
U.S. TIMBERLANDS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR U.S. TIMBERLANDS
------------ ------------------------
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
(A) (A)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............. $ 1 $ 16,613 $ 28,648
Accounts receivable.................... 741 1,563 --
Other receivables...................... 75 131 1,134
Receivable from affiliate.............. -- 10,121 --
Inventories............................ 1,846 78 78
Prepaid expenses....................... 433 680 520
Logging equipment held for resale...... -- 400 400
-------- -------- --------
Total current assets................. 3,096 29,586 30,780
-------- -------- --------
TIMBER, TIMBERLANDS AND LOGGING ROADS,
net..................................... 20,822 273,457 269,948
SEED ORCHARD AND NURSERY STOCK........... 2,443 1,901 1,965
PROPERTY, PLANT AND EQUIPMENT, at cost:
Equipment.............................. 13,712 801 894
Buildings and land improvements........ 2,774 677 677
Less--Accumulated depreciation......... (11,900) (58) (108)
-------- -------- --------
Total property, plant and equipment.. 4,586 1,420 1,463
-------- -------- --------
LONG-TERM RECEIVABLE..................... -- -- 1,169
DEFERRED FINANCING FEES.................. -- 3,827 3,653
-------- -------- --------
Total assets......................... $ 30,947 $310,191 $308,978
======== ======== ========
LIABILITIES AND WEYERHAEUSER INVESTMENT AND ADVANCES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable....................... $ 561 $ 889 $ 239
Accrued liabilities.................... 1,231 7,238 9,813
-------- -------- --------
Total current liabilities............ 1,792 8,127 10,052
BORROWINGS UNDER REVOLVING CREDIT FACILI-
TY...................................... -- 90,000 90,000
LONG-TERM DEBT........................... -- 215,000 215,000
WEYERHAEUSER INVESTMENT AND ADVANCES AND
MEMBERS' DEFICIT:
Weyerhaeuser investment and advances... 29,155 -- --
USTK--Member's deficit................. -- (1,809) (3,424)
Services--Members' deficit............. -- (1,127) (2,650)
-------- -------- --------
29,155 (2,936) (6,074)
-------- -------- --------
Total liabilities and Weyerhaeuser
investment and advances and members'
deficit............................. $ 30,947 $310,191 $308,978
======== ======== ========
</TABLE>
- - - --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
balance sheets as of December 31, 1996 and March 31, 1997 (unaudited) 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 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 601,000 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 are 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 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 balance sheet as of March 31, 1997, and the
accompanying combined statements of operations, changes in members' deficit and
cash flows for the three months ended March 31, 1997, are unaudited. In the
opinion of management, the accompanying balance sheet has been prepared on the
same basis as the audited balance sheet as of December 31, 1996. The
accompanying combined financial statements for the three months ended March 31,
1997, have been prepared on the same basis as the audited combined statements
of operations for the period from August 30, 1996 through December 31, 1996.
The accompanying combined statements of operations and cash flows for the three
months ended March 31, 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 balance sheet as of
March 31, 1997 and the results of operations and cash flows for the three
months ended March 31, 1996 and 1997, respectively. Operating results for the
three months ended March 31, 1996 and March 31, 1997 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.
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 combined balance sheets. 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.
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
------------------------- -----------------
JANUARY 1, 1996 AUGUST 30, 1996
THROUGH THROUGH
1994 1995 AUGUST 29, 1996 DECEMBER 31, 1996
---- ---- --------------- -----------------
<S> <C> <C> <C> <C>
Weyerhaeuser Company............. 52% 63% 65% --
Unaffiliated customer............ 12% 14% 14% 54%
Unaffiliated customer............ -- -- 10% 14%
Unaffiliated customer............ -- -- -- 11%
</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 timber
cruises. Logging road costs for main and spur roads are amortized based on the
net merchantable volume harvested. Surface rock replacement costs are
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, the Company
estimates it would have paid $716 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
----------------- -----------------
<S> <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
----------------- -----------------
<S> <C> <C>
Interest................................................................................ $ -- $5,254
Debt guarantee fee...................................................................... -- 1,100
Workers' compensation................................................................... 565 --
Severance and harvest tax............................................................... 290 230
Employee compensation................................................................... 192 81
Other................................................................................... 184 573
------ ------
$1,231 $7,238
</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
----------------- -----------------
<S> <C> <C>
Holdings--Term loan, due September
1999.................................. $ -- $130,000
USTK--Borrowings under revolving credit
facility.............................. -- 90,000
USTK--Term loan payable quarterly, due
August 2002........................... -- 85,000
----- --------
$ -- $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.
Debt Refinancing Subsequent to Year-End
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 the lesser of 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
F-22
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
prepayment in the event that timber and timberland dispositions, which are not
reinvested in other timber and timberlands, 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.
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 the 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.
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:
Member's Distribution
Subsequent to December 31, 1996, a member's equity distribution of $1,191
was paid from Services to John M. Rudey related to his estimated 1997 tax
liability.
Ochoco Acquisition
On July 15, 1997, USTK acquired approximately 43,000 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 $148,300. In addition, the Company intends that the MLP's
operating subsidiary, USTK (the Operating Company), issue $150,000 of senior
unsecured notes to institutional investors in a private placement (the Private
Note Placement) and the MLP intends to issue $100,000 of senior unsecured
notes in a public offering (the Public Note Offering). The Company also
intends that the Operating Company will enter into a $25,000 working capital
facility and a $100,000 acquisition facility (the Acquisition Facility). The
Company intends to use the proceeds from the Common Unit Offering, the Private
Note Placement, the Public Note Offering, and a drawdown of approximately
$30,000 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.
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)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S.
PREDECESSOR TIMBERLANDS
------------ ------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1996 1997
------------ ------------
(A)
<S> <C> <C>
REVENUES:
Logs............................................................................................... $3,417 $ 8,827
Timber and property sales.......................................................................... -- 3,494
By-products and other.............................................................................. 616 13
------ -------
Total revenues................................................................................... 4,033 12,334
OPERATING COSTS:
Cost of products sold.............................................................................. 2,407 3,525
Cost of timber and property sales.................................................................. -- 1,191
Depreciation, depletion and road amortization...................................................... 332 2,360
Selling, general and administrative expenses....................................................... 941 1,190
------ -------
Operating income................................................................................. 353 4,068
INTEREST EXPENSE..................................................................................... -- 5,319
AMORTIZATION OF DEFERRED FINANCING FEES AND DEBT GUARANTEE FEES...................................... -- 999
INTEREST INCOME...................................................................................... -- (366)
OTHER EXPENSE, net................................................................................... 95 63
------ -------
NET INCOME (LOSS).................................................................................... $ 258 $(1,947)
- - - --------------------------------------------------
====== =======
</TABLE>
- - - --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
statement of operations for the three months ended March 31, 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)
(UNAUDITED)
<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................ (1,615) (332) (1,947)
------- ------- -------
BALANCE, March 31, 1997... $(3,424) $(2,650) $(6,074)
======= ======= =======
</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) (UNAUDITED)
<TABLE>
<CAPTION>
U.S.
PREDECESSOR TIMBERLANDS
------------ ------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1996 1997
------------ ------------
(A)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ 258 $(1,947)
Adjustments to reconcile net income (loss) to cash
provided by operating activities--
Depreciation, depletion, amortization and cost of
timber and property sold........................ 332 3,775
Changes in operating accounts--
Accounts receivable.............................. 486 (609)
Inventories...................................... 106 --
Prepaid expenses................................. 379 160
Accounts payable................................. (449) (650)
Accrued interest and debt guarantee fees......... -- 2,703
Other accrued liabilities........................ (277) (128)
Interest receivable from member affiliate........ -- 121
----- -------
Net cash provided by operating activities...... 835 3,425
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment of receivable from affiliate............. -- 10,000
Purchase of property, plant and equipment.......... -- (93)
Timber and road additions.......................... (44) (42)
Capitalized seed orchard and nursery costs......... (82) (64)
----- -------
Net cash provided by (used in) investing
activities.................................... (126) 9,801
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to member............................. -- (1,191)
Weyerhaeuser investment and advances, net.......... (709) --
----- -------
Net cash used in financing activities.......... (709) (1,191)
NET INCREASE IN CASH AND CASH EQUIVALENTS............ -- 12,035
CASH AND CASH EQUIVALENTS, beginning of period....... 1 16,613
----- -------
CASH AND CASH EQUIVALENTS, end of period............. $ 1 $28,648
===== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............................. $ -- $ 3,441
NONCASH ACTIVITIES:
Net property, plant and equipment transfers to
Weyerhaeuser Company.............................. (108) --
</TABLE>
- - - --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
statement of cash flows for the three months ended March 31, 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>
<S> <C>
ASSET
-----
CURRENT ASSET:
Cash................................................................... $1,000
======
PARTNERS' EQUITY
----------------
LIMITED PARTNER'S EQUITY................................................. $ 990
GENERAL PARTNER'S EQUITY................................................. 10
------
Total partners' equity............................................... $1,000
======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-29
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTES 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>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. Timberlands Finance Corp.:
We have audited the accompanying balance sheet of U.S. Timberlands Finance
Corp. (Finance Corp.), a wholly owned subsidiary of U.S. Timberlands Company,
L.P., as of August 26, 1997. This statement is the responsibility of the
Finance Corp.'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 Finance Corp., as of August 26,
1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Portland, Oregon,
August 26, 1997
F-34
<PAGE>
U.S. TIMBERLANDS FINANCE CORP.
(A WHOLLY OWNED SUBSIDIARY OF U.S. TIMBERLANDS COMPANY, L.P.)
BALANCE SHEET
AUGUST 26, 1997
<TABLE>
<S> <C>
ASSETS
CASH................................................................... $1,000
------
Total Assets......................................................... $1,000
======
LIABILITIES AND STOCKHOLDERS' EQUITY
COMMON STOCK, $.01 par value, 1,000 shares authorized, issued and
outstanding........................................................... $ 10
ADDITIONAL PAID-IN CAPITAL............................................. 990
------
Total stockholders' equity........................................... $1,000
======
</TABLE>
The accompanying note is an integral part of this balance sheet.
F-35
<PAGE>
U.S. TIMBERLANDS FINANCE CORP.
(A WHOLLY OWNED SUBSIDIARY OF U.S. TIMBERLANDS COMPANY, L.P.)
NOTE TO BALANCE SHEET
AUGUST 26, 1997
1. FINANCE CORP.:
U.S. Timberlands Finance Corp. (Finance Corp.), a Delaware corporation, was
formed on August 20, 1997 and is a wholly owned subsidiary 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., which are Delaware limited
liability companies engaged in the harvest and sale of timber to third-party
wood processors.
Finance Corp. and the MLP intend to offer, jointly and severally,
$100,000,000 aggregate principal amount of Senior Notes due 2007 (the Notes).
Finance Corp. and the MLP will each serve as co-obligors for the Notes.
The MLP contributed $1,000 on August 26, 1997 for 1,000 shares of common
stock, par value $.01 per share, of Finance Corp. There have been no other
transactions involving Finance Corp. as of August 26, 1997.
F-36
<PAGE>
APPENDIX A
GLOSSARY OF CERTAIN TERMS
Acquisition Facility: A $100.0 million revolving credit facility entered
into by the Operating Company to be used for acquisitions and improvements.
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 $100.0 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.
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 Notes are sold by the Issuers to the
Underwriters pursuant to the provisions of the Underwriting Agreement.
Code: Internal Revenue Code of 1986, as amended.
A-1
<PAGE>
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 of the MLP Offering 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.
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.
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.
A-2
<PAGE>
Finance Corp.: U.S. Timberlands Finance Corp., a wholly-owned subsidiary of
the Company.
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 USTK in connection with the transfer of its assets to the
Company pursuant to the Partnership Agreement and subsequently contributed to
the General Partner, 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).
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.
Issuers: The Company together with Finance Corp.
Klamath Falls Timberlands: The approximately 601,000 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.
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. See "The
Partnership Agreement--Cash Distributions."
Notes: The $100 million aggregate principal amount of % Senior Notes due
2007 offered hereby.
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.
A-3
<PAGE>
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 Agreement of Limited
Partnership of the Operating Company, as it may be amended, supplemented or
restated from time to time.
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, 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.
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.
Private Note Agreement: The agreement pursuant to which the Private 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.
Private Note Placement: The private placement by the Operating Company of
the Private Notes.
Private Notes: The $150 million aggregate principal amount of unsecured
senior notes due to be privately placed by the Operating Company.
Registration Statement: The Registration Statement on Form S-1, as amended
(No. 333- ), filed by the Company with the Commission, relating to the
Notes.
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.
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).
A-4
<PAGE>
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 during such periods, 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 (1,377,525 Subordinated Units) and
(b) December 31, 2001 with respect to an additional one-quarter of the
Subordinated Units (1,377,525 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 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 outstanding Common Units and Subordinated Units and the related
distribution on the general partner interests in the Company and in the
Operating Company during such periods, 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.
Target Distribution Levels: See "The Partnership Agreement--Cash
Distributions."
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: Timberlands Management Group, an entity 100% owned and controlled by
Rudey Timber Company L.L.C.
A-5
<PAGE>
Transactions: The transactions related to the formation of the Company, the
issuance of the Common Units, the issuance of the Notes, the issuance of the
Private Notes, the entering into of the Bank Credit Facility and the other
transactions to occur in connection with this offering and the MLP Offering.
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.
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 and other Company
purposes.
A-6
<PAGE>
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
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 ISSUERS 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
Risk Factors............................................................. 15
The Transactions......................................................... 21
Use of Proceeds.......................................................... 22
Capitalization........................................................... 23
Selected Historical and Pro Forma Financial and Operating Data........... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business and Properties.................................................. 36
Management............................................................... 47
Security Ownership of Certain Beneficial Owners and Management........... 53
Certain Relationships and Related Transactions........................... 54
The Partnership Agreement................................................ 55
Description of Notes..................................................... 58
ERISA Considerations..................................................... 88
Underwriting............................................................. 89
Validity of the Notes.................................................... 90
Experts.................................................................. 90
Available Information.................................................... 91
Index to Financial Statements............................................ F-1
Glossary of Certain Terms................................................ A-1
</TABLE>
-----------
Until , 1997 (25 calendar days after the date of this Prospectus), all
dealers effecting transactions in the Notes, whether or not participating in
this distribution, may be required to deliver a Prospectus. This is in addi-
tion to the obligation of dealers to deliver a Prospectus when acting as Un-
derwriters and with respect to their unsold allotments or subscriptions.
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
$100,000,000
U.S. TIMBERLANDS
COMPANY, L.P.
U.S. TIMBERLANDS
FINANCE CORP.
% SENIOR NOTES DUE 2007
-------
PROSPECTUS
, 1997
-------
SMITH BARNEY INC.
BANCAMERICA SECURITIES, INC.
DEUTSCHE MORGAN GRENFELL
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
<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.............. $30,304
NASD filing fee.................................................. 10,500
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... *
Transfer agent and registrar fees................................ *
Miscellaneous expenses........................................... *
-------
Total........................................................ $ *
=======
</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.
+3.2 --Form of Amended and Restated Operating Agreement of U.S. Timberlands
Klamath Falls, L.L.C.
4.1 --Form of Notes Indenture between U.S. Timberlands Company, L.P. and
, as trustee
5.1 --Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered
+10.1 --Form of Credit Agreement among U.S. Timberlands Klamath Falls,
L.L.C. and certain banks
+10.2 --Form of Note Purchase Agreement among U.S. Timberlands Klamath
Falls, L.L.C. and certain investors
+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. Long-Term Incentive Plan
+10.5 --Forms of Employment Agreement for Messrs. Rudey, Stephens, Kobacker,
Morgan and Lugus
*12.1 --Statement re computation of ratio of earnings to fixed charges
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)
*24.1 --Powers of Attorney (included on signature page)
+27.1 --Financial Data Schedule
</TABLE>
- - - --------
* Filed herewith
+ Incorporated by reference to an Exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 333-32811) filed August 4, 1997
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>
U.S. TIMBERLANDS COMPANY, L.P.
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 August 26, 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>
U.S. TIMBERLANDS COMPANY, L.P.
POWER OF ATTORNEY
Each person whose signature appears below appoints John M. Rudey, John J.
Stephens, Edward J. Kobacker and George R. Hornig, and each of them, any of
whom may act without the joinder of the other, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any Registration Statement
(including any amendment thereto) for this Offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or
would do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents or any of them or their or his substitute and substitutes,
may lawfully do or cause to be done by virtue hereof.
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 August 26, 1997
- - - ------------------------------------- Director
JOHN M. RUDEY
/s/ John J. Stephens President, Chief August 26, 1997
- - - ------------------------------------- Executive Officer
JOHN J. STEPHENS and Director
/s/ Edward J. Kobacker Executive Vice August 26, 1997
- - - ------------------------------------- President, Chief
EDWARD J. KOBACKER Operating Officer
and Director
/s/ Michael J. Morgan Vice President and August 26, 1997
- - - ------------------------------------- Chief Financial
MICHAEL J. MORGAN Officer
/s/ John H. Beuter Director August 26, 1997
- - - -------------------------------------
JOHN H. BEUTER
/s/ Aubrey L. Cole Director August 26, 1997
- - - -------------------------------------
AUBREY L. COLE
/s/ George R. Hornig Director August 26, 1997
- - - -------------------------------------
GEORGE R. HORNIG
/s/ Robert F. Wright Director August 26, 1997
- - - -------------------------------------
ROBERT F. WRIGHT
II-5
<PAGE>
U.S. TIMBERLANDS FINANCE CORP.
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 August 26, 1997.
U.S. Timberlands Finance Corp.
By: /s/ John M. Rudey
----------------------------------
Name: John M. Rudey
Title: Chairman
POWER OF ATTORNEY
Each person whose signature appears below appoints John M. Rudey and John J.
Stephens, and each of them, either of whom may act without the joinder of the
other, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement and any Registration
Statement (including any amendment thereto) for this Offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto, and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or
would do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents or any of them or their or his substitute and substitutes,
may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ John M. Rudey Chairman and August 26, 1997
- - - ------------------------------------- Director
JOHN M. RUDEY
/s/ John J. Stephens President and Chief August 26, 1997
- - - ------------------------------------- Executive Officer
JOHN J. STEPHENS
/s/ Michael J. Morgan Vice President, August 26, 1997
- - - ------------------------------------- Secretary, Chief
MICHAEL J. MORGAN Financial Officer
and Principal
Accounting Officer
II-6
<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.
+3.2 --Form of Amended and Restated Operating Agreement of U.S. Timberlands
Klamath Falls, L.L.C.
4.1 --Form of Notes Indenture between U.S. Timberlands Company, L.P. and
, as trustee
5.1 --Opinion of Andrews & Kurth L.L.P. as to the legality of the securities
being registered
+10.1 --Form of Credit Agreement among U.S. Timberlands Klamath Falls, L.L.C.
and certain banks
+10.2 --Form of Note Purchase Agreement among U.S. Timberlands Klamath Falls,
L.L.C. and certain investors
+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. Long-Term Incentive Plan
+10.5 --Forms of Employment Agreement for Messrs. Rudey, Stephens, Kobacker,
Morgan and Lugus
*12.1 --Statement re computation of ratio of earnings to fixed charges
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)
*24.1 --Powers of Attorney (included on signature page)
+27.1 --Financial Data Schedule
</TABLE>
- - - --------
* Filed herewith
+ Incorporated by reference to an Exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 333-32811) filed August 4, 1997
<PAGE>
EXHIBIT 12.1
U.S. TIMBERLANDS COMPANY, L.P.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(A)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(B) HISTORICAL PRO FORMA(B)
--------------- ------------ ---------- ------------
THREE MONTHS ENDED
MARCH 31,
-----------------------
AUGUST 30, 1996
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1996 1996 1997
--------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Net loss................. $(13,036) $(23,373) $(1,947) $(1,988)
Fixed charges............ 8,642 23,922 6,318 5,980
-------- -------- ------- -------
Earnings (loss).......... $ (4,394) $ 549 $ 4,371 $ 3,992
======== ======== ======= =======
Interest expense......... $ 7,316 $ 23,592 $ 5,319 $ 5,898
Amortization of deferred
financing fees and debt
guarantee fees.......... 1,326 330 999 82
-------- -------- ------- -------
Fixed charges............ $ 8,642 $ 23,922 $ 6,318 $ 5,980
======== ======== ======= =======
Ratio of earnings (loss)
to fixed charges........ (.51)x .02x .69x .67x
======== ======== ======= =======
</TABLE>
- - - --------
(a) No computation of ratio of earnings to fixed charges is shown for the
periods ended prior to August 30, 1996 as the Predecessor participated in
Weyerhaeuser's centralized cash management system and therefore had no
indebtedness or fixed charges.
(b) Gives effect to the Weyerhaeuser Acquisition, the Ochoco Acquisition and
related refinancing, and the Transactions as if these events were
consummated as of the beginning of the periods presented. The pro forma
results of operations are not necessarily indicative of the results that
would have occurred had these events been consummated as of January 1, 1996
or that might be attained in the future.
<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
August 26, 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
August 26, 1997
