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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1998
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)
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DELAWARE 0800 91-1842156
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
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1301 FIFTH AVENUE
SUITE 3725
SEATTLE, WASHINGTON 98101-2636
(206) 652-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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ALLEN E. SYMINGTON
1301 FIFTH AVENUE
SUITE 3725
SEATTLE, WASHINGTON 98101-2636
(206) 652-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
ANDREWS & KURTH L.L.P.
425 LEXINGTON AVENUE
10TH FLOOR
NEW YORK, NEW YORK 10017
(212) 850-2800
ATTN: JONATHAN P. CRAMER
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.
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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. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Subordinated Units representing limited partner interests..... $25,000,000 $7,576
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
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THIS REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 MAY 6, 1998
PROSPECTUS
SUBORDINATED UNITS
U.S. TIMBERLANDS COMPANY, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
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This Prospectus, as appropriately amended or supplemented, may be used from
time to time principally by the Selling Unitholders described in this
Prospectus under "Selling Unitholders." The Subordinated Units covered by this
Prospectus (the "Securities") were pledged to Smith Barney Inc. as security for
a revolving line of credit. This revolving line of credit has been in effect
since July 1997, at which time the predecessor collateral was pledged. See
"Selling Unitholders" and "Manner of Offering." U.S. Timberlands Company, L.P.
(the "Company") will not receive any of the proceeds from any such sale. Any
commissions paid or concessions allowed to any broker-dealer, and, if any
broker-dealer purchases such Subordinated Units as principal, any profits
received on the resale of such Subordinated Units, may be deemed to be
underwriting discounts and commissions under the Securities Act. Printing,
certain legal and accounting, filing and other similar expenses of this
offering will be paid by the Company. Selling Unitholders will generally bear
all other expenses of this offering, including brokerage fees and any
underwriting discounts or commissions.
The Company will distribute to its partners, on a quarterly basis, all of its
Available Cash, which is generally all cash on hand at the end of a quarter, as
adjusted for reserves. The General Partner has broad discretion in establishing
reserves. During the Subordination Period, which will generally extend at least
through December 31, 2002, each holder of Common Units representing limited
partner interests in the Company ("Common Units") will be entitled to receive
$0.50 per Common Unit per quarter (the "Minimum Quarterly Distribution") or
$2.00 per Common Unit on an annualized basis before any distributions are made
on the Subordinated Units. Upon expiration of the Subordination Period, all
Subordinated Units will convert into Common Units on a one-for-one basis and
will thereafter participate pro rata with the other Common Units in
distributions of Available Cash.
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION. PURCHASERS OF COMMON UNITS SHOULD CONSIDER EACH OF THE FACTORS
DESCRIBED UNDER "RISK FACTORS," STARTING ON PAGE 22 OF THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE COMPANY, INCLUDING, BUT NOT LIMITED TO, THE
FOLLOWING:
. DURING THE SUBORDINATION PERIOD, WHICH WILL GENERALLY NOT END PRIOR TO
DECEMBER 31, 2002, DISTRIBUTIONS OF CASH TO THE HOLDERS OF SUBORDINATED
UNITS (INCLUDING THOSE OFFERED HEREBY) ARE SUBORDINATE TO THE RIGHTS OF
THE HOLDERS OF COMMON UNITS TO RECEIVE THE MINIMUM QUARTERLY DISTRIBUTION,
PLUS ANY ARREARAGES ON COMMON UNITS FOR PRIOR QUARTERS. THERE CAN BE NO
ASSURANCE THAT THE COMPANY WILL GENERATE SUFFICIENT AVAILABLE CASH TO MAKE
DISTRIBUTIONS ON THE SUBORDINATED UNITS. IN ADDITION, THERE CAN BE NO
ASSURANCE THAT THE COMPANY WILL EVER MEET THE REQUIREMENTS NECESSARY FOR
THE SUBORDINATION PERIOD TO END. ACCORDINGLY, THERE CAN BE NO ASSURANCE
THAT THE SUBORDINATED UNITS WILL EVER CONVERT INTO COMMON UNITS.
(continued on page iii)
Prior to this offering, there has not been a public market for the
Subordinated Units. On May 1, 1998 the last reported sale price of the Common
Units on the Nasdaq National Market was $20.25 per Common Unit. The Company
does not intend to apply for listing of the Subordinated Units on any
securities exchange.
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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 ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE COMMON UNITS,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
ii
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(continued from page i)
. AS OF DECEMBER 31, 1997, THE COMPANY'S TOTAL LONG-TERM INDEBTEDNESS WAS
$225.0 MILLION, REPRESENTING 60.7% OF THE COMPANY'S TOTAL
CAPITALIZATION. AS A RESULT, THE COMPANY IS SIGNIFICANTLY LEVERAGED AND
HAS INDEBTEDNESS THAT IS SUBSTANTIAL IN RELATION TO ITS PARTNERS'
CAPITAL.
. SUBJECT TO CERTAIN LIMITATIONS, THE COMPANY HAS THE RIGHT TO ISSUE
ADDITIONAL COMMON UNITS AND SUBORDINATED UNITS (COLLECTIVELY, "UNITS")
WITHOUT THE CONSENT OF THE HOLDERS OF UNITS ("UNITHOLDERS"). THE
ISSUANCE OF SUCH ADDITIONAL UNITS COULD RESULT IN A DECREASE IN THE
AMOUNT OF CASH AVAILABLE FOR DISTRIBUTION ON EACH SUBORDINATED UNIT.
. THE MINIMUM QUARTERLY DISTRIBUTION ON THE UNITS IS NOT GUARANTEED. THE
ACTUAL AMOUNT OF CASH DISTRIBUTIONS WILL DEPEND ON FUTURE COMPANY
OPERATING PERFORMANCE AND WILL BE AFFECTED BY THE FUNDING OF RESERVES,
OPERATING AND CAPITAL EXPENDITURES AND OTHER MATTERS WITHIN THE
DISCRETION OF THE GENERAL PARTNER, AS WELL AS REQUIRED INTEREST AND
PRINCIPAL PAYMENTS ON, AND THE OTHER TERMS OF, THE COMPANY'S
INDEBTEDNESS.
. HOLDERS OF UNITS HAVE ONLY LIMITED VOTING RIGHTS, AND THE GENERAL
PARTNER MANAGES AND OPERATES THE COMPANY. THE GENERAL PARTNER MAY NOT BE
REMOVED EXCEPT PURSUANT TO THE VOTE OF THE HOLDERS OF AT LEAST 66 2/3%
OF THE OUTSTANDING UNITS (INCLUDING UNITS OWNED BY THE GENERAL PARTNER
AND ITS AFFILIATES).
. PRIOR TO MAKING ANY DISTRIBUTION ON THE UNITS, THE COMPANY WILL
REIMBURSE THE GENERAL PARTNER AND ITS AFFILIATES (INCLUDING OFFICERS AND
DIRECTORS OF THE GENERAL PARTNER) FOR ALL EXPENSES INCURRED ON BEHALF OF
THE COMPANY (INCLUDING WAGES AND SALARIES OF EMPLOYEES, OFFICERS AND
DIRECTORS OF THE GENERAL PARTNER), WHICH ARE DETERMINED BY THE GENERAL
PARTNER IN ITS SOLE DISCRETION.
. THE COMPANY'S OPERATIONS ARE SUBJECT TO CYCLICAL FLUCTUATIONS IN PRICE
AND DEMAND FOR FOREST PRODUCTS AND SUPPLIES OF TIMBER.
. THE COMPANY'S BUSINESS, INCLUDING THE ABILITY TO HARVEST ITS TIMBER, MAY
BE AFFECTED BY VARIOUS FACTORS, INCLUDING ENVIRONMENTAL AND ENDANGERED
SPECIES CONCERNS, FEDERAL AND STATE REGULATIONS, LIMITATIONS ON ACCESS
ACROSS PUBLIC LANDS AND DAMAGE BY FIRE, INSECT INFESTATION AND OTHER
NATURAL CAUSES.
. CONFLICTS OF INTEREST MAY ARISE BETWEEN THE GENERAL PARTNER AND ITS
AFFILIATES, ON THE ONE HAND, AND THE COMPANY AND THE UNITHOLDERS, ON THE
OTHER.
. THE PARTNERSHIP AGREEMENT CONTAINS CERTAIN PROVISIONS THAT LIMIT THE
LIABILITY AND REDUCE THE FIDUCIARY DUTIES OF THE GENERAL PARTNER TO THE
UNITHOLDERS. HOLDERS OF UNITS ARE DEEMED TO HAVE CONSENTED TO CERTAIN
ACTIONS AND CONFLICTS OF INTEREST THAT MIGHT OTHERWISE BE DEEMED A
BREACH OF FIDUCIARY OR OTHER DUTIES UNDER APPLICABLE STATE LAW.
. THE AVAILABILITY TO A UNITHOLDER OF THE FEDERAL INCOME TAX BENEFITS OF
AN INVESTMENT IN THE COMPANY DEPENDS ON THE CLASSIFICATION OF THE
COMPANY AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES. THE COMPANY
WILL RELY UPON AN OPINION OF COUNSEL, AND NOT A RULING FROM THE INTERNAL
REVENUE SERVICE, ON THAT ISSUE AND OTHERS RELEVANT TO A UNITHOLDER.
. THE TAX CONSEQUENCES OF AN INVESTMENT IN THE COMPANY ARE COMPLEX. IT IS
ANTICIPATED A UNITHOLDER MAY RECEIVE SUBSTANTIAL DISTRIBUTIONS THAT
WOULD REDUCE SUCH HOLDER'S TAX BASIS, WITH THE RESULT THAT SUCH HOLDER
MAY RECOGNIZE SUBSTANTIAL TAXABLE GAIN UPON A SALE OF SUCH HOLDER'S
UNITS.
iii
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The Subordinated Units covered by this Prospectus represent an aggregate
31.5% interest in the Company and U.S. Timberlands Klamath Falls, L.L.C.
("USTK"), a Delaware limited liability company which is the Company's
subsidiary operating company (in such capacity, the "Operating Company"). The
general partner of the Company is U.S. Timberlands Services Company, L.L.C., a
Delaware limited liability company (the "General Partner" or "New Services").
The General Partner owns an aggregate 2% interest in the Company and the
Operating Company.
iv
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TABLE OF CONTENTS
<TABLE>
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PROSPECTUS SUMMARY........................................................ 1
U.S. Timberlands Company, L.P. ......................................... 1
Summary Historical Financial and Operating Data......................... 6
Summary of Risk Factors................................................. 8
Company Structure and Management........................................ 12
Securities Covered by this Prospectus................................... 14
Summary of Tax Considerations........................................... 19
FORWARD-LOOKING STATEMENTS................................................ 22
RISK FACTORS.............................................................. 22
Risks Inherent in an Investment in the
Company................................................................ 22
Risks Inherent in the Company's Business................................ 25
Conflicts of Interest and Fiduciary Responsibilities.................... 28
Tax Risks............................................................... 29
FORMATION OF THE COMPANY.................................................. 32
USE OF PROCEEDS........................................................... 33
DISTRIBUTIONS AND MARKET FOR COMMON AND SUBORDINATED UNITS................ 33
CAPITALIZATION............................................................ 34
CASH DISTRIBUTION POLICY.................................................. 35
General................................................................. 35
Quarterly Distributions of Available Cash............................... 36
Distributions from Operating Surplus during Subordination Period........ 36
Distributions from Operating Surplus after Subordination Period......... 38
Incentive Distributions................................................. 38
Distributions from Capital Surplus...................................... 39
Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels................................................................. 39
Distributions of Cash Upon Liquidation.................................. 40
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA............ 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 44
General................................................................. 44
Supply and Demands Factors.............................................. 44
Recent Developments..................................................... 45
Results of Operations................................................... 46
Liquidity and Capital Resources......................................... 49
Description of Indebtedness............................................. 51
Contingencies........................................................... 53
Effects of Inflation.................................................... 53
Other................................................................... 53
BUSINESS AND PROPERTIES................................................... 54
General................................................................. 54
Business Strategy....................................................... 55
Transaction Background.................................................. 55
The Timberlands......................................................... 56
Resource Management..................................................... 59
Federal and State Regulation............................................ 61
Litigation.............................................................. 63
Employees............................................................... 63
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MANAGEMENT................................................................. 64
Company Management....................................................... 64
Directors, Executive Officers and Key Employees of the General Partner... 64
Reimbursement of Expenses of the General Partner and its Affiliates...... 67
Executive Compensation................................................... 67
Compensation of Directors................................................ 70
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 71
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 72
Rights of the General Partner............................................ 72
Consulting Agreements.................................................... 72
Related Party Transactions............................................... 72
Repurchase of Certain Member Interests; Severance Payments............... 72
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES....................... 73
Conflicts of Interest.................................................... 73
Fiduciary and Other Duties............................................... 75
DESCRIPTION OF THE SUBORDINATED UNITS...................................... 77
The Units................................................................ 77
Transfer Agent and Registrar............................................. 77
Transfer of Subordinated Units........................................... 77
THE PARTNERSHIP AGREEMENT.................................................. 79
Organization and Duration................................................ 79
Purpose.................................................................. 79
Power of Attorney........................................................ 79
Capital Contributions.................................................... 80
Limited Liability........................................................ 80
Issuance of Additional Securities........................................ 81
Amendment of Partnership Agreement....................................... 81
Merger, Sale or Other Disposition of Assets.............................. 83
Termination and Dissolution.............................................. 83
Liquidation and Distribution of Proceeds................................. 83
Withdrawal or Removal of the General
Partner................................................................. 84
Transfer of General Partner's Interests and Incentive Distribution
Rights.................................................................. 85
Change of Management Provisions.......................................... 85
Limited Call Right....................................................... 85
Meetings; Voting......................................................... 86
Status as Limited Partner or Assignee.................................... 86
Non-citizen Assignees; Redemption........................................ 87
Indemnification.......................................................... 87
Books and Reports........................................................ 87
Right to Inspect Company Books and
Records................................................................. 88
Registration Rights...................................................... 88
UNITS ELIGIBLE FOR FUTURE SALE............................................. 89
SELLING UNITHOLDERS........................................................ 90
MANNER OF OFFERING......................................................... 91
TAX CONSIDERATIONS......................................................... 92
Legal Opinions and Advice................................................ 92
</TABLE>
v
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Partnership Status........................................................ 93
Limited Partner Status.................................................... 94
Tax Consequences of Unit Ownership........................................ 94
Allocation of Company Income, Gain, Loss and Deduction.................... 96
Tax Treatment of Operations............................................... 97
Disposition of Subordinated Units......................................... 101
Uniformity of Units....................................................... 104
Administrative Matters.................................................... 105
State, Local and Other Tax Considerations................................. 107
INVESTMENT IN THE COMPANY BY EMPLOYEE BENEFIT PLANS......................... 108
VALIDITY OF THE SUBORDINATED UNITS.......................................... 109
EXPERTS..................................................................... 109
AVAILABLE INFORMATION....................................................... 109
INDEX TO FINANCIAL STATEMENTS............................................... F-1
APPENDIX A--Glossary of Certain Terms....................................... A-1
APPENDIX B--Application for Transfer of Subordinated Units.................. B-1
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vi
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial and operating
data appearing elsewhere in this Prospectus. The transactions related to the
formation of the Company, the issuance of the Notes, the entering into of the
Bank Credit Facility and the other transactions that occurred in connection
with the Company's initial public offering of Common Units are referred to in
this Prospectus as the "Transactions." See "Formation of the Company." 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 633,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated, as of January 1, 1998,
to be approximately 2.1 billion board feet ("BBF") in Oregon east of the
Cascade Range (the "Timberlands"). Logs harvested from the Timberlands are sold
to unaffiliated domestic conversion facilities. These logs are processed for
sale as lumber, plywood and other wood products, primarily for use in new
residential home construction, home remodeling and repair and general
industrial applications. The Company also owns and operates its own seed
orchard and produces approximately five million conifer seedlings annually from
its nursery, approximately half of which are used for its own internal
reforestation programs, with the balance sold to other forest products
companies.
The Timberlands include substantial holdings of merchantable, good quality
timber. The Timberlands' merchantable timber consists of Ponderosa Pine
(approximately 44%) and Douglas fir (approximately 13%), 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 180,000 acres are actively
managed tree farms (the "Plantations"). The Plantations were first established
by Weyerhaeuser Company ("Weyerhaeuser") in the early 1960s and acreage has
been planted each year since then. Currently, the Plantations contain age
classes ranging generally from two to 36 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.
On November 19, 1997, the Company acquired substantially all of the equity
interests in USTK and 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") (the "Acquisition") and completed its initial public offering
of Common Units (the "Initial Offering"). In August 1996, USTK and Old Services
acquired approximately 604,000 fee acres of timberland (the "Klamath Falls
Timberlands"), containing an estimated merchantable timber volume of
approximately 1.9 BBF and related assets from Weyerhaeuser (the "Weyerhaeuser
Acquisition"). Most of the Klamath Falls Timberlands had been owned by
Weyerhaeuser for more than 50 years.
1
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The Company recently sold approximately 13,000 acres from the Klamath Falls
Timberlands. 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 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.
During the period from January 1, 1994 through the acquisition of the Klamath
Falls Timberlands by USTK, approximately 58% of the logs harvested from the
Klamath Falls Timberlands had been delivered to a plywood mill owned by
Weyerhaeuser at Klamath Falls, Oregon. In recent years, substantially all of
the timber harvested from the Ochoco Timberlands had been delivered to Ochoco's
mills. The Company does not currently own any conversion facilities nor does it
intend in the future to own any such facilities on a long-term basis;
consequently all of the Company's sales are made to unaffiliated third parties.
Concurrent with USTK's acquisition of the Klamath Falls Timberlands, USTK
arranged for Collins Products LLC ("Collins"), a privately owned forest
products company located within the Klamath Falls Timberlands area, to purchase
Weyerhaeuser's Klamath Falls mill facilities. The Company has entered into a
10-year log supply agreement with Collins (the "Collins Supply Agreement")
providing for the purchase by the plywood mill and delivery by the Company of a
minimum of 34 MMBF of logs each year (approximately 25% of the Company's
estimated annual harvest in the next three years) at market prices. The Collins
Supply Agreement is extendable by Collins for two additional five-year terms.
In addition to its sales under the Collins Supply Agreement, the Company sells
logs to conversion facilities located in the area surrounding the Timberlands
and operated by third parties. There are currently more than 50 primary
conversion facilities located within a 150 mile radius of the Company's base of
operations in Klamath Falls.
The Company believes that it is well positioned to compete successfully in
the timber business for the following reasons: (i) the Company has substantial
holdings of timber properties which include over 2.1 BBF of merchantable, good
quality timber, approximately 180,000 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 29 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
2
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. Maximize investment in Ochoco Timberlands
. Pursue accretive acquisition opportunities
. Implement flexible marketing satrategies
. Consummate land sales
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. From January 1988 to January 1998, federal
timber under contract in Washington and Oregon decreased approximately 88%. 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
3
<PAGE>
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 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.
FORMATION OF THE COMPANY
Upon the closing of the Acquisition, Old Services contributed all of its
assets, including its timber operations, to the General Partner in exchange for
interests therein. Immediately thereafter, USTK assumed certain indebtedness of
U.S. Timberlands Holdings, L.L.C., an affiliate of USTK ("Holdings"), and the
General Partner contributed its timber operations to USTK in exchange for a
member interest in USTK. Then the General Partner contributed 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 1,387,963 Subordinated Units and Holdings contributed all
of its interest in USTK to the Company in exchange for 2,894,157 Subordinated
Units. The General Partner then distributed the Subordinated Units to Old
Services. Approximately 143,398 Subordinated Units were used by Old Services to
redeem interests in Old Services held by certain founding directors of the
General Partner (the "Founding Directors"). As a result of such transactions,
USTK became the Operating Company and the General Partner owns an aggregate 2%
interest in the Company and the Operating Company on a combined basis, and the
right to receive Incentive Distributions; Old Services owns 1,244,565
Subordinated Units; Holdings owns 2,894,157 Subordinated Units; and the
Founding Directors own an aggregate of 143,398 Subordinated Units. The
4,282,120 Subordinated Units owned by Old Services, Holdings and the Founding
Directors represent an aggregate 31.5% interest in the Company.
Use of Proceeds
The Company contributed the net proceeds from the sale of Common Units in the
Initial Offering ($141.3 million) to the Operating Company. Concurrent with the
closing of the Initial Offering, the Operating Company issued $225.0 million
aggregate principal amount of unsecured 9 5/8% Senior Notes Due 2007 (the
"Notes") in a public offering (the "Public Note Offering"). Net proceeds from
the sale of the Notes ($218.3 million), together with the net proceeds from the
sale of Common Units in the Initial Offering, $26.0 million borrowed by the
Operating Company under the Acquisition Facility (defined below) and cash on
hand ($25.6 million) were used by the Operating Company to repay $411.2 million
of indebtedness of the Operating Company (including accrued interest).
Concurrent with the closing of the Initial Offering, the Operating Company
entered into a $25.0 million revolving credit facility to be used for working
capital purposes (the "Working Capital Facility") and a $75.0 million revolving
credit facility to be used for acquisitions and capital improvements (the
"Acquisition Facility" and, together with the Working Capital Facility, the
"Bank Credit Facility"). As of March 31, 1998, there were no amounts
outstanding under the Bank Credit Facility. For additional information
regarding the terms of the Notes and the Bank Credit Facility, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Description of Indebtedness."
4
<PAGE>
The Company also granted to the underwriters of the Initial Offering an
option to purchase up to 1,118,803 additional Common Units solely to cover
over-allotments. Such option was exercised in its entirety on December 8, 1997.
The Company used the net proceeds from the exercise of the underwriters' over-
allotment option (approximately $21.9 million) to repay borrowings under the
Acquisition Facility.
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following tables set forth for the periods and at the dates indicated,
summary financial and operating data for the Company. The summary 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 audited financial statements of the southern Oregon
timberlands operations of Weyerhaeuser (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 combined financial data for
the four months ended December 31, 1996 and consolidated financial data for the
year ended December 31, 1997 are derived from the audited financial statements
of the Company. In the opinion of management, the unaudited financial
statements include all adjustments, consisting of normal recurring adjustments,
necessary for a fair statement of the results for the unaudited period. See
also "Management's Discussion and Analysis of Financial Condition and Results
of Operations." The dollar amounts in the table below, except per Unit data,
are in thousands.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(A)
--------------------------------------- -------------------------
JANUARY 1, AUGUST 30,
1996 1996
YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED
--------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1996 1997
----------- ------- ------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT
DATA:
Revenues:
Logs and stumpage
sales................. $28,609 $29,102 $29,110 $14,077 $ 13,590 $ 60,445
Timberland and property
sales................. 4,180 -- -- -- -- 15,244
By-products and other.. 3,537 3,240 2,623 1,501 429 1,656
------- ------- ------- ------- -------- --------
Total revenues......... 36,326 32,342 31,733 15,578 14,019 77,345
Operating costs:
Cost of products sold.. 15,697 16,351 14,951 9,225 6,179 17,778
Cost of timber and
property sales........ 58 -- -- -- -- 8,746
Depreciation, depletion
and road
amortization.......... 1,443 1,455 1,486 927 3,323 17,303
Selling, general and
administrative
expenses.............. 4,034 4,454 4,235 2,730 9,284 6,250
------- ------- ------- ------- -------- --------
Operating income
(loss)................ 15,094 10,082 11,061 2,696 (4,767) 27,268
Interest expense(b).... -- -- -- -- 7,316 25,321
Amortization of
deferred financing
fees and debt
guarantee fees(b)..... -- -- -- -- 1,326 4,193
Interest income........ -- -- -- -- (409) (1,452)
Other (income) expense,
net................... 297 140 (555) 1 36 574
------- ------- ------- ------- -------- --------
Income (loss) before
extraordinary items... 14,797 9,942 11,616 2,695 (13,036) (1,368)
Extraordinary items,
losses on
extinguishment of
debt(c)............... -- -- -- -- -- 9,337
------- ------- ------- ------- -------- --------
Net income (loss)...... $14,797 $ 9,942 $11,616 $ 2,695 $(13,036) $(10,705)
======= ======= ======= ======= ======== ========
Limited partners'
interests in net
loss.................. $(10,692)
========
Basic income (loss)
before extraordinary
items per Unit(d):
Common................. $ -- $ 3.05
Subordinated........... $ (3.04) $ (1.01)
Diluted loss before
extraordinary items
per Unit(d)........... $ (3.04) $ (0.28)
Basic net loss per
Unit(d):
Common................. $ -- $ (0.86)
Subordinated........... $ (3.04) $ (2.30)
Diluted net loss per
Unit(d)............... $ (3.04) $ (2.04)
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(A)
----------------------------------------- -------------------------
JANUARY 1,
1996 AUGUST 30,
YEAR ENDED DECEMBER 31, THROUGH 1996 THROUGH YEAR ENDED
----------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1996 1997
----------- -------- ------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS AND OTHER
DATA:
EBITDDA(e)............. $ 16,595 $ 11,537 $12,547 $3,623 $ (1,444) $ 53,317
Capital expenditures--
Maintenance(f)........ 1,157 2,098 2,082 459 360 111,966
Cash flow from (used
in) operations........ 15,124 13,173 11,810 5,512 (2,984) 26,283
Cash flow used in
investing............. (1,157) (2,013) (1,859) (459) (291,450) (101,566)
Cash flow from (used
in) financing......... (13,967) (11,160) (9,951) (5,054) 311,047 69,295
BALANCE SHEET DATA (AT
PERIOD END):
Working capital........ $ 2,068 $ 211 $ 1,304 $ 524 $ 21,459 1,835
Timber, timberlands and
logging roads, net.... 21,495 20,885 20,822 21,275 273,457 359,349
Total assets........... 32,292 29,844 30,947 27,839 310,191 385,214
Long-term debt......... -- -- -- -- 305,000 225,000
Equity (deficit)(g).... 29,643 27,745 29,155 27,839 (2,936) 145,646
OPERATING DATA
(UNAUDITED):
Sales volumes:
Log, stumpage and
timber deed sales
(MBF)(h).............. 66,250 68,302 63,822 32,760 30,210 138,983
Property sales (MBF)... 9,449 -- -- -- -- 41,530
Chip sales (BDT)....... 52,278 38,380 25,702 20,568 7,174 18,957
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial and
operating data after August 30, 1996 are not comparable to financial and
operating data of the Predecessor. See Note 1 of the Notes to the
Consolidated Financial Statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations"included elsewhere in this
Prospectus.
(b) See effect of interest expense and amortization of deferred financing fees
and debt guarantee fees in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
(c) See effect of debt extinguishment in Note 5 of the Notes to the
Consolidated Financial Statements included elsewhere in this Prospectus.
(d) No per Unit information is presented for periods ended August 29, 1996 and
December 31, 1995 as the Predecessor had a different ownership structure
and any per Unit information would not be relevant or meaningful to the
user of the summary financial data. See discussion of per Unit information
in Note 2 of the Notes to the Consolidated Financial Statements included
elsewhere in this Prospectus.
(e) EBITDDA is defined as operating income (loss) plus depreciation, depletion
and road amortization and cost of timber and property sales. EBITDDA should
not be considered as an alternative to net income, operating income, cash
flows from operating activities or any other measure of financial
performance presented in accordance with generally accepted accounting
principles. EBITDDA is not intended to represent cash flow and does not
represent the measure of cash available for distribution, but provides
additional information for evaluating the Company's ability to make the
Minimum Quarterly Distribution. In addition, EBITDDA does not necessarily
represent funds available for management's discretionary use as it is
calculated prior to debt service obligations and capital expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
(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. See July 1997 acquisition of the
Ochoco Timberlands in Note 3 of the Notes to the Consolidated Financial
Statements included elsewhere in this Prospectus.
(g) See discussion of the Company and the Predecessor's equity (deficit) in
Note 1 of the Notes to the Consolidated Financial Statements included
elsewhere in this Prospectus.
(h) Revenues prior to 1997 consisted primarily of log sales.
7
<PAGE>
SUMMARY OF RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which the Company will be
subject are similar to those that would be faced by a corporation engaged in a
similar business. Prospective purchasers of the Subordinated Units should
consider the following risk factors in evaluating an investment in the
Subordinated Units.
RISKS INHERENT IN AN INVESTMENT IN THE COMPANY
. During the Subordination Period, which will generally not end prior to
December 31, 2002, distributions of cash to the Subordinated Unitholders
are subordinate to the rights of the holders of Common Units to receive
the Minimum Quarterly Distribution of $0.50 per Common Unit, plus any
arrearages on Common Units for prior quarters. There can be no assurance
that the Company will generate sufficient Available Cash to make
distributions on the Subordinated Units or the Common Units. In addition
there can be no assurance that the Company will ever meet the
requirements necessary for the Subordination Period to end. Accordingly,
there can be no assurance that the Subordinated Units will ever convert
into Common Units.
. The actual amount of cash distributions may fluctuate and will depend on
the Company's future operating performance. Cash distributions are
dependent primarily on cash flow, including cash flow from reserves and
working capital borrowings, and not solely on profitability, which is
affected by non-cash items. Therefore, cash distributions might be made
during periods when the Company records losses and might not be made
during periods when the Company records profits. Decisions of the General
Partner with respect to the amount and timing of cash expenditures,
borrowings, issuances of additional Units and reserves will affect the
amount of Available Cash. Because the business of the Company is
seasonal, it is likely that the General Partner will make additions to
reserves during certain quarters in order to fund operating expenses,
interest and principal payments and cash distributions to Unitholders
with respect to other quarters.
. Subject to certain limitations, the Company has the right to issue Units
without the consent of the Unitholders. The effect of such issuances may
be to dilute the value of the interests of the then-existing Unitholders
in the net assets of the Company, to dilute the interests of Unitholders
in distributions by the Company or to make it more difficult for a person
or group to remove the General Partner or otherwise change the management
of the Company.
. The Notes and the Bank Credit Facility effectively prohibit the Company
from making distributions to Unitholders during an event of default and
from distributing to Unitholders the proceeds of harvests in excess of
specified levels. The Notes also effectively prohibit the Company, with
respect to any quarter that the Consolidated Fixed Charge Coverage Ratio
(as defined in the indenture governing the Notes) is equal to or less
than 1.75 to 1.00, from distributing to Unitholders more than $7.5
million less the aggregate amount of distributions made with respect to
any of the immediately preceding 16 quarters during which the
Consolidated Fixed Charge Coverage Ratio was equal to or less than 1.75
to 1.00.
. The Klamath Falls and Ochoco Timberlands, prior to their acquisition by
the Company, had been part of Weyerhaeuser and Ochoco, respectively, and
had not been operated as separate businesses or divisions. In addition,
prior to the Company's acquisition of the Timberlands, sales from the
Timberlands were generally made to affiliated conversion facilities and
not to unaffiliated customers. Although the Company has operated the
Klamath Falls Timberlands since September 1996, and sales during such
period have been made exclusively to unaffiliated customers, there can be
no assurance that the Company will be able to manage successfully the
Timberlands as a separate business on a profitable basis. For the years
ended December 31, 1994 and 1995 and the eight-month period ended August
29, 1996, the Company had net income of $9.9 million, $11.6 million and
$2.7 million, respectively. Since the Weyerhaeuser Acquisition, the
Company had a net loss of $13.0 million and $10.7 million for the four-
month period ended December 31, 1996 and the year ended December 31,
1997, respectively.
8
<PAGE>
. As of December 31, 1997, the Company's total long-term indebtedness was
$225.0 million, representing 60.7% of the Company's total capitalization.
As a result, the Company is significantly leveraged and has indebtedness
that is substantial in relation to its partners' capital. The Company's
leverage may adversely affect the ability of the Company to finance its
future operations and capital needs, limit its ability to pursue
acquisitions and other business opportunities and make its results of
operations more susceptible to adverse economic or operating conditions.
In addition, as of March 31, 1998, the Company had $100.0 million of
unused borrowing capacity under the Bank Credit Facility. Future
borrowings could result in a significant increase in the Company's
leverage.
. The General Partner manages and operates the Company. Unitholders have no
right to elect the General Partner on an annual or other continuing
basis, and have only limited voting rights on matters affecting the
Company's business. The General Partner may not be removed except
pursuant to the vote of the holders of at least 66 2/3% of the
outstanding Units (including Units owned by the General Partner and its
affiliates) and upon the election of a successor general partner by the
holders of at least a Unit Majority. As a result, holders of Units have
limited influence on matters affecting the operations of the Company.
. The Company's Amended and Restated Agreement of Limited Partnership (the
"Partnership Agreement") contains certain provisions that may have the
effect of discouraging a person or group from attempting to remove the
General Partner or otherwise change the management of the Company. The
effect of these provisions may be to diminish the price at which the
Subordinated Units will trade under certain circumstances.
. Prior to making any distribution on the Common Units, the Company will
reimburse the General Partner and its affiliates (including officers and
directors of the General Partner) for all expenses incurred by the
General Partner and its affiliates on behalf of the Company rather than
by the Company directly (including wages and salaries of employees,
officers and directors of the General Partner), which expenses are
determined by the General Partner in its sole discretion. In addition,
the General Partner and its affiliates may provide services to the
Company for which the Company will be charged reasonable fees as
determined by the General Partner. The reimbursement of such expenses and
the payment of any such fees could adversely affect the ability of the
Company to make distributions.
. Prior to this offering, there has been no public market for the
Subordinated Units. No assurance can be given as to the market prices at
which the Subordinated Units will trade or that any trading market for
the Subordinated Units will develop. The Company does not intend to apply
for listing of the Subordinated Units on any securities exchange.
. If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class are held by persons other than the General
Partner and its affiliates, the General Partner will have the right,
which it may assign to any of its affiliates or the Company, to acquire
all, but not less than all, of the remaining limited partner interests of
such class held by such unaffiliated persons at a price generally equal
to the then-current market price of limited partner interests of such
class. As a consequence, a holder of Units may be required to sell his
Units at a time when he may not desire to sell them or at a price that is
less than the price he would desire to receive upon such sale. A holder
may also incur a tax liability upon such sale.
. Under certain circumstances, Unitholders could lose their limited
liability and could become liable for amounts improperly distributed to
them by the Company.
RISKS INHERENT IN THE COMPANY'S BUSINESS
. The Company's results of operations are, and will continue to be,
affected by the cyclical nature of the forest products industry. Prices
and demand for logs have been, and in the future can be expected to be,
subject to cyclical fluctuations.
9
<PAGE>
. Various factors, including environmental and endangered species concerns,
have limited, and are likely to continue to limit, the amount of timber
offered for sale by certain United States government agencies, which
historically have been major suppliers of timber to the United States
forest products industry. Although the Company believes that sales of
timber by United States government agencies are likely to remain at
relatively low levels for the foreseeable future, any reversal of policy
that substantially increases such sales could significantly reduce prices
for logs, which could have a material adverse effect on the Company.
. Revenues, net income and cash flow from the Company's operations will be
dependent to a significant extent on its ability to harvest timber at
adequate levels. The Company's business, including the ability to harvest
its timber, may be affected by various factors, including environmental
and endangered species concerns, federal and state regulations,
limitations on access across public lands and damage by fire, insect
infestation and other natural causes. There can be no assurance that one
or more of these factors will not prevent the Company from achieving
future harvest levels necessary to maintain or increase revenues, net
income or cash flows.
. The forest products industry is highly competitive in terms of price and
quality. Many of the Company's competitors have substantially greater
financial and operating resources than the Company. Wood products are
subject to increasing competition from a variety of non-wood products,
which affects the demand for logs. In addition, competition from imported
logs and end-use wood products from foreign sources into the United
States may adversely affect the demand and prices for the Company's logs.
To the extent there is a significant increase in competitive pressures,
the Company's results of operations could be materially and adversely
affected.
. The Company intends to pursue acquisitions as one means of increasing the
value of the Company's Units and its cash flow. The Company cannot
predict whether it will be successful in consummating any such
acquisitions or what the consequences of any such acquisitions would be.
Moreover, there can be no assurance that general economic or industry
conditions will be conducive to the Company's acquisition strategy, that
the Company will be able to identify and acquire any such assets or
businesses on economically acceptable terms, that any acquisitions will
not be dilutive to earnings and distributions to the Unitholders or that
any additional debt incurred to finance an acquisition will not affect
the ability of the Company to make distributions to the Unitholders.
. The Company believes that its success will depend to a significant extent
upon the efforts and abilities of its senior operating management team.
The failure by the General Partner to retain the key members of its
senior operating management team could adversely affect the financial
condition or results of operations of the Company.
. The Company currently derives a significant portion of its revenues from
sales of timber to certain key customers. For 1997, three of these
customers, Collins, Crown Pacific Partners L.P. and Boise Cascade
Corporation, purchased timber representing approximately 23%, 21% and
15%, respectively, of the Company's revenues. Collins made its purchases
pursuant to the long-term Collins Supply Agreement, while the other
purchases were made pursuant to short-term arrangements. The loss of
these or other significant customers could materially adversely affect
the Company's results of operations.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
. The General Partner and its affiliates may have conflicts of interest
with the Company and its limited partners. The Partnership Agreement
contains certain provisions that limit the liability and reduce the
fiduciary duties of the General Partner to the Unitholders, as well as
provisions that may restrict the remedies available to Unitholders for
actions that might, without such limitations, constitute breaches of
fiduciary duty. Unitholders are deemed to have consented to certain
actions and conflicts of interest that might otherwise be deemed a breach
of fiduciary or other duties under applicable state law.
10
<PAGE>
. Decisions of the General Partner with respect to the amount and timing of
timber harvests, stumpage sales, property sales, cash expenditures,
borrowings, issuances of additional Units and creation of reserves in any
quarter will affect whether, or the extent to which, there is sufficient
Available Cash from Operating Surplus to meet the Minimum Quarterly
Distribution and Target Distribution Levels on all Units in a given
quarter.
. The Partnership Agreement provides that the General Partner will
generally be restricted from engaging in any business activities other
than those incidental to its ownership of interests in the Company.
Notwithstanding the foregoing, the Partnership Agreement permits
affiliates of the General Partner to engage in any activities except for
certain business activities in North America that are in competition with
the Company. The General Partner's affiliates may, therefore, compete
with the Company outside of North America. There can be no assurance that
there will not be competition between the Company and affiliates of the
General Partner in the future.
TAX RISKS
. The availability to a Unitholder of the federal income tax benefits of an
investment in the Company depends on the classification of the Company as
a partnership for federal income tax purposes. Assuming the accuracy of
certain factual matters as to which the General Partner and the Company
have made representations, Andrews & Kurth L.L.P., special counsel to the
General Partner and the Company, is of the opinion that, under current
law, the Company is classified as a partnership for federal income tax
purposes and will continue to be so classified after giving effect to the
offering of the Subordinated Units.
. No ruling has been requested from the Internal Revenue Service (the
"IRS") with respect to classification of the Company as a partnership for
federal income tax purposes or any other matter affecting the Company.
. A Unitholder will be required to pay income taxes on his allocable share
of the Company's income, whether or not he receives cash distributions
from the Company.
. Investment in Units by certain tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to such persons. For
example, much of the taxable income derived by most organizations exempt
from federal income tax (including individual retirement accounts
("IRAs") and other retirement plans) from the ownership of a Unit will be
unrelated business taxable income and thus will be taxable to such
Unitholder.
. In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the
Company will generally only be available to offset future income
generated by the Company and cannot be used to offset income from other
activities, including other passive activities or investments. Passive
losses which are not deductible because they exceed the Unitholder's
income generated by the Company may be deducted in full when the
Unitholder disposes of his entire investment in the Company in a fully
taxable transaction to an unrelated party.
. The Company has applied for registration with the Secretary of the
Treasury as a "tax shelter." No assurance can be given that the Company
will not be audited by the IRS or that tax adjustments will not be made.
Any adjustments in the Company's tax returns will lead to adjustments in
the Unitholders' tax returns and may lead to audits of the Unitholders'
tax returns and adjustments of items unrelated to the Company.
. A Unitholder will likely be required to file state and local income tax
returns and pay state and local income taxes in some or all of the
various jurisdictions in which the Company does business or owns
property. The Company will initially own property and conduct business in
Oregon, which imposes a personal income tax.
See "Risk Factors," "Cash Distribution Policy," "Conflicts of Interest and
Fiduciary Responsibilities," "The Partnership Agreement" and "Tax
Considerations" for a more detailed description of these and other risk factors
and conflicts of interest that should be considered in evaluating an investment
in the Subordinated Units.
11
<PAGE>
COMPANY STRUCTURE AND MANAGEMENT
The operations of the Company are conducted through, and the operating assets
are owned by, USTK, as the Operating Company. The Company owns a 98.9899%
member interest in the Operating Company and the General Partner owns a 1%
general partner interest in the Company and a 1.0101% managing member interest
in the Operating Company. The General Partner therefore owns an aggregate 2%
interest in the Company and the Operating Company on a combined basis.
The Company's business is managed by the senior executives of the General
Partner. The General Partner does not receive any management fee or other
compensation in connection with its management of the Company, but is
reimbursed for all direct and indirect expenses incurred on behalf of the
Company (including wages and salaries of employees, officers and directors of
the General Partner) and all other necessary or appropriate expenses allocable
to the Company or otherwise reasonably incurred by the General Partner in
connection with the operation of the Company's business.
Conflicts of interest may arise between the General Partner and its
affiliates, on the one hand, and the Company, the Operating Company and the
Unitholders, on the other, including conflicts relating to the compensation of
the directors, officers and employees of the General Partner and the
determination of fees and expenses that are allocable to the Company. The
General Partner has a conflicts committee (the "Conflicts Committee"),
consisting of two independent members of its Board of Directors, that is
available at the General Partner's discretion to review matters involving
conflicts of interest. See "Management" and "Conflicts of Interest and
Fiduciary Responsibilities."
The principal executive offices of the Company are located at 1301 Fifth
Avenue, Suite 3725, Seattle, Washington 98101-2636. The telephone number at
such offices is (206) 652-5000. The principal executive offices of the General
Partner are located at 625 Madison Avenue, Suite 10-B, New York, New York
10022. The telephone number at such offices is (212) 755-1100.
The following chart depicts the organization and ownership of the Company and
the Operating Company after giving effect to the sale of all of the
Subordinated Units offered hereby. The percentages reflected 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.
12
<PAGE>
[CHART DEPICTING AGGREGATE OWNERSHIP OF THE
COMPANY AND THE OPERATING COMPANY]
13
<PAGE>
SECURITIES COVERED BY THIS PROSPECTUS
Securities Covered.......... 4,138,722 Subordinated Units.
Units Outstanding After 8,577,487 Common Units and 4,282,120 Subordinated
This Offering.............. Units, representing an aggregate 65.4% and 31.5%
limited partner interest in the Company,
respectively.
Distributions of Available The Company generally distributes Available Cash
Cash....................... 98% to Unitholders and 2% to the General Partner
within 45 days after the end of each quarter. If
distributions of Available Cash from Operating
Surplus exceed specified target levels ("Target
Distribution Levels") in excess of the Minimum
Quarterly Distribution, the General Partner will
receive a percentage of such excess distributions
that will increase to up to 50% of the excess
distributions above the highest Target
Distribution Level. See "Cash Distribution
Policy--Incentive Distributions."
Distributions to Common and
Subordinated Unitholders... With respect to each quarter during the
Subordination Period, which will generally not
end prior to December 31, 2002, the Common
Unitholders will generally have the right to
receive the Minimum Quarterly Distribution of
$0.50 per Common Unit, plus any arrearages in the
distribution of the Minimum Quarterly
Distribution on the Common Units for prior
quarters, and the General Partner will have the
right to receive the related distribution on its
interest, before any distribution of Available
Cash from Operating Surplus is made to the
Subordinated Unitholders. In addition, no
distributions of Available Cash from Operating
Surplus may be made on the Subordinated Units
with respect to any quarter if the Consolidated
Fixed Charge Coverage Ratio (as defined in the
Partnership Agreement) for the four-quarter
period ended with such quarter is equal to or
less than 1.75 to 1.00. Subordinated Units will
not accrue distribution arrearages. Upon
expiration of the Subordination Period, Common
Units will no longer accrue distribution
arrearages and the Subordinated Units will be
deemed to be Common Units for purposes of
determining the priority and amounts of
distributions. See "Cash Distribution Policy."
Subordination Period........ The Subordination Period will end on the first to
occur of the following dates:
(a) the first day of any quarter beginning after
December 31, 2002 in respect of which (i)
distributions of Available Cash from Operating
Surplus on the Common Units and the Subordinated
Units with respect to each of the three
consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum
of the Minimum Quarterly Distribution on all of
the outstanding Common Units and Subordinated
Units during such periods, (ii) the Adjusted
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Operating Surplus generated during each of the
three consecutive four-quarter periods
immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and
Subordinated Units that were outstanding during
such period on a fully diluted basis and the
related distribution on the general partner
interest in the Company, and (iii) there are no
outstanding arrearages in the distribution of the
Minimum Quarterly Distribution on the Common
Units; and
(b) the date on which the General Partner is
removed as general partner of the Company upon
the requisite vote by limited partners where
Cause does not exist.
Upon expiration of the Subordination Period, all
remaining Subordinated Units will convert into
Common Units on a one-for-one basis and will
thereafter participate pro rata with the other
Common Units in distributions of Available Cash.
See "Cash Distribution Policy--Distribution from
Operating Surplus during Subordination Period."
Early Conversion of
Subordinated Units......... Up to one-half of the Subordinated Units may
convert into Common Units prior to the end of the
Subordination Period. A portion of the
Subordinated Units will convert into Common Units
on the first day after the record date
established for the distribution in respect of
any quarter ending on or after (a) December 31,
2000 (with respect to one-quarter of the
Subordinated Units) and (b) December 31, 2001
(with respect to one-quarter of the Subordinated
Units), in respect of which (i) distributions of
Available Cash from Operating Surplus on the
Common Units and the Subordinated Units with
respect to each of the three consecutive four-
quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the outstanding
Common Units and Subordinated Units during such
periods, (ii) the Adjusted Operating Surplus
generated during each of the two consecutive
four-quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the Common Units
and Subordinated Units that were outstanding
during such period on a fully diluted basis and
the related distribution on the General Partner's
interest in the Company, and (iii) there are no
outstanding arrearages in the distribution of the
Minimum Quarterly Distribution on the Common
Units; provided, however, that the early
conversion of the second one-quarter of
Subordinated Units may not occur until at least
one year following the early conversion of the
first one-quarter of Subordinated Units. See
"Cash Distribution Policy--Distributions from
Operating Surplus during Subordination Period."
Incentive Distributions..... As an incentive, if quarterly distributions of
Available Cash exceed the Target Distribution
Levels, the General Partner will receive
distributions which are generally equal to 15%,
then 25% and then
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50% of the distributions of Available Cash that
exceed such Target Distribution Levels. The
Target Distribution Levels are based on the
amounts of Available Cash from Operating Surplus
distributed with respect to a given quarter that
exceed distributions made with respect to the
Minimum Quarterly Distribution and arrearages in
the distribution of the Minimum Quarterly
Distribution on the Common Units, if any. See
"Cash Distribution Policy--Incentive
Distributions." The distributions to the General
Partner described above that are in excess of its
combined 2% interest are referred to herein as
the "Incentive Distributions."
Adjustment of Minimum
Quarterly Distribution and
Target Distribution
Levels..................... The Minimum Quarterly Distribution and the Target
Distribution Levels are subject to downward
adjustments in the event that the Unitholders
receive distributions of Available Cash from
Capital Surplus or legislation is enacted or
existing law is modified or interpreted by the
relevant governmental authority in a manner that
causes the Company to be treated as an
association taxable as a corporation or otherwise
taxable as an entity for federal, state or local
income tax purposes. If, as a result of
distributions of Available Cash from Capital
Surplus, the Unitholders receive a full return of
the initial public offering price of the Common
Units and any unpaid arrearages in the
distribution of the Minimum Quarterly
Distribution on the Common Units, the
distributions of Available Cash payable to the
General Partner and its affiliates will increase
to 50% of all amounts distributed thereafter.
See "Cash Distribution Policy--General,"
"--Distributions from Capital Surplus" and
"--Adjustment of Minimum Quarterly Distribution
and Target Distribution Levels."
Company's Ability to Issue
Additional Units........... The Partnership Agreement generally authorizes
the Company to issue an unlimited number of
additional limited partner interests and other
equity securities of the Company for such
consideration and on such terms and conditions as
shall be established by the General Partner in
its sole discretion without the approval of the
Unitholders. During the Subordination Period,
however, the Company may not issue equity
securities ranking prior or senior to the Common
Units or an aggregate of more than 7,458,684
Common Units (excluding the 1,118,803 Common
Units issued upon the exercise of the
underwriters' over-allotment option in connection
with the Initial Offering and Common Units issued
upon conversion of Subordinated Units, in
connection with the repayment of certain
indebtedness or pursuant to employee benefit
plans) or an equivalent number of securities
ranking on a parity with the Common Units,
without the approval of the holders of at least a
majority of all of the holders of the
Subordinated Units and of all of the holders of
the Common Units (a "Unit Majority"). See "The
Partnership Agreement--Issuance of Additional
Securities."
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Limited Call Right.......... If at any time less than 20% of the issued and
outstanding Subordinated Units are held by
persons other than the General Partner and its
affiliates, the General Partner may purchase all
of the remaining Subordinated Units at a price
generally equal to the then current market price
of the Subordinated Units. See "The Partnership
Agreement--Limited Call Right."
Limited Voting Rights.......
Unitholders will not have voting rights except
with respect to the following matters, for which
the Partnership Agreement requires the approval
of at least a majority (and in certain cases a
greater percentage) of all of the holders of the
Subordinated Units and of all of the holders of
the Common Units: a sale or exchange of all or
substantially all of the Company's assets, the
removal or the withdrawal of the General Partner,
the election of a successor General Partner, a
dissolution or reconstitution of the Company, a
merger of the Company, issuance of limited
partner interests in certain circumstances,
approval of certain actions of the General
Partner (including the transfer by the General
Partner of its general partner interest or
Incentive Distribution Rights under certain
circumstances) and certain amendments to the
Partnership Agreement, including any amendment
that would cause the Company to be treated as an
association taxable as a corporation. Holders of
Subordinated Units will generally vote as a class
separate from the holders of Common Units. After
Subordinated Units convert into Common Units
(either upon termination of the Subordination
Period or upon early conversion), holders of such
Common Units will vote as a single class together
with the holders of the other Common Units. Under
the Partnership Agreement, the General Partner
generally will be permitted to effect amendments
to the Partnership Agreement that do not
adversely affect Unitholders. See "The
Partnership Agreement."
Removal and Withdrawal of
the General Partner........ Subject to certain conditions, the General
Partner may be removed upon the approval of the
holders of at least 66 2/3% of the outstanding
Units (including Units held by the General
Partner and its affiliates) and the election of a
successor general partner by the vote of the
holders of at least a Unit Majority. A meeting of
limited partners may be called only by the
General Partner or by the holders of 20% or more
of the limited partner interests of the class for
which the meeting is called. The General Partner
has agreed not to voluntarily withdraw as general
partner of the Company and the Operating Company
prior to December 31, 2007, subject to limited
exceptions, without obtaining the approval of at
least a Unit Majority and furnishing an Opinion
of Counsel (as defined in the Glossary). See "The
Partnership Agreement--Withdrawal or Removal of
the General Partner" and "--Meetings; Voting."
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<PAGE>
Consequences of Removal of
General Partner in Certain
Circumstances..............
If the General Partner is removed other than for
Cause, (i) the Subordination Period will end and
all outstanding Subordinated Units will
immediately convert into Common Units on a one-
for-one basis, (ii) any existing Common Unit
Arrearages will be extinguished and (iii) the
General Partner will have the right to convert
its general partner interest (and its right to
receive Incentive Distributions) into Common
Units or to receive cash in exchange for such
interests. See "The Partnership Agreement--Change
of Management Provisions."
Distributions Upon In the event of a liquidation of the Company
Liquidation................ during the Subordination Period, the outstanding
Common Units generally will be entitled to
receive a distribution out of the net assets of
the Company in preference to liquidating
distributions on the Subordinated Units.
Following conversion of the Subordinated Units
into Common Units, all Units will be treated the
same upon liquidation of the Company. See "Cash
Distribution Policy--Distributions of Cash Upon
Liquidation."
Use of Proceeds.............
All of the Securities covered by this Prospectus
are being sold by the Selling Unitholders. The
Company will not receive any of the proceeds from
the sale of the Securities.
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SUMMARY OF TAX CONSIDERATIONS
The tax consequences of an investment in the Company to a particular investor
will depend in part on the investor's own tax circumstances. Each prospective
investor should consult his own tax advisor about the United States federal,
state and local tax consequences of an investment in Subordinated Units.
The following is a brief summary of certain expected tax consequences of
owning and disposing of Common Units. The following discussion, insofar as it
relates to United States federal income tax laws, is based upon the opinion of
Andrews & Kurth L.L.P., special counsel to the General Partner and the Company
("Counsel"), described in "Tax Considerations." This summary is qualified by
the discussion in "Tax Considerations," particularly the qualifications on the
opinions of Counsel described therein.
PARTNERSHIP STATUS; CASH DISTRIBUTIONS
In the opinion of Counsel, the Company will be classified for federal income
tax purposes as a partnership, and the beneficial owners of Units will
generally be considered partners in the Company. Accordingly, the Company will
pay no federal income taxes, and a Unitholder will be required to report in his
federal income tax return his share of the Company's income, gains, losses and
deductions. In general, cash distributions to a Subordinated Unitholder will be
taxable only if, and to the extent that, they exceed the tax basis in his
Units.
COMPANY ALLOCATIONS
In general, income and loss of the Company will be allocated to the General
Partner and the Unitholders for each taxable year in accordance with their
respective percentage interests in the Company, as determined annually and
prorated on a monthly basis and subsequently apportioned among the General
Partner and the Unitholders of record as of the opening of the first business
day of the month to which they relate, even though Unitholders may dispose of
their Units during the month in question. At any time that distributions are
made on the Common Units and not on the Subordinated Units, or that Incentive
Distributions are made to the General Partner, gross income will be allocated
to the recipients to the extent of such distribution. A Unitholder will be
required to take into account, in determining his federal income tax liability,
his share of income generated by the Company for each taxable year of the
Company ending within or with the Unitholder's taxable year even if cash
distributions are not made to him. As a consequence, a Unitholder's share of
taxable income of the Company (and possibly the income tax payable by him with
respect to such income) may exceed the cash actually distributed to him.
Accordingly, no assurance can be given that the estimates will prove to be
correct. The actual percentages could be higher or lower than as described
above and any differences could be material. See "Tax Considerations--Tax
Consequences of Unit Ownership--Ratio of Taxable Income to Distributions," and
"--Tax Treatment of Operations--Timber Income."
BASIS OF SUBORDINATED UNITS
A Unitholder's initial tax basis for a Subordinated Unit purchased in this
offering will generally be the amount paid for the Subordinated Unit. A
Unitholder's basis will generally be increased by his share of Company income
and decreased by his share of Company losses and distributions.
LIMITATIONS ON DEDUCTIBILITY OF COMPANY LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any Company losses will only be
available to offset future income generated by the Company and cannot be used
to offset income from other activities, including passive activities or
investments. Any losses unused by virtue of the passive loss rules may be fully
deducted when the Unitholder disposes of all of his investment in the Company
in a taxable transaction with an unrelated party.
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SECTION 754 ELECTION
The Company has made the election provided for by Section 754 of the Code,
which will generally result in a Unitholder being allocated income and
deductions calculated by reference to the portion of his purchase price
attributable to each asset of the Company.
DISPOSITION OF UNITS
A Unitholder who sells Units will recognize gain or loss equal to the
difference between the amount realized and the adjusted tax basis of those
Units. Thus, distributions of cash from the Company to a Unitholder in excess
of the income allocated to him will, in effect, become taxable income if he
sells the Units at a price greater than his adjusted tax basis even if the
price is less than his original cost. A portion of the amount realized (whether
or not representing gain) may be ordinary income.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that are imposed by the
various jurisdictions in which a Unitholder resides or in which the Company
does business or owns property. Although an analysis of those various taxes is
not presented here, each prospective Unitholder should consider their potential
impact on his investment in the Company. The Company currently owns property
and/or conducts business in Oregon and Washington. Oregon currently imposes a
personal income tax. In certain states, tax losses may not produce a tax
benefit in the year incurred (if, for example, the Company has no income from
sources within that state) and also may not be available to offset income in
subsequent taxable years. Some states may require the Company, or the Company
may elect, to withhold a percentage of income from amounts to be distributed to
a Unitholder. Withholding, the amount of which may be more or less than a
particular Unitholder's income tax liability owed to the state, may not relieve
the nonresident Unitholder from the obligation to file an income tax return.
Amounts withheld may be treated as if distributed to Unitholders for purposes
of determining the amounts distributed by the Company. Based on current law and
its estimate of future Company operations, the Company anticipates that any
amounts required to be withheld will not be material.
It is the responsibility of each prospective Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states and localities,
of his investment in the Company. Accordingly, each prospective Unitholder
should consult, and must depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each Unitholder
to file all U.S. federal, state and local tax returns that may be required of
such Unitholder. Counsel has not rendered an opinion on the state or local tax
consequences of an investment in the Company.
OWNERSHIP OF UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
An investment in Units by tax-exempt organizations (including IRAs and other
retirement plans), regulated investment companies (mutual funds) and foreign
persons raises issues unique to such persons. Much of the income allocated to a
Unitholder which is a tax-exempt organization will be unrelated business
taxable income and, thus, will be taxable to such Unitholder; no significant
amount of the Company's gross income will be qualifying income for purposes of
determining whether a Unitholder will qualify as a regulated investment
company; and a Unitholder who is a nonresident alien, foreign corporation or
other foreign person will be regarded as being engaged in a trade or business
in the United States as a result of ownership of a Unit and, thus, will be
required to file federal income tax returns and to pay tax on such Unitholder's
share of Company taxable income. Furthermore, distributions to foreign
Unitholders will be subject to federal income tax withholding. See "Tax
Considerations--Uniformity of Units--Tax-Exempt Organizations and Certain Other
Investors."
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TAX SHELTER REGISTRATION
The Code generally requires that "tax shelters" be registered with the
Secretary of the Treasury. It is arguable that the Company is not subject to
this registration requirement. Nevertheless, the Company has applied for
registration as a tax shelter with the Secretary of the Treasury. ISSUANCE OF
THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE COMPANY OR
THE CLAIMED TAX BENEFITS HAS BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS.
See "Tax Considerations--Administrative Matters--Registration as a Tax
Shelter."
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FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements and information that are
based on the beliefs of the Company and the General Partner, as well as
assumptions made by, and information currently available to, the Company and
the General Partner. All statements, other than statements of historical fact,
included in this Prospectus are forward-looking statements, including, but not
limited to, statements identified by the words "anticipate", "believe",
"estimate" and "expect" and similar expressions and statements regarding the
Company's business strategy, plans and objectives of management of the Company
for future operations. Such statements reflect the current views of the
Company and the General Partner with respect to future events, based on what
they believe are reasonable assumptions; however, such statements are subject
to certain risks, uncertainties and assumptions, including, but not limited
to, the risk factors described in this Prospectus. If one or more these risks
or uncertainties materialize, or if underlying assumptions prove incorrect,
actual results may vary materially from those in the forward-looking
statements. The Company does not intend to update these forward-looking
statements and information.
RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which the Company will be
subject are similar to those that would be faced by a corporation engaged in a
similar business. Prospective purchasers of the Subordinated Units should
consider the following risk factors in evaluating an investment in the
Subordinated Units.
RISKS INHERENT IN AN INVESTMENT IN THE COMPANY
Distribution Priority of Common Units; Ability to Issue Additional Units
During the Subordination Period, which will generally not end prior to
December 31, 2002, distributions of cash to the holders of Subordinated Units
are subordinated to the rights of the holders of Common Units to receive the
Minimum Quarterly Distribution of $0.50 per Common Unit, or $2.00 per Common
Unit on an annualized basis, plus any arrearages on the Common Units for prior
quarters. There can be no assurance that the Partnership will generate
sufficient Available Cash to make distributions on Subordinated Units or
Common Units. In addition, there can be no assurance that the Partnership will
ever meet the requirements necessary for the Subordination Period to end.
Accordingly, there can be no assurance that the Subordinated Units will ever
convert into Common Units.
Subject to certain limitations, the Partnership has the right to issue Units
without the consent of the Unitholders. The effect of such issuances may be to
dilute the value of the interests of the then-existing holders of Units in the
net assets of the Partnership, to dilute the interests of holders of Units in
distributions by the Partnership or to make it more difficult for a person or
group to remove the General Partner or otherwise change the management of the
Partnership. See "--The Partnership May Issue Additional Units thereby
Diluting Existing Unitholders' Interests."
The Partnership May Issue Additional Units thereby Diluting Existing
Unitholders' Interests
The Company generally has the authority under the Partnership Agreement to
issue an unlimited number of additional Common Units, Subordinated Units or
other equity securities for such consideration and on such terms and
conditions as are established by the General Partner, in its sole discretion
without the approval of the Unitholders. A total of 8,577,487 Common Units and
4,282,120 Subordinated Units are currently outstanding. During the
Subordination Period, however, the Company may not issue equity securities
ranking prior or senior to the Common Units or an aggregate of more than
7,458,684 additional Common Units (excluding the 1,118,803 Common Units issued
upon the exercise of the underwriters' over-allotment option in connection
with the Initial Offering and Common Units issued upon conversion of
Subordinated Units and for certain other limited
22
<PAGE>
purposes) or an equivalent number of securities ranking on a parity with the
Common Units without the approval of holders of a Unit Majority. After the end
of the Subordination Period, the Company may issue an unlimited number of
limited partner interests of any type (including interests ranking prior or
senior to the Common Units) without the approval of the Unitholders. The
Partnership does not give the holders of Subordinated Units the right to
approve the issuance by the Company of equity securities ranking junior to the
Subordinated Units at any time. Based on the circumstances of each case, the
issuance of additional Units or other securities may reduce the cash available
for distribution to holders of previously outstanding Units, dilute the value
of the interests of the then-existing holders of Units in the net assets of
the Company or make it more difficult for a person or group to remove the
General Partner or otherwise change the management of the Company.
Cash Distributions Are Not Guaranteed, May Fluctuate with Company Performance
and Are Limited by Debt Instruments
Although the Company will distribute all of its Available Cash, there can be
no assurance regarding the amounts of Available Cash to be generated by the
Company. The actual amounts of cash distributions may fluctuate and will
depend upon numerous factors, including cash flow generated by operations,
required principal and interest payments on the Company's debt, the costs of
acquisitions (including related debt service payments), restrictions contained
in the Company's debt instruments, issuances of debt and equity securities by
the Company, fluctuations in working capital, capital expenditures,
adjustments in reserves, prevailing economic conditions and financial,
business and other factors, a number of which will be beyond the control of
the Company and the General Partner. Cash distributions are dependent
primarily on cash flow, including from reserves and working capital
borrowings, and not solely on profitability, which is affected by non-cash
items. Therefore, cash distributions might be made during periods when the
Company records losses and might not be made during periods when the Company
records profits.
The Partnership Agreement gives the General Partner broad discretion in
establishing reserves for the proper conduct of the Company's business that
will affect the amount of Available Cash. Because the business of the Company
is seasonal, the General Partner will make additions to reserves during
certain quarters in order to fund operating expenses, interest and principal
payments and cash distributions to partners with respect to other quarters.
The effect of the establishment of such operating reserves is to increase the
likelihood that the Minimum Quarterly Distribution will be paid in any given
quarter but to decrease the likelihood that any amount in excess of the
Minimum Quarterly Distribution will be paid in such quarter. The Notes and the
Bank Credit Facility prohibit the Company from making distributions to
Unitholders during an event of default and from distributing to Unitholders
the proceeds of harvests in excess of specified levels. The Notes also
effectively prohibit the Company, with respect to any quarter that the
Consolidated Fixed Charge Coverage Ratio (as defined in the indenture
governing the Notes) is equal to or less than 1.75 to 1.00, from distributing
to Unitholders more than $7.5 million less the aggregate amount of
distributions made with respect to any of the immediately preceding 16
quarters during which the Consolidated Fixed Charge Coverage Ratio was equal
to or less than 1.75 to 1.00. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Description of Indebtedness."
Any subsequent refinancing of the Notes, the Bank Credit Facility or any other
indebtedness incurred by the Company may have similar restrictions. As a
result of these and other factors, there can be no assurance regarding the
actual levels of cash distributions to Unitholders by the Company.
The Company Has a Limited Operating History; Recent Losses
The Klamath Falls Timberlands and the Ochoco Timberlands, prior to their
acquisition by the Company, had been part of Weyerhaeuser and Ochoco,
respectively, and had not been operated as separate businesses or divisions.
In addition, prior to the Company's acquisition of the Timberlands, sales from
the Timberlands were generally made to affiliated conversion facilities and
not to unaffiliated customers. Although the Company has operated the Klamath
Falls Timberlands since September 1996, and sales during such period have been
made exclusively to unaffiliated customers, there can be no assurance that the
Company will be able to manage successfully the Timberlands as a separate
business on a profitable basis. For the years ended December 31, 1994 and 1995
and the eight-month period ended August 29, 1996, the Company had net income
of $9.9 million, $11.6
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million and $2.7 million, respectively. Since the Weyerhaeuser Acquisition,
the Company has had net losses of $13.0 million and $10.7 million for the
four-month period ended December 31, 1996 and the year ended December 31,
1997, respectively.
The Company's Indebtedness May Affect its Operations
As of December 31, 1997, the Company's total long-term indebtedness was
$225.0 million, representing 60.7% of the Company's total capitalization. As a
result, the Company is significantly leveraged and has indebtedness that is
substantial in relation to its partners' capital. 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."
Unitholders Have Limited Voting Rights
The General Partner manages and operates the Company. Unlike the holders of
common stock in a corporation, Unitholders have only limited voting rights on
matters affecting the Company's business. Unitholders have no right to elect
the General Partner on an annual or other continuing basis, and the General
Partner may not be removed except pursuant to the vote of the holders of at
least 66 2/3% of the outstanding Units (including Units owned by the General
Partner and its affiliates) and upon the election of a successor general
partner by the vote of the holders of at least a Unit Majority. All of the
other matters requiring the approval of the Unitholders first require the
support of the General Partner and then require the approval of holders of at
least a Unit Majority. As a result, Unitholders have limited influence on
matters affecting the operation of the Company. See "The Partnership
Agreement."
No Removal of the General Partner Without Its Consent
The Partnership Agreement contains certain provisions that may have the
effect of discouraging a person or group from attempting to remove the General
Partner or otherwise change the management of the Company. If the General
Partner is removed as general partner of the Company under circumstances where
Cause does not exist and Units held by the General Partner and its affiliates
are not voted in favor of such removal, (i) the Subordination Period will end
and all outstanding Subordinated Units will immediately convert into Common
Units on a one-for-one basis, (ii) any existing arrearages in the distribution
of the Minimum Quarterly Distribution on the Common Units will be extinguished
and (iii) the General Partner will have the right to convert its general
partner interest (and its right to receive Incentive Distributions) into
Common Units or to receive cash in exchange for such interests. Further, if
any person or group (other than the General Partner or its affiliates)
acquires beneficial ownership of 20% or more of any class of Units then
outstanding, such person or group will lose voting rights with respect to all
of its Units. In addition, the Company has substantial latitude in issuing
equity securities without Unitholder approval. The Partnership Agreement also
contains provisions limiting the ability of Unitholders to call meetings of
Unitholders or to acquire information about the Company's operations as well
as other provisions limiting the Unitholders' ability to influence the manner
or direction of management. The effect of these provisions may be to diminish
the price at which the Subordinated Units will trade under certain
circumstances. See "The Partnership Agreement--Withdrawal or Removal of the
General Partner."
Cost Reimbursements and Fees Due to the General Partner May Be Substantial
Prior to making any distribution on the Common Units, the Company will
reimburse the General Partner and its affiliates (including officers and
directors of the General Partner) for all expenses incurred by the General
Partner and its affiliates on behalf of the Company rather than by the Company
directly (including wages and salaries of employees, officers and directors of
the General Partner), which expenses are determined by the
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<PAGE>
General Partner in its sole discretion. In addition, the General Partner and
its affiliates may provide services to the Company for which the Company will
be charged reasonable fees as determined by the General Partner, and its
affiliates may provide services to the Company for which the Company will be
charged reasonable fees as determined by the General Partner. The
reimbursement of such expenses and the payment of any such fees could
adversely affect the ability of the Company to make distributions. See
"Management--Executive Compensation" and "--Compensation of Directors."
No Prior Public Market for Subordinated Units
Prior to the sale of the Securities covered by this Prospectus, there has
been no public market for the Subordinated Units. No assurance can be given as
to the market prices at which the Subordinated Units will trade or that any
trading market for the Subordinated Units will develop. The Company does not
intend to apply for listing of the Subordinated Units on any securities
exchange.
The General Partner Will Have a Limited Call Right with Respect to the
Limited Partner Interests
If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class (including Subordinated Units) are held by
persons other than the General Partner and its affiliates, the General Partner
will have the right, which it may assign to any of its affiliates or the
Company, to acquire all, but not less than all, of the remaining limited
partner interests of such class held by such unaffiliated persons at a price
generally equal to the then-current market price of limited partner interests
of such class. As a consequence, a holder of Subordinated Units may be
required to sell his Subordinated Units at a time when he may not desire to
sell them or at a price that is less than the price he would desire to receive
upon such sale. A holder may also incur a tax liability upon such sale. See
"The Partnership Agreement--Limited Call Right."
Unitholders May Not Have Limited Liability in Certain Circumstances;
Liability for Return of Certain Distributions
The limitations on the liability of holders of limited partner interests for
the obligations of a limited partnership have not been clearly established in
some states. If it were determined that the Company had been conducting
business in any state without compliance with the applicable limited
partnership statute, or that the right or the exercise of the right by the
Unitholders as a group to remove or replace the General Partner, to make
certain amendments to the Partnership Agreement or to take other action
pursuant to the Partnership Agreement constituted participation in the
"control" of the Company's business, then the Unitholders could be held liable
in certain circumstances for the Company's obligations to the same extent as a
general partner. In addition, under certain circumstances a Unitholder may be
liable to the Company for the amount of a distribution for a period of three
years from the date of the distribution. See "The Partnership Agreement--
Limited Liability" for a discussion of the limitations on liability and the
implications thereof to a Unitholder.
Holders of Common Units Have Not Been Represented by Counsel
The holders of Common Units have not been represented by counsel in
connection with this offering, including the preparation of the Partnership
Agreement or the other agreements referred to herein or in establishing the
terms of this offering.
RISKS INHERENT IN THE COMPANY'S BUSINESS
Cyclicality of Forest Products Industry Will Affect the Company's Results of
Operations
The Company's results of operations are, and will continue to be, affected
by the cyclical nature of the forest products industry. Prices and demand for
logs have been, and in the future can be expected to be, subject to cyclical
fluctuations. The demand for logs is primarily affected by the level of new
residential construction activity, and, to a lesser extent, repair and
remodeling activity and other industrial uses, which are subject to
fluctuations due to changes in economic conditions, interest rates, population
growth, weather conditions and other factors. Decreases in the level of
residential construction activity will be reflected in reduced demand for
logs, which may result in lower revenues, profits and cash flows.
25
<PAGE>
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. From January 1988 to January 1998, federal timber under
contract in Washington and Oregon decreased approximately 88%.
Although the Company believes that sales of timber by United States
government agencies are likely to remain at relatively low levels for the
foreseeable future, any reversal of policy that substantially increases such
sales could significantly reduce prices for logs, which could have a material
adverse effect on the Company. Furthermore, increased imports from Canada (due
to the expiration in 2001 of the United States-Canada lumber trade agreement
or otherwise) and other foreign countries could reduce the prices the Company
receives for its timber.
The Company's Ability to Harvest Timber Will be Subject to Limitations
Revenues, net income and cash flow from the Company's operations will be
dependent to a significant extent on its ability to harvest timber at adequate
levels. There can be no assurance that the Company will in the 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
26
<PAGE>
Oregon Department of Fish and Wildlife, has developed plans for managing such
species and does not believe that such plans will have a material adverse
effect on the Company's ability to harvest the Timberlands in accordance with
current harvest plans. There can be no assurance, however, that species on or
around the Timberlands may not subsequently receive protected status under the
Endangered Species Act or that currently protected species may not be
discovered in significant numbers on or around the Timberlands. Any such
changes could materially and adversely affect the results of operations of the
Company.
The Federal Water Pollution Control Act authorizes the regulation of wetland
areas. Timberlands within a wetlands area may be subject to access limitations
or prohibitions, and may involve the expenditure of substantial sums for the
protection of such wetland areas. The Federal Insecticide, Fungicide, and
Rodenticide Act regulates the use of pesticides that may be used in forestry
practices. Violations of various statutory and regulatory programs that apply
to the Company's operations can result in civil penalties, remediation
expenses, natural resource damages, potential injunctions, cease and desist
orders and criminal penalties. Some environmental statutes impose strict
liability, rendering a person liable for environmental damage without regard
to negligence or fault on the part of such person. There can be no assurance
that such laws or future legislation or administrative or judicial action with
respect to protection of the environment will not adversely affect the
Company.
The Company Experiences Significant Competition
The forest products industry is highly competitive in terms of price and
quality. Many of the Company's competitors have substantially greater
financial and operating resources than the Company. Wood products are subject
to increasing competition from a variety of non-wood products, which affects
the demand for logs. In addition, competition from imported logs and end-use
wood products from foreign sources into the United States may adversely affect
the demand and prices for the Company's timber. To the extent there is a
significant increase in competitive pressures, the Company's results of
operations could be materially and adversely affected. See "Business and
Properties--The Timberlands--Competition."
Risks of Acquisition Strategy
The Company intends to pursue acquisitions as one means of increasing both
the value of the Company's Units and its cash flow. The Company cannot predict
whether it will be successful in consummating any such acquisitions or what
the consequences of any such acquisitions would be. Moreover, there can be no
assurance that general economic or industry conditions will be conducive to
the Company's acquisition strategy, that the Company will be able to identify
and acquire any such assets or businesses on economically acceptable terms,
that any acquisitions will not be dilutive to earnings and distributions to
Unitholders or that any additional debt incurred to finance an acquisition
will not affect the ability of the Company to make distributions to
Unitholders. The Company is subject to certain covenants in agreements
governing its indebtedness that might restrict the ability of the Company to
incur indebtedness to finance acquisitions. The Company currently has no
commitments to acquire any material assets.
The Company's acquisition strategy involves numerous risks, including
difficulties inherent in the integration of operations and systems, the
diversion of management's attention from other business concerns and the
potential loss of key employees of acquired businesses. In addition, future
acquisitions also may involve the expenditure of significant funds. Depending
upon the nature, size and timing of future acquisitions, the Company may be
required to secure additional financing. There is no assurance that such
additional financing will be available to the Company on acceptable terms.
The Company Will Be Dependent Upon Key Personnel
The Company believes that its success will depend to a significant extent
upon the efforts and abilities of its senior operating management team. The
failure by the General Partner to retain the key members of its senior
operating management team could adversely affect the financial condition or
results of operations of the Company.
27
<PAGE>
Dependence on Certain Key Customers
The Company currently derives a significant portion of its revenues from
sales of timber to certain key customers. For the year ended December 31,
1997, three of these customers, Collins, Crown Pacific Partners L.P. and Boise
Cascade Corporation, purchased timber representing approximately 23%, 21% and
15%, respectively, of the Company's revenues. Collins made its purchases
pursuant to the long-term Collins Supply Agreement, while the other purchases
were made pursuant to short-term arrangements. The loss of these or other
significant customers could materially adversely affect the Company's results
of operations.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of interest could arise as a result of the relationships between
the Company, on the one hand, and the General Partner and its affiliates, on
the other. The directors and officers of the General Partner have fiduciary
duties to manage the General Partner in a manner beneficial to its members. At
the same time, the General Partner has fiduciary duties to manage the Company
in a manner beneficial to the Company and the Unitholders. The duties of the
General Partner, as general partner, to the Company and the Unitholders,
therefore, may come into conflict with the duties of management of the General
Partner to its members.
Conflicts of interest might arise with respect to the following matters,
among others:
(i) Decisions of the General Partner with respect to the amount and
timing of timber harvests, stumpage sales, property sales, cash
expenditures, borrowings, issuances of additional Units and creation of
reserves in any quarter will affect whether, or the extent to which, there
is sufficient Available Cash from Operating Surplus to meet the Minimum
Quarterly Distribution and Target Distribution Levels on all Units in a
given quarter. In addition, actions by the General Partner may have the
effect of enabling the General Partner to receive Incentive Distributions.
(ii) The Company does not have any employees and relies solely on
employees of the General Partner and its affiliates.
(iii) Under the terms of the Partnership Agreement, the Company
reimburses the General Partner and its affiliates for costs incurred in
managing and operating the Company, including costs incurred in rendering
corporate staff and support services to the Company.
(iv) Whenever possible, the General Partner limits the Company's
liability under contractual arrangements to all or particular assets of the
Company, with the other party thereto having no recourse against the
General Partner or its assets.
(v) Any agreements between the Company and the General Partner and its
affiliates will not grant to the Unitholders, separate and apart from the
Company, the right to enforce the obligations of the General Partner and
such affiliates in favor of the Company. Therefore, the General Partner, in
its capacity as the general partner of the Company, will be primarily
responsible for enforcing such obligations.
(vi) Under the terms of the Partnership Agreement, the General Partner is
not restricted from causing the Company to pay the General Partner or its
affiliates for any services rendered on terms that are fair and reasonable
to the Company or entering into additional contractual arrangements with
any of such entities on behalf of the Company. Neither the Partnership
Agreement nor any of the other agreements, contracts and arrangements
between the Company, on the one hand, and the General Partner and its
affiliates, on the other, are or will be the result of arm's-length
negotiations.
(vii) The General Partner may exercise its right to call for and purchase
Units as provided in the Partnership Agreement or assign such right to one
of its affiliates or to the Company.
(viii) The Partnership Agreement provides that the General Partner is
generally restricted from engaging in any business activities other than
those incidental to its ownership of interests in the Company. In addition,
affiliates of the General Partner are restricted from engaging in
Restricted Activities (as defined in the Glossary) in North America.
Affiliates may, however, engage in any other activity in competition with
the Company and may engage in Restricted Activities outside of North
America. There can be no assurance that there will not be competition
between the Company and affiliates of the General Partner in
28
<PAGE>
the future. See "Conflicts of Interest and Fiduciary Responsibilities--
Conflicts of Interest--The General Partner's Affiliates May Compete With
the Company Under Certain Circumstances."
Unless provided for otherwise in the partnership agreement, Delaware law
generally requires a general partner of a Delaware limited partnership to
adhere to fiduciary duty standards under which it owes its limited partners
the highest duties of good faith, fairness and loyalty and which generally
prohibit such general partner from taking any action or engaging in any
transaction as to which it has a conflict of interest. The Partnership
Agreement expressly permits the General Partner to resolve conflicts of
interest between itself or its affiliates, on the one hand, and the Company or
the Unitholders, on the other, and to consider, in resolving such conflicts of
interest, the interests of other parties in addition to the interests of the
Unitholders. In addition, the Partnership Agreement provides that a purchaser
of Common Units is deemed to have consented to certain conflicts of interest
and actions of the General Partner and its affiliates that might otherwise be
prohibited, including those described in clauses (i)-(viii) above, and to have
agreed that such conflicts of interest and actions do not constitute a breach
by the General Partner of any duty stated or implied by law or equity. The
General Partner will not be in breach of its obligations under the Partnership
Agreement or its duties to the Company or the Unitholders if the resolution of
such conflict is fair and reasonable to the Company. The latitude given in the
Partnership Agreement to the General Partner in resolving conflicts of
interest may significantly limit the ability of a Unitholder to challenge what
might otherwise be a breach of fiduciary duty.
The Partnership Agreement expressly limits the liability of the General
Partner by providing that the General Partner, its affiliates and its officers
and directors will not be liable for monetary damages to the Company, the
limited partners or assignees for errors of judgment or for any acts or
omissions if the General Partner and such other persons acted in good faith.
In addition, the Company is required to indemnify the General Partner, its
affiliates and their respective officers, directors, employees, agents and
trustees to the fullest extent permitted by law against liabilities, costs and
expenses incurred by the General Partner or such other persons, if the General
Partner or such persons acted in good faith and in a manner they reasonably
believed to be in, or (in the case of a person other than the General Partner)
not opposed to, the best interests of the Company and, with respect to any
criminal proceedings, had no reasonable cause to believe the conduct was
unlawful.
The provisions of Delaware law that allow the common law fiduciary duties of
a general partner to be modified by a partnership agreement have not been
tested in a court of law, and the General Partner has not obtained an opinion
of counsel covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict the fiduciary duties of the General Partner that
would be in effect under common law were it not for the Partnership Agreement.
See "Conflicts of Interest and Fiduciary Responsibilities--Conflicts of
Interest."
TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of Common Units, see "Tax Considerations."
Tax Treatment is Dependent on Partnership Status
The availability to a Unitholder of the federal income tax benefits of an
investment in the Company depends on the classification of the Company as a
partnership for federal income tax purposes. Assuming the accuracy of certain
factual matters as to which the General Partner and the Company have made
representations, Counsel is of the opinion that, under current law, the
Company and the Operating Company have been and will be classified as a
partnership for federal income tax purposes. No ruling from the IRS as to
classification has been or is expected to be requested. Instead, the Company
intends to rely on such opinion of Counsel (which is not binding on the IRS).
One of the representations of the Company on which the opinion of Counsel is
based is that at least 90% of the Company's gross income for each taxable year
has been and will be "qualifying income." Whether the Company will continue to
be classified as a partnership in part depends, therefore, on the Company's
ability to meet this qualifying income test in the future. See "Tax
Considerations--Partnership Status."
29
<PAGE>
If the Company were classified as an association taxable as a corporation
for federal income tax purposes, the Company would pay tax on its income at
corporate rates (currently a 35% federal rate), distributions would generally
be taxed again to the Unitholders as corporate distributions, and no income,
gains, losses or deductions would flow through to the Unitholders. Because a
tax would be imposed upon the Company as an entity, the cash available for
distribution to Unitholders would be substantially reduced. Treatment of the
Company as an association taxable as a corporation or otherwise as a taxable
entity would result in a material reduction in the anticipated cash flow and
after-tax return to Unitholders and thus would likely result in a substantial
reduction in the value of the Units. See "Tax Considerations--Partnership
Status."
There can be no assurance that the law will not be changed so as to cause
the Company to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level
taxation. The Partnership Agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subjects the Company
to taxation as a corporation or otherwise subjects the Company to entity-level
taxation for federal, state or local income tax purposes, certain provisions
of the Partnership Agreement will be subject to change, including a decrease
in the Minimum Quarterly Distribution and the Target Distribution Levels to
reflect the impact of such law on the Company. See "Cash Distribution Policy--
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels."
No IRS Ruling With Respect to Tax Consequences
No ruling has been requested from the IRS with respect to classification of
the Company as a partnership for federal income tax purposes, whether the
Company's timber operations generate "qualifying income" under Section 7704 of
the Code or any other matter affecting the Company. Accordingly, the IRS may
adopt positions that differ from Counsel's conclusions expressed herein. It
may be necessary to resort to administrative or court proceedings in an effort
to sustain some or all of Counsel's conclusions, and some or all of such
conclusions ultimately may not be sustained. Any such contest with the IRS may
materially and adversely impact the market for the Units and the prices at
which the Units trade. In addition, the costs of any contest with the IRS will
be borne directly or indirectly by some or all of the Unitholders and the
General Partner.
Tax Liability Exceeding Cash Distributions
A Unitholder will be required to pay federal income taxes and, in certain
cases, state and local income taxes on his allocable share of the Company's
income, whether or not he receives cash distributions from the Company. There
is no assurance that a Unitholder will receive cash distributions equal to his
allocable share of taxable income from the Company or even the tax liability
to him resulting from that income. Further, a Unitholder may incur a tax
liability, in excess of the amount of cash received, upon the sale of his
Units. See "Tax Considerations--Tax Consequences of Unit Ownership" and
"--Disposition of Units."
Ownership of Units by Tax-Exempt Organizations and Certain Other Investors
Investment in Units by certain tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to such persons. For
example, much of the taxable income derived by most organizations exempt from
federal income tax (including IRAs and other retirement plans) from the
ownership of a Unit will be unrelated business taxable income and thus will be
taxable to such a Unitholder. See "Tax Considerations--Tax-Exempt
Organizations and Certain Other Investors."
Limitation on Deductibility of Losses
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the Company
will only be available to offset future income generated by the Company and
cannot be used to offset income from other activities, including other passive
activities or investments. Passive losses which are not deductible because
they exceed the Unitholder's income generated by the Company may be deducted
in full when the Unitholder disposes of his entire investment in the Company
in a fully taxable transaction to an unrelated party. Net passive income from
the Company may be offset by unused Company losses carried over from prior
years, but not by losses from other passive activities, including losses
30
<PAGE>
from other publicly traded partnerships. See "Tax Considerations--Tax
Consequences of Unit Ownership--Limitations on Deductibility of Company
Losses."
Tax Shelter Registration; Potential IRS Audit
The Company has applied for registration with the Secretary of the Treasury
as a "tax shelter." No assurance can be given that the Company will not be
audited by the IRS or that tax adjustments will not be made. The rights of a
Unitholder owning less than a 1% interest in the Company to participate in the
income tax audit process are very limited. Further, any adjustments in the
Company's tax returns will lead to adjustments in the Unitholders' tax returns
and may lead to audits of Unitholders' tax returns and adjustments of items
unrelated to the Company. Each Unitholder would bear the cost of any expenses
incurred in connection with an examination of such Unitholder's personal tax
return. Registration as a tax shelter may increase the risk of an audit.
Possible Loss of Tax Benefits Relating to Non-uniformity of Units and
Nonconforming Depreciation Conventions
Because the Company cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of Units must be maintained. To maintain uniformity and for other reasons, the
Company will adopt certain depreciation and amortization conventions that do
not conform with all aspects of certain proposed and final Treasury
Regulations. A successful challenge to those conventions by the IRS could
adversely affect the amount of tax benefits available to a purchaser of Units
and could have a negative impact on the value of the Units. See "Tax
Considerations--Uniformity of Units."
State, Local and Other Tax Considerations
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which the Company does business or owns property. A
Unitholder will likely be required to file state and local income tax returns
and pay state and local income taxes in some or all of the various
jurisdictions in which the Company does business or owns property and may be
subject to penalties for failure to comply with those requirements. The
Company currently owns property and/or conducts business in Oregon and
Washington. Oregon currently imposes a personal income tax. It is the
responsibility of each Unitholder to file all United States federal, state and
local tax returns that may be required of such Unitholder. Counsel has not
rendered an opinion on the state or local tax consequences of an investment in
the Company. See "Tax Considerations--State, Local and Other Tax
Considerations."
Tax Gain or Loss on Disposition of Units
A Unitholder who sells Units will recognize gain or loss equal to the
difference between the amount realized (including his share of Company
nonrecourse liabilities) and his adjusted tax basis in such Units (which also
includes his share of Company nonrecourse liabilities). Thus, prior Company
distributions in excess of cumulative net taxable income in respect of a Unit
which decreased a Unitholder's tax basis in such Unit will, in effect, become
taxable income if the Unit is sold at a price greater than the Unitholder's
tax basis in such Units, even if the price is less than his original cost. A
portion of the amount realized (whether or not representing gain) may be
ordinary income. Furthermore, should the IRS successfully contest certain
conventions to be used by the Company, a Unitholder could realize more gain on
the sale of Units than would be the case under such conventions without the
benefit of decreased income in prior years.
Reporting of Company Tax Information and Risk of Audits
The Company will furnish each Unitholder with a Schedule K-1 that sets forth
his share of Company income, gains, losses and deductions. In preparing these
schedules, the Company will use various accounting and reporting conventions
and adopt various depreciation and amortization methods. There is no assurance
that these schedules will yield a result that conforms to statutory or
regulatory requirements or to administrative pronouncements of the IRS.
Further, the Company's tax return may be audited, and any such audit could
result in an audit of a Unitholder's individual tax return as well as
increased liabilities for taxes because of adjustments resulting from the
audit.
31
<PAGE>
FORMATION OF THE COMPANY
Upon the closing of the Acquisition, Old Services contributed all of its
assets, including its timber operations, to the General Partner in exchange
for interests therein. Immediately thereafter, USTK assumed certain
indebtedness of Holdings and the General Partner contributed its timber
operations to USTK in exchange for a member interest in USTK. Then, the
General Partner contributed 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 1,387,963 Subordinated Units and Holdings
contributed all of its interest in USTK to the Company in exchange for
2,894,157 Subordinated Units. The General Partner then distributed the
Subordinated Units to Old Services. Approximately 143,398 Subordinated Units
were used by Old Services to redeem interests in Old Services held by the
Founding Directors. As a result of such transactions, USTK became the
Operating Company and the General Partner owns an aggregate 2% interest in the
Company and the Operating Company on a combined basis, and the right to
receive Incentive Distributions; Old Services owns 1,244,565 Subordinated
Units; Holdings owns 2,894,157 Subordinated Units; and the Founding Directors
own an aggregate of 143,398 Subordinated Units. The 4,282,120 Subordinated
Units owned by Old Services, Holdings and the Founding Directors represent an
aggregate 32.6% interest in the Company.
The Company contributed the net proceeds from the sale of Common Units in
the Initial Offering ($141.3 million) to the Operating Company. Concurrent
with the closing of the Initial Offering, the Operating Company issued $225.0
million aggregate principal amount of Notes in the Public Note Offering. Net
proceeds from the sale of the Notes ($218.3 million), together with the net
proceeds from the sale of Common Units in the Initial Offering, $26.0 million
borrowed by the Operating Company under the Acquisition Facility and cash on
hand ($25.6 million), were used by the Operating Company to repay $411.2
million of indebtedness of the Operating Company (including accrued interest).
Concurrent with the closing of this offering, the Operating Company entered
into the Bank Credit Facility, which includes the $25.0 million Working
Capital Facility to be used for working capital purposes, and the $75.0
million Acquisition Facility to be used for acquisitions and capital
improvements. For additional information regarding the terms of the Notes and
the Bank Credit Facility, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Description of Indebtedness."
The Company also granted to the underwriters of the Initial Offering an
option to purchase up to 1,118,803 additional Common Units solely to cover
over-allotments. Such option was exercised in its entirety on December 8,
1997. The Company used the net proceeds from the exercise of the underwriters'
over-allotment option (approximately $21.9 million) to repay borrowings under
the Acquisition Facility.
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<PAGE>
USE OF PROCEEDS
All of the Securities covered by the Prospectus are being sold by the
Selling Unitholders. The Company will not receive any of the proceeds from the
sale of the Securities.
DISTRIBUTIONS AND MARKET FOR COMMON AND SUBORDINATED UNITS
The Company was formed in June 1997, consummated the Initial Offering in
November 1997. On April 22, 1998, the Company announced a cash distribution of
$0.73 per Common and Subordinated Unit payable to holders of record as of May
5, 1998. Such distribution represents the sum of the $0.50 Minimum Quarterly
Distribution for the first quarter of 1998, plus $0.23 for the pro rata
portion of the Minimum Quarterly Distribution for the period from November 19,
1997, the day the Company completed the Initial Offering, through December 31,
1997.
The Common Units are listed and traded on the Nasdaq National Market
("Nasdaq") under the symbol "TIMBZ." The Common Units began trading on
November 14, 1997, at an initial public offering price of $21.00 per Common
Unit. As of March 23, 1998, there were 118 registered Common Unitholders of
record. The following table sets forth the high and low sales prices for the
Common Units on the Nasdaq.
<TABLE>
<CAPTION>
COMMON UNIT
PRICE RANGE
----------------
HIGH LOW
------ ------
<S> <C> <C>
November 14 to December
31, 1997............... $22.75 $20.00
First Quarter 1998...... 21.50 20.31
Second Quarter 1998..... 21.88(1) 20.25(1)
</TABLE>
- --------
(1) Second Quarter high/low is through May 1, 1998.
The last reported sale price of the Common Units on Nasdaq on May 1, 1998
was $20.25 per Common Unit.
Prior to the date of this Prospectus, there has been no trading market for
the Subordinated Units. The Company does not intend to apply for listing of
the Subordinated Units on any securities exchange. The Partnership believes
that the Subordinated Units will trade at a price that will be less than the
price at which the Common Units trade. There can be no assurance that there
will be an active trading market in the Subordinated Units or that any trading
market for the Subordinated Units will develop.
33
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997. The table should be read in conjunction with the historical
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER
31, 1997
--------
<S> <C>
Long-term debt:
9 5/8% Senior Notes due 2007........................................ $225,000
--------
Total indebtedness................................................ 225,000
Minority interest..................................................... 1,471
Partners' equity:
General partner interest............................................ 1,471
Limited partner interest............................................ 144,175
Total partners' capital........................................... 145,646
--------
Total capitalization.............................................. $370,646
========
</TABLE>
34
<PAGE>
CASH DISTRIBUTION POLICY
GENERAL
The Company distributes to its partners, on a quarterly basis, all of its
Available Cash in the manner described herein. Available Cash is defined in
the Glossary and generally means, with respect to any quarter of the Company,
all cash on hand at the end of such quarter less the amount of cash reserves
that is necessary or appropriate in the reasonable discretion of the General
Partner to (i) provide for the proper conduct of the Company's business, (ii)
comply with applicable law or any Company debt instrument or other agreement,
or (iii) provide funds for distributions to Unitholders and the General
Partner in respect of any one or more of the next four quarters.
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to Unitholders relative to the General Partner, and under certain
circumstances it determines whether holders of Subordinated Units receive any
distributions. See "--Quarterly Distributions of Available Cash."
Operating Surplus is defined in the Glossary and refers generally to (i) the
cash balance of the Company on the date the Company commences operations, plus
$15.0 million, plus all cash receipts of the Company from its operations since
the closing of the Transactions, less (ii) all Company operating expenses,
debt service payments (including reserves therefor but not including payments
required in connection with the sale of assets or any refinancing with the
proceeds of new indebtedness or an equity offering), maintenance capital
expenditures and reserves established for future Company operations, in each
case since the closing of the Transactions.
Capital Surplus is also defined in the Glossary and will generally be
generated only by borrowings (other than for working capital purposes), sales
of debt and equity securities and sales or other dispositions of assets for
cash (other than inventory, accounts receivable and other assets all as
disposed of in the ordinary course of business and up to $50.0 million of land
sales).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Company is from Operating Surplus or from Capital Surplus,
all Available Cash distributed by the Company from any source will be treated
as distributed from Operating Surplus until the sum of all Available Cash
distributed since the commencement of the Company equals the Operating Surplus
as of the end of the quarter prior to such distribution. Any Available Cash in
excess of such amount (irrespective of its source) will be deemed to be from
Capital Surplus and distributed accordingly.
If Available Cash from Capital Surplus is distributed in respect of each
Common Unit in an aggregate amount per Common Unit equal to $21.00 (the
"Initial Unit Price"), plus any Common Unit Arrearages, the distinction
between Operating Surplus and Capital Surplus will cease, and all
distributions of Available Cash will be treated as if they were from Operating
Surplus. The Company does not anticipate that there will be significant
distributions from Capital Surplus.
The Subordinated Units are a separate class of interests in the Company, and
the rights of holders of such interests to participate in distributions to
partners differ from the rights of the holders of Common Units. For any given
quarter, any Available Cash will be distributed to the General Partner and to
the holders of Common Units, and may also be distributed to the holders of
Subordinated Units depending upon the amount of Available Cash for the
quarter, the amount of Common Unit Arrearages, if any, and other factors
discussed below.
The Incentive Distributions are nonvoting limited partner interests that
represent the right to receive an increasing percentage of quarterly
distributions of Available Cash from Operating Surplus after the Target
Distribution Levels have been achieved. The Target Distribution Levels are
based on the amounts of Available Cash from Operating Surplus distributed in
excess of the payments made with respect to the Minimum Quarterly Distribution
and Common Unit Arrearages, if any, and the related 2% distribution to the
General Partner.
35
<PAGE>
Subject to the limitations described under "The Partnership Agreement--
Issuance of Additional Securities," the Company has the authority to issue
additional Units or other equity securities of the Company for such
consideration and on such terms and conditions as are established by the
General Partner in its sole discretion and without the approval of the
Unitholders. It is possible that the Company will fund acquisitions of other
timber assets through the issuance of additional Units or other equity
securities of the Company. Holders of any additional Common Units issued by
the Company will be entitled to share equally with the then-existing holders
of Common Units in distributions of Available Cash by the Company. If the
Company were to issue additional Common Units, it would be necessary for the
Company to generate additional Available Cash in order for it to distribute
the Minimum Quarterly Distribution on all outstanding Common Units before it
could make any distributions on the Subordinated Units. In addition, the
issuance of additional Partnership Interests may dilute the value of the
interests of the then-existing holders of Units in the net assets of the
Company. The General Partner will be required to make an additional capital
contribution to the Company or the Operating Company (other than in connection
with the exercise of the over-allotment option) in connection with the
issuance of additional Partnership Interests.
The discussion in the sections below indicates the percentages of cash
distributions required to be made to the General Partner and the holders of
Common Units and the circumstances under which holders of Subordinated Units
are entitled to cash distributions and the amounts thereof. For a discussion
of Available Cash from Operating Surplus available for distributions with
respect to the Common Units on a pro forma basis, see "Cash Available for
Distribution."
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Company makes distributions to its partners with respect to each quarter
of the Company prior to its liquidation in an amount equal to 100% of its
Available Cash for such quarter. The Company expects to make distributions of
all Available Cash within approximately 45 days after the end of each quarter,
to holders of record on the applicable record date. The Minimum Quarterly
Distribution and the Target Distribution Levels for the period from the
closing of the Initial Offering through March 31, 1998 was adjusted upward
based on the actual length of such period. The Minimum Quarterly Distribution
and the Target Distribution Levels are also subject to certain other
adjustments as described below under "--Distributions from Capital Surplus"
and "--Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels."
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distribution, plus any Common Unit
Arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. This subordination feature will enhance the Company's
ability to distribute the Minimum Quarterly Distribution on the Common Units
during the Subordination Period. There is no guarantee, however, that the
Minimum Quarterly Distribution will be made on the Common Units. Upon
expiration of the Subordination Period, all Subordinated Units will be
converted on a one-for-one basis into Common Units and will participate pro
rata with all other Common Units in future distributions of Available Cash.
Under certain circumstances, up to 2,141,060 Subordinated Units may convert
into Common Units prior to the expiration of the Subordination Period. Common
Units will not accrue arrearages with respect to distributions for any quarter
after the Subordination Period and Subordinated Units will not accrue any
arrearages with respect to distributions for any quarter.
DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD
The Subordination Period will generally extend from the closing of this
offering until the first day of any quarter beginning after December 31, 2002
in respect of which (i) distributions of Available Cash from Operating Surplus
on the Common Units and the Subordinated Units with respect to each of the
three consecutive four-quarter periods immediately preceding such date equaled
or exceeded the sum of the Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated Units during such periods, (ii) the
36
<PAGE>
Adjusted Operating Surplus generated during each of the three consecutive
four-quarter periods immediately preceding such date equaled or exceeded the
sum of the Minimum Quarterly Distribution on all of the Common Units and
Subordinated Units that were outstanding during such period on a fully diluted
basis and the related distribution on the general partner interest in the
Company and the managing member interest in the Operating Company, and (iii)
there are no outstanding Common Unit Arrearages.
Prior to the end of the Subordination Period, a portion of the Subordinated
Units will convert into Common Units on a one-for-one basis on the first day
after the record date established for the distribution in respect of any
quarter ending on or after (a) December 31, 2000 with respect to one-quarter
of the Subordinated Units (1,070,530 Subordinated Units), and (b) December 31,
2001 with respect to one-quarter of the Subordinated Units (1,070,530
Subordinated Units), in respect of which (i) distributions of Available Cash
from Operating Surplus on the Common Units and the Subordinated Units with
respect to each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
during such periods, (ii) the Adjusted Operating Surplus generated during each
of the two consecutive four-quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on all of
the Common Units and Subordinated Units that were outstanding during such
period on a fully diluted basis and the related distribution on the general
partner interest in the Company and the managing member interest in the
Operating Company, and (iii) there are no outstanding Common Unit Arrearages;
provided, however, that the early conversion of the second one-quarter of
Subordinated Units may not occur until at least one year following the early
conversion of the first one-quarter of Subordinated Units. The Partnership
Agreement provides that the Subordinated Units to be converted to Common Units
will be allocated among the holders of Subordinated Units pro rata based on
the number of Subordinated Units held by each holder. No fractional Common
Units will be issued in connection with any such conversion.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will
thereafter participate, pro rata, with the other Common Units in distributions
of Available Cash. In addition, if the General Partner is removed as the
general partner of the Company under circumstances where Cause does not exist
and Units held by the General Partner and its affiliates are not voted in
favor of such removal, (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be
extinguished and (iii) the General Partner will have the right to convert its
general partner interest (and its right to receive Incentive Distributions)
into Common Units or to receive cash in exchange for such interests.
"Adjusted Operating Surplus" for any period generally means Operating
Surplus generated during such period, less (a) any net increase in working
capital borrowings during such period and (b) any net reduction in cash
reserves for Operating Expenditures during such period not relating to an
Operating Expenditure made during such period; and plus (x) any net decrease
in working capital borrowings during such period and (y) any net increase in
cash reserves for Operating Expenditures during such period required by any
debt instrument for the repayment of principal, interest or premium. Operating
Surplus generated during a period is equal to the difference between (i) the
Operating Surplus determined at the end of such period and (ii) the Operating
Surplus determined at the beginning of such period.
Distributions by the Company of Available Cash from Operating Surplus with
respect to any quarter during the Subordination Period will be made in the
following manner:
first, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding
Common Unit an amount equal to the Minimum Quarterly Distribution for such
quarter;
second, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding
Common Unit an amount equal to any Common Unit Arrearages accrued and
unpaid with respect to any prior quarters during the Subordination Period;
37
<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
thereafter, in the manner described in "--Incentive Distributions" below.
Notwithstanding the foregoing, no distributions may be made on the
Subordinated Units with respect to any quarter if the Consolidated Fixed
Charge Coverage Ratio (as defined in the Partnership Agreement) for the four-
quarter period ended with such quarter is equal to or less than 1.75 to 1.00.
The above references to the 2% of Available Cash from Operating Surplus
distributed to the General Partner are references to the amount of the
percentage interest in distributions from the Company and the Operating
Company of the General Partner (exclusive of its or any of its affiliates'
interests as holders of Common Units or Subordinated Units). The General
Partner owns a 1% general partner interest in the Company and a 1.0101%
managing member interest in the Operating Company. Other references in this
Prospectus to the General Partner's 2% interest or to distributions of 2% of
Available Cash are also references to the amount of the combined percentage
interest in the Company and the Operating Company of the General Partner
(exclusive of its or any of its affiliates' interests as holders of Common
Units or Subordinated Units). With respect to any Common Unit, the term
"Common Unit Arrearages" refers to the amount by which the Minimum Quarterly
Distribution in any quarter during the Subordination Period exceeds the
distribution of Available Cash from Operating Surplus actually made for such
quarter on a Common Unit issued in this offering, cumulative for such quarter
and all prior quarters during the Subordination Period. Common Unit Arrearages
will not accrue interest.
DISTRIBUTIONS FROM OPERATING SURPLUS AFTER SUBORDINATION PERIOD
Distributions by the Company of Available Cash from Operating Surplus with
respect to any quarter after the Subordination Period will be made in the
following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit an amount equal to
the Minimum Quarterly Distribution for such quarter; and
thereafter, in the manner described in "--Incentive Distributions" below.
INCENTIVE DISTRIBUTIONS
For any quarter for which Available Cash from Operating Surplus is
distributed to the Common and Subordinated Unitholders in an amount equal to
the Minimum Quarterly Distribution on all Units and to the Common Unitholders
in an amount equal to any unpaid Common Unit Arrearages, then any additional
Available Cash from Operating Surplus in respect of such quarter will be
distributed among the Unitholders and the General Partner in the following
manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate Common Unit Arrearages) a total of $0.550
for such quarter in respect of each outstanding Unit (the "First Target
Distribution");
second, 85% to all Unitholders, pro rata, and 15% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate Common Unit Arrearages) a total of $0.633
for such quarter in respect of each outstanding Unit (the "Second Target
Distribution");
third, 75% to all Unitholders, pro rata, and 25% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate Common Unit Arrearages) a total of $0.822
for such quarter in respect of each outstanding Unit (the "Third Target
Distribution"); and
thereafter, 50% to all Unitholders, pro rata, and 50% to the General
Partner.
38
<PAGE>
The distributions to the General Partner set forth above that are in excess
of its aggregate 2% general partner interest represent the Incentive
Distributions. The right to receive Incentive Distributions is not part of the
general partner interest and may be transferred separately from such interest
in certain limited circumstances. See "The Partnership Agreement--Transfer of
General Partner's Interests and Incentive Distribution Rights."
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Company of Available Cash from Capital Surplus will be
made in the following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until the Company has distributed, in respect of each outstanding Common
Unit issued in the Initial Offering, Available Cash from Capital Surplus in
an aggregate amount per Common Unit equal to the Initial Unit Price;
second, 98% to the holders of Common Units, pro rata, and 2% to the
General Partner, until the Company has distributed, in respect of each
outstanding Common Unit, Available Cash from Capital Surplus in an
aggregate amount equal to any unpaid Common Unit Arrearages with respect to
such Common Unit; and
thereafter, all distributions of Available Cash from Capital Surplus will
be distributed as if they were from Operating Surplus.
As a distribution of Available Cash from Capital Surplus is made, it is
treated as if it were a repayment of the Initial Unit Price. To reflect such
repayment, the Minimum Quarterly Distribution and the Target Distribution
Levels will be adjusted downward by multiplying each such amount by a
fraction, the numerator of which is the Unrecovered Capital (as defined in the
Glossary) of the Common Units immediately after giving effect to such
repayment and the denominator of which is the Unrecovered Capital of the
Common Units immediately prior to such repayment. This adjustment to the
Minimum Quarterly Distribution may make it more likely that Subordinated Units
will be converted into Common Units (whether pursuant to the termination of
the Subordination Period or to the provisions permitting early conversion of
some Subordinated Units) and may accelerate the dates at which such
conversions occur.
When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Capital of the Common Units is zero (and any accrued Common Unit
Arrearages have been paid), then in effect the Minimum Quarterly Distribution
and each of the Target Distribution Levels will have been reduced to zero for
subsequent quarters. Thereafter, all distributions of Available Cash from all
sources will be treated as if they were from Operating Surplus. Because the
Minimum Quarterly Distribution and the Target Distribution Levels will have
been reduced to zero, the General Partner will be entitled thereafter to
receive 50% of all distributions of Available Cash in its capacity as General
Partner and as holder of the Incentive Distribution Rights (in addition to any
distributions to which it or its affiliates may be entitled as holders of
Units).
Distributions of Available Cash from Capital Surplus will not reduce the
Minimum Quarterly Distribution or Target Distribution Levels for the quarter
with respect to which they are distributed.
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to reductions of the Minimum Quarterly Distribution and Target
Distribution Levels made upon a distribution of Available Cash from Capital
Surplus, the Minimum Quarterly Distribution, the Target Distribution Levels,
the Unrecovered Capital, the number of additional Common Units issuable during
the Subordination Period without a Unitholder vote, the number of Common Units
issuable upon conversion of the Subordinated Units and other amounts
calculated on a per Unit basis will be proportionately adjusted upward or
downward, as appropriate, in the event of any combination or subdivision of
Common Units (whether effected by a distribution payable in Common Units or
otherwise), but not by reason of the issuance of additional Common Units for
cash or property. For example, in the event of a two-for-one split of the
Common Units (assuming no prior adjustments), the Minimum Quarterly
Distribution, each of the Target Distribution Levels and the Unrecovered
Capital of the Common Units would each be reduced to 50% of its initial level.
39
<PAGE>
The Minimum Quarterly Distribution and the Target Distribution Levels may
also be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Company to become taxable as a corporation or otherwise subjects the Company
to taxation as an entity for federal, state or local income tax purposes. In
such event, the Minimum Quarterly Distribution and the Target Distribution
Levels would be reduced to an amount equal to the product of (i) the Minimum
Quarterly Distribution and each of the Target Distribution Levels,
respectively, multiplied by (ii) one minus the sum of (x) the maximum
effective federal income tax rate to which the Company is then subject as an
entity plus (y) any increase that results from such legislation in the
effective overall state and local income tax rate to which the Company is
subject as an entity for the taxable year in which such event occurs (after
taking into account the benefit of any deduction allowable for federal income
tax purposes with respect to the payment of state and local income taxes). For
example, assuming the Company was not previously subject to state and local
income tax, if the Company were to become taxable as an entity for federal
income tax purposes and the Company became subject to a maximum marginal
federal, and effective state and local, income tax rate of 38%, then the
Minimum Quarterly Distribution and the Target Distribution Levels would each
be reduced to 62% of the amount thereof immediately prior to such adjustment.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
Following the commencement of the dissolution and liquidation of the
Company, assets will be sold or otherwise disposed of from time to time and
the partners' capital account balances will be adjusted to reflect any
resulting gain or loss. The proceeds of such liquidation will, first, be
applied to the payment of creditors of the Company in the order of priority
provided in the Partnership Agreement and by law and, thereafter, be
distributed to the Unitholders and the General Partner in accordance with
their respective capital account balances as so adjusted.
Partners are entitled to liquidating distributions in accordance with
capital account balances. The allocations of gains and losses upon liquidation
are intended, to the extent possible, to entitle the holders of outstanding
Common Units to a preference over the holders of outstanding Subordinated
Units upon the liquidation of the Company, to the extent required to permit
Common Unitholders to receive their Unrecovered Capital plus any unpaid Common
Unit Arrearages. Thus, net losses recognized upon liquidation of the Company
will be allocated to the holders of the Subordinated Units to the extent of
their capital account balances before any loss is allocated to the holders of
the Common Units, and net gains recognized upon liquidation will be allocated
first to restore negative balances in the capital account of the General
Partner and any Unitholders and then to the Common Unitholders until their
capital account balances equal their Unrecovered Capital plus unpaid Common
Unit Arrearages. However, no assurance can be given that there will be
sufficient gain upon liquidation of the Company to enable the holders of
Common Units to fully recover all of such amounts, even though there may be
cash available after such allocation for distribution to the holders of
Subordinated Units.
The manner of such adjustment is as provided in the Partnership Agreement,
the form of which is filed as an exhibit to the Registration Statement of
which this Prospectus is a part. If the liquidation of the Company occurs
before the end of the Subordination Period, any net gain (or unrealized gain
attributable to assets distributed in kind) will be allocated to the partners
as follows:
first, to the General Partner and the holders of Units having negative
balances in their capital accounts to the extent of and in proportion to
such negative balances;
second, 98% to the holders of Common Units, pro rata, and 2% to the
General Partner, until the capital account for each Common Unit is equal to
the sum of (i) the Unrecovered Capital in respect of such Common Unit, (ii)
the amount of the Minimum Quarterly Distribution for the quarter during
which liquidation of the Company occurs and (iii) any unpaid Common Unit
Arrearages in respect of such Common Unit;
third, 98% to the holders of Subordinated Units, pro rata, and 2% to the
General Partner, until the capital account for each Subordinated Unit is
equal to the sum of (i) the Unrecovered Capital in respect of
40
<PAGE>
such Subordinated Unit and (ii) the amount of the Minimum Quarterly
Distribution for the quarter during which the liquidation of the Company
occurs;
fourth, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until there has been allocated under this paragraph fourth an amount per
Unit equal to (a) the sum of the excess of the First Target Distribution
per Unit over the Minimum Quarterly Distribution per Unit for each quarter
of the Company's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
Minimum Quarterly Distribution per Unit that were distributed 98% to the
Unitholders, pro rata, and 2% to the General Partner for each quarter of
the Company's existence;
fifth, 85% to the Unitholders, pro rata, and 15% to the General Partner,
until there has been allocated under this paragraph fifth an amount per
Unit equal to (a) the sum of the excess of the Second Target Distribution
per Unit over the First Target Distribution per Unit for each quarter of
the Company's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
First Target Distribution per Unit that were distributed 85% to the
Unitholders, pro rata, and 15% to the General Partner for each quarter of
the Company's existence;
sixth, 75% to all Unitholders, pro rata, and 25% to the General Partner,
until there has been allocated under this paragraph sixth an amount per
Unit equal to (a) the sum of the excess of the Third Target Distribution
per Unit over the Second Target Distribution per Unit for each quarter of
the Company's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
Second Target Distribution per Unit that were distributed 75% to the
Unitholders, pro rata, and 25% to the General Partner for each quarter of
the Company's existence; and
thereafter, 50% to all Unitholders, pro rata, and 50% to the General
Partner.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that clauses
(ii) and (iii) of paragraph second above and all of paragraph third above will
no longer be applicable.
Upon liquidation of the Company, any loss will generally be allocated to the
General Partner and the Unitholders as follows:
first, 98% to holders of Subordinated Units in proportion to the positive
balances in their respective capital accounts and 2% to the General
Partner, until the capital accounts of the holders of the Subordinated
Units have been reduced to zero;
second, 98% to the holders of Common Units in proportion to the positive
balances in their respective capital accounts and 2% to the General
Partner, until the capital accounts of the Common Unitholders have been
reduced to zero; and
thereafter, 100% to the General Partner.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that all of
paragraph first above will no longer be applicable.
In addition, interim adjustments to capital accounts will be made at the
time the Company issues additional interests in the Company or makes
distributions of property. Such adjustments will be based on the fair market
value of the interests or the property distributed and any gain or loss
resulting therefrom will be allocated to the Unitholders and the General
Partner in the same manner as gain or loss is allocated upon liquidation. In
the event that positive interim adjustments are made to the capital accounts,
any subsequent negative adjustments to the capital accounts resulting from the
issuance of additional interests in the Company, distributions of property by
the Company, or upon liquidation of the Company, will be allocated in a manner
which results, to the extent possible, in the capital account balances of the
General Partner equaling the amount which would have been the General
Partner's capital account balances if no prior positive adjustments to the
capital accounts had been made.
41
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following tables set forth for the periods and at the dates indicated,
selected financial and operating data for the Company. The selected 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 audited 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 combined
financial data for the four months ended December 31, 1996 and consolidated
financial data for the year ended December 31, 1997 are derived from the
audited financial statements of the Company. In the opinion of management, the
unaudited financial statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair statement of the results for the
unaudited period. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The dollar amounts in the table below,
except per Unit data, are in thousands.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(A)
--------------------------------------- -------------------------
JANUARY 1, AUGUST 30,
1996 1996
YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED
--------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1996 1997
----------- ------- ------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT
DATA:
Revenues:
Logs and stumpage
sales................. $28,609 $29,102 $29,110 $14,077 $ 13,590 $ 60,445
Timberland and property
sales................. 4,180 -- -- -- -- 15,244
By-products and other.. 3,537 3,240 2,623 1,501 429 1,656
------- ------- ------- ------- -------- --------
Total revenues......... 36,326 32,342 31,733 15,578 14,019 77,345
Operating costs:
Cost of products sold.. 15,697 16,351 14,951 9,225 6,179 17,778
Cost of timber and
property sales........ 58 -- -- -- -- 8,746
Depreciation, depletion
and road
amortization.......... 1,443 1,455 1,486 927 3,323 17,303
Selling, general and
administrative
expenses.............. 4,034 4,454 4,235 2,730 9,284 6,250
------- ------- ------- ------- -------- --------
Operating income
(loss)................ 15,094 10,082 11,061 2,696 (4,767) 27,268
Interest expense(b).... -- -- -- -- 7,316 25,321
Amortization of
deferred financing
fees and debt
guarantee fees(b)..... -- -- -- -- 1,326 4,193
Interest income........ -- -- -- -- (409) (1,452)
Other (income) expense,
net................... 297 140 (555) 1 36 574
------- ------- ------- ------- -------- --------
Income (loss) before
extraordinary items... 14,797 9,942 11,616 2,695 (13,036) (1,368)
Extraordinary items,
losses on
extinguishment of
debt(c)............... -- -- -- -- -- 9,337
------- ------- ------- ------- -------- --------
Net income (loss)...... $14,797 $ 9,942 $11,616 $ 2,695 $(13,036) $(10,705)
======= ======= ======= ======= ======== ========
Limited partners'
interests in net
loss.................. $(10,692)
========
Basic income (loss)
before extraordinary
items per Unit(d):
Common................. $ -- $ 3.05
Subordinated........... $ (3.04) $ (1.01)
Diluted loss before
extraordinary items
per Unit(d)........... $ (3.04) $ (0.28)
Basic net loss per
Unit(d):
Common................. $ -- $ (0.86)
Subordinated........... $ (3.04) $ (2.30)
Diluted net loss per
Unit(d)............... $ (3.04) $ (2.04)
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(A)
----------------------------------------- -------------------------
JANUARY 1,
1996 AUGUST 30,
YEAR ENDED DECEMBER 31, THROUGH 1996 THROUGH YEAR ENDED
----------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1996 1997
----------- -------- ------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS AND OTHER
DATA:
EBITDDA(e)............. $ 16,595 $ 11,537 $12,547 $3,623 $ (1,444) $ 53,317
Capital expenditures--
Maintenance(f)........ 1,157 2,098 2,082 459 360 111,966
Cash flow from (used
in) operations........ 15,124 13,173 11,810 5,512 (2,984) 26,283
Cash flow used in
investing............. (1,157) (2,013) (1,859) (459) (291,450) (101,566)
Cash flow from (used
in) financing......... (13,967) (11,160) (9,951) (5,054) 311,047 69,295
BALANCE SHEET DATA (AT
PERIOD END):
Working capital........ $ 2,068 $ 211 $ 1,304 $ 524 $ 21,459 1,835
Timber, timberlands and
logging roads, net.... 21,495 20,885 20,822 21,275 273,457 359,349
Total assets........... 32,292 29,844 30,947 27,839 310,191 385,214
Long-term debt......... -- -- -- -- 305,000 225,000
Equity (deficit)(g).... 29,643 27,745 29,155 27,839 (2,936) 145,646
OPERATING DATA
(UNAUDITED):
Sales volumes:
Log, stumpage and
timber deed sales
(MBF)(h).............. 66,250 68,302 63,822 32,760 30,210 138,983
Property sales (MBF)... 9,449 -- -- -- -- 41,530
Chip sales (BDT)....... 52,278 38,380 25,702 20,568 7,174 18,957
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial and
operating data after August 30, 1996 are not comparable to financial and
operating data of the Predecessor. See Note 1 of the Notes to the
Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations"included
elsewhere in this Prospectus.
(b) See effect of interest expense and amortization of deferred financing fees
and debt guarantee fees in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
(c) See effect of debt extinguishment in Note 5 of the Notes to the
Consolidated Financial Statements included elsewhere in this Prospectus.
(d) No per Unit information is presented for periods ended August 29, 1996 and
December 31, 1995 as the Predecessor had a different ownership structure
and any per Unit information would not be relevant or meaningful to the
user of the selected financial data. See discussion of per Unit
information in Note 2 of the Notes to the Consolidated Financial
Statements included elsewhere in this Prospectus.
(e) EBITDDA is defined as operating income (loss) plus depreciation, depletion
and road amortization and cost of timber and property sales. EBITDDA
should not be considered as an alternative to net income, operating
income, cash flows from operating activities or any other measure of
financial performance presented in accordance with generally accepted
accounting principles. EBITDDA is not intended to represent cash flow and
does not represent the measure of cash available for distribution, but
provides additional information for evaluating the Company's ability to
make the Minimum Quarterly Distribution. In addition, EBITDDA does not
necessarily represent funds available for management's discretionary use
as it is calculated prior to debt service obligations and capital
expenditures. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this
Prospectus.
(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. See July 1997
acquisition of the Ochoco Timberlands in Note 3 of the Notes to the
Consolidated Financial Statements included elsewhere in this Prospectus.
(g) See discussion of the Company and the Predecessor's equity (deficit) in
Note 1 of the Notes to the Consolidated Financial Statements included
elsewhere in this Prospectus.
(h) Revenues prior to 1997 consisted primarily of log sales.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company and the Predecessor, should be read in conjunction
with the Summary Financial and Operating Data and notes thereto, the Selected
Financial and Operating Data and notes thereto and the financial statements
and notes thereto included elsewhere in this Prospectus.
GENERAL
The Company is a Delaware limited partnership which on November 19, 1997
acquired, and now operates, the timber business of USTK and Old Services. 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 was 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) revenues realized from harvesting on the Ochoco Timberlands
aquired by the Company in July 1997, (iii) increased depletion charges
resulting from the step-up in asset values of the Timberlands, (iv) reduced
per MBF logging and hauling costs resulting from the use of independent
contractors rather than Company employees to conduct silvicultural activities
and the harvesting and delivery of logs due to lower hourly wage rates, the
elimination of compensation payments during seasonal down time and the
reduction in associated capital costs and (v) 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).
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. From January 1988 to January 1998,
federal timber under contract in Washington and Oregon decreased approximately
88%. 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
44
<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 current impact on timber prices 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.
RECENT DEVELOPMENTS
The Company's net loss increased from $1.9 million during the three months
ended March 31, 1997 to $6.7 million during the three months ended March 31,
1998. The increase in the net loss is primarily due to a $5.4 million decline
in operating results, partially offset by a $0.6 million improvement in
financing and other expenses, net.
Operating results declined from income of $4.0 million during the first
three months of 1997 as compared to a loss of $1.3 million during the first
three months of 1998. The decline was the result of a $4.5 million decrease in
revenues combined with an $0.8 million increase in operating costs. Revenues
for the three months ended March 31, 1998 were $7.8 million, which represented
63% of revenues for the same period in 1997 of $12.3 million. The decrease in
revenues is primarily the result of a $3.5 million timber deed sale during the
three months ended March 31, 1997 and a $1.1 million decrease in log and
stumpage sales. Due to seasonality factors, the Company reduced its volume of
log and stumpage sales by 14% during the three months ended March 31, 1998 as
compared to the three months ended March 31, 1997. Despite soft domestic log
markets, the Company's sales realization per MBF improved by 2% from $413
during the three months ended March 31, 1997 to $421 during the three months
ended March 31, 1998, partially offsetting the impact of the reduced harvest
levels. The improved sales realization is due to the sale of higher quality
logs and the result of enhanced marketing efforts.
The increase in operating costs was primarily the result of a $2.4 million
increase in selling, general and administrative ("SG&A") expenses, a $0.4
million increase in depletion, depreciation and road amortization
45
<PAGE>
("DD&A") expense, partially offset by a $1.2 million decrease in the cost of
timber and property sales and a $0.8 million decrease in cost of goods sold.
The increase in SG&A expenses was primarily due to the increased cost of
operating as a public company combined with one-time expense of $1.1 million,
related to severance costs and the repurchase of member interests in the
Company's general partner. The increase in DD&A expense is primarily due to
the increase in the Company's depletion rate which resulted from the Company's
acquisition of the Ochoco Timberlands in July, 1997, offset somewhat by the
14% decrease in log and stumpage volume sold. The decrease in cost of goods
sold is primarily due to decreased logging costs resulting from the 23%
decrease in logs harvested by the Company during the three months ended March
31, 1998 as compared to the same period in 1997.
The $0.6 million decrease in financing and other expenses, net is primarily
the result of $0.8 million of debt guarantee fees payable to Weyerhaeuser
Company recognized during the three months ended March 31, 1997. No such
expense was incurred during the three months ended March 31, 1998.
As of March 31, 1998 and December 31, 1997, the Company's total long-term
debt was $225.0 million.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The results of operations for the year ended December 31, 1996 are based on
combining the periods of 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 depletion, depreciation and road
amortization ("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 in 1997 were $77.3 million, an increase of 161% over
revenues of $29.6 million in 1996. This increase was primarily attributable to
a $32.8 million increase in revenues from log and stumpage sales and a $15.2
million increase in timber and property sales, partially offset by a decrease
of $0.3 million in by-products and other revenues.
Log and stumpage sales volumes in 1997 were 127,900 MBF, an increase of 103%
over log and stumpage sales volumes of 63,000 MBF in 1996. The significant
increase in the volume harvested was mainly due to the Company's aggressive
harvest plan compared to that of the Predecessor for the first eight months of
1996, as well as the commencement of log and stumpage sales from the Ochoco
Timberlands which were acquired on July 15, 1997. Average log and stumpage
prices increased by 8% from $439 per MBF in 1996 to $472 per MBF in 1997,
primarily due to a larger proportion of higher valued timber harvested from
the Ochoco Timberlands during the last half of 1997.
Revenues from timber and property sales were $15.2 million during 1997.
There were no such timber or property sales during 1996.
The reduction in by-products and other revenue was primarily attributable to
a 36% decrease in chip sales volume. Due to low demand in the pulp and paper
industry, chip prices had decreased to a level where it was no longer
profitable for the Company to process residual fiber for use as chips for much
of 1997. Demand for these chips, however, increased in the last quarter of
1997.
Operating Costs. Operating costs were $50.1 million in 1997, an increase of
58% over operating costs of $31.7 million in 1996. This increase was the
result of a $2.4 million increase in cost of products sold, an $8.7 million
increase in the cost of timber and property sales and a $13.1 million increase
in DD&A expense. These increases were partially offset by a $5.8 million
decrease in selling, general and administrative expenses.
46
<PAGE>
The increase in cost of products sold was primarily the result of a $4.3
million increase in logging costs and a $0.3 million increase in severance
taxes. Partially offsetting these increases were a $1.2 million decrease in
wood fiber processing costs and a $1.0 million decrease in outside log
purchases. Logging costs and severance taxes increased primarily as a result
of a 55% increase in the level of merchantable grade logs harvested and sold,
partially offset by a 14% decrease in the Company's logging cost per MBF. The
decrease in the Company's logging cost per MBF was primarily the result of the
Company's changing from a mix of internal logging crews and outside
contractors during the first eight months of 1996 to the use of outside
contractors for all its logging operations during the last four months of 1996
and in 1997. Wood fiber processing costs decreased by 58% as a result of a 14%
decrease in the volume of fiber processed and sold as chips and a writedown to
fiber log inventories during 1996, resulting from a decline in chip prices
during the period. During 1997, the Company had timber deed sales with a
combined cost basis of $8.7 million. No sales of tracts of timber or
timberland were made during 1996.
DD&A expense was $17.3 million in 1997, a $13.1 million increase over DD&A
expense of $4.2 million in 1996. This increase was primarily due to the
significant increase in the Company's depletion rate combined with the large
increase in the volume of logs harvested and sold as previously mentioned. The
increase in the depletion rate was primarily 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 $6.2 million in 1997, a
decrease of 48% from comparable expenses of $12.0 million in 1996. This
decrease in selling, general and administrative expenses 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 one-time management fees paid to an affiliate of the Company
for management services in 1996. The advisory fees were incurred in connection
with the Weyerhaeuser Acquisition and its initial financing. The management
fee generally relates to services rendered in connection with the initial
formation of USTK and Old Services. Primarily offsetting these advisory and
management fees were increases in salaries and wages as well as professional
fees resulting from the Company operating as an independent entity rather than
as a division of Weyerhaeuser.
Interest Expense. Interest expense was $25.3 million during 1997 and
primarily 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 and $110.0 million of debt incurred in connection with the Ochoco
Acquisition on July 15, 1997. The Company refinanced $225.0 million of its
existing debt on November 19, 1997 by issuing the Notes in the Public Note
Offering and paid down the remaining $190.0 million of outstanding debt
between July 15, 1997 and December 31, 1997 with the proceeds from the Initial
Offering and cash flows from operating activities. The Company incurred $7.3
million in interest expense during the last four months of 1996. There was no
interest expense and no debt outstanding during the first eight 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. The Company deferred $6.0 million of fees in
connection with the financing of the Ochoco Acquisition and related term debt
refinancing. These costs were being amortized over the life of the debt. The
Company deferred $6.7 million of fees incurred in connection with the issuance
of $225.0 million of Notes in the Public Note Offering. The Company also
incurred $4.4 million of debt guarantee fees from August 30, 1996 through the
extinguishment of the $130.0 million of debt guaranteed by Weyerhaeuser on
November 19, 1997. The amortization of deferred financing fees and debt
guarantee fee expense during 1997 and 1996 were $4.2 million and $1.3 million,
respectively. There was no deferred financing fee amortization or debt
guarantee expense during the first eight months of 1996.
Interest Income. Interest income was $1.5 million during 1997. For the last
four months of 1996, there was $0.4 million in interest income. There was no
interest income during the first eight months of 1996, as the Predecessor
participated in Weyerhaeuser's centralized cash management system.
47
<PAGE>
Other (Income) Expense. Other (income) expense, net changed from
approximately zero in 1996 to $0.6 million in 1997. Other (income) expense in
1997 primarily represents a $0.6 million charge related to an unrealized loss
on an unhedged financial instrument as of December 31, 1997.
Loss on Extinguishment of Debt. The Company refinanced certain long-term
borrowings during 1997 resulting in extraordinary losses on extinguishment of
debt of $9.3 million due to the write-off of existing unamortized deferred
financing fees and other related fees.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The results of operations for 1996 are based on combining the periods
January 1, 1996 through August 29, 1996 (the period prior to the Weyerhaeuser
Acquisition) and August 30, 1996 through December 31, 1996 both as shown in
the historical financial statements appearing elsewhere in this Prospectus.
The principal effect of the Weyerhaeuser Acquisition in 1996 was an increase
in DD&A expense (due to a higher cost basis for the Company's timber,
timberlands and logging roads) and interest expense (due to borrowings to
finance the Weyerhaeuser Acquisition).
Revenues. Revenues were $29.6 million in 1996, a decrease of 7% from
revenues of $31.7 million in 1995. Revenues from the sale of logs were $27.7
million in 1996, as compared to $29.1 million in 1995 while by-products and
other revenues were $1.9 million in 1996, as compared to $2.6 million in 1995.
Log sales volumes remained relatively constant, decreasing from 63,800 MBF
in 1995 to 63,000 MBF in 1996. The majority of the revenue decrease was due to
a reduction in the average log sales price of $17 per MBF from $456 in 1995 to
$439 in 1996. Sales prices were negatively affected in 1996 by uncertainty
surrounding the possible sale of the Klamath Falls Timberlands, as some
customers obtained other sourcing commitments. The average sales price was
also reduced due to a change in the species mix of the logs sold, with a
higher percentage of lower valued White Fir and a lower percentage of higher
valued Douglas Fir logs.
The reduction in revenues from by-products and other was primarily
attributable to a 26% decrease in chip sales revenue. Due to low demand in the
pulp and paper industry, average chip prices decreased by 26% in 1996 compared
to 1995.
Operating Costs. Operating costs were $31.7 million in 1996, a 53% increase
over operating costs of $20.7 million in 1995. This increase was the result of
a $7.8 million increase in selling, general and administrative expense, a $2.8
million increase in DD&A expense and a $0.4 million increase in cost of
products sold. The increase in selling, general and administrative expenses
was primarily the result of $4.9 million in one time payments for advisory
services paid to affiliates of the Company in connection with the Weyerhaeuser
Acquisition and $2.8 million of management fees paid to an affiliate of the
Company for management services. The advisory fees were incurred in connection
with the Weyerhaeuser Acquisition and its initial financing. The management
fee generally relates to services rendered in connection with the initial
formation of USTK and Old Services. The increase in DD&A was primarily due to
the significant increase in the Company's depletion rate as a result of the
step-up in asset values of the Klamath Falls Timberlands upon their
acquisition from Weyerhaeuser. The increase in cost of goods sold was
primarily due to an increase in wood fiber processing costs.
Interest Expense. Interest expense was $7.3 million in 1996 and related to
$215.0 million of term debt and $90.0 million of revolving debt incurred in
connection with the Weyerhaeuser Acquisition in August 1996. There was no
interest expense and no debt outstanding during 1995, as the Predecessor
participated in Weyerhaeuser's centralized cash management system.
Amortization of Deferred Financing Fees and Debt Guarantee Fees. The Company
deferred $4.1 million of fees incurred in connection with the financing of the
Weyerhaeuser Acquisition. These costs are being amortized over the life of the
related debt. In addition, the Company is accreting $3.6 million of estimated
Guarantee Fees from August 30, 1996 through the estimated Holdings Debt
extinguishment date of November 15, 1997. The Guarantee Fees payable to
Weyerhaeuser relate to the Holdings Debt which was incurred in
48
<PAGE>
connection with the Weyerhaeuser Acquisition. The amortization of deferred
financing fees and debt guarantee fee expense during 1996 were $0.2 million
and $1.1 million, respectively. There was no deferred financing fee
amortization or debt guarantee fee expense during 1995.
Interest Income. Interest income was $0.4 million during 1996. There was no
interest income during 1995, as the Predecessor participated in Weyerhaeuser's
centralized cash management system.
Other (Income) Expense, Net. Other (income) expense, net changed from income
of $0.6 million in 1995 to near zero in 1996. Nonrecurring income from
easements and road use permits represents $0.4 million of the 1995 other
income, net.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues were $31.7 million in 1995, a decrease of 2% from
revenues of $32.3 million in 1994. Revenues from the sale of logs remained
constant at $29.1 million, while by-products and other revenues were $2.6
million in 1995 as compared to $3.2 million in 1994.
Log sales volumes for 1995 were 63,800 MBF, a decrease of 7% from log sales
volumes of 68,300 MBF in 1994. This decrease was largely attributable to a 34%
decrease in the volume of logs sold to unaffiliated customers from 34,900 MBF
in 1994 to 23,000 MBF in 1995, partially offset by a 22% increase in the
volume of logs sold to Weyerhaeuser facilities, from 33,400 MBF in 1994 to
40,700 MBF in 1995. The higher level of sales to unaffiliated customers in
1994 was mainly attributable to accelerated harvesting by the Predecessor of
certain tracts of timberland which were susceptible to fire and insect loss in
the then-prevailing drought conditions.
The average log sales price per MBF increased by $30 per MBF, or 7%, to $456
per MBF in 1995, as compared to $426 per MBF in 1994. This increase was
primarily attributable to an increase of 12% in the average price per MBF of
log sales to unaffiliated customers from $436 per MBF in 1994 to $490 per MBF
in 1995 and a 5% increase in the price per MBF of log sales to Weyerhaeuser
facilities from $415 per MBF in 1994 to $437 per MBF in 1995. The increase in
the average unaffiliated customer selling price per MBF was primarily due to
an increase in the mix of Douglas Fir from 29% of total unaffiliated customer
sales volume in 1994 to 54% in 1995. The average sales price per MBF for
Douglas Fir was $512 and $544 in 1994 and 1995, respectively, as compared to
an average of $405 and $427, respectively, for the combined sales of all other
species. The increase in the average sales prices per MBF was consistent with
an industry-wide increase in log prices during this period. The log sales
price per MBF for sales to Weyerhaeuser facilities was based on internal
transfer prices determined by Weyerhaeuser.
Operating Costs. Operating costs were $20.7 million in 1995, a decrease of
7% from operating costs of $22.3 million in 1994. This decrease was primarily
due to a $1.4 million decrease in cost of products sold. Cost of products sold
decreased because of a $1.0 million decrease in wood fiber processing costs
due to a 34% decline in chip volume processed and sold and a $0.6 million
decrease in logging costs resulting from a decrease in the harvest levels of
merchantable grade logs, partially offset by an increase in logging costs on a
per MBF basis.
Other Income and Expense, Net. Other income and expense, net, showed a
change from an expense of $0.1 million in 1994 to income of $0.6 million in
1995. Nonrecurring income from easements and road use permits represents $0.4
million of the 1995 income.
LIQUIDITY AND CAPITAL RESOURCES
Since inception of operations on August 30, 1996, the Company's primary
source of liquidity had been cash and cash equivalents from borrowings under
its revolving credit facility drawn on at the closing of the Weyerhaeuser
Acquisition. On July 14, 1997, this revolving credit facility and certain term
debt was refinanced. See the further discussion of this refinancing below. As
of December 31, 1997, the Company had a cash balance
49
<PAGE>
of $10.6 million, $1.8 million of working capital and $100.0 million of
internal borrowing capacity under the Bank Credit Facility.
For purposes of the following comparison of cash flows from operating,
investing and financing activities, the 1996 period cash flows 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. Each of such periods are shown in the historical financial
statements appearing elsewhere in this Prospectus.
Operating Activities. Cash flows provided by operating activities in 1997
were $26.3 million, as compared to cash flows provided by operating activities
of $2.5 million in 1996. The $23.8 million increase in cash flows provided by
operating activities was primarily due to an increase in the volume of log and
stumpage sales, proceeds from timber and property sales and $5.7 million of
advance deposits on stumpage sales contracts. In addition, 1996 operating cash
flows included $4.9 million of one-time payments to certain affiliates of the
Company in connection with the Weyerhaeuser Acquisition and $2.8 million in
one-time management fees paid to an affiliate of the Company. The increase in
operating cash flows was partially offset by a substantial increase in
interest and debt guarantee fees in 1997 as compared to 1996.
Investing Activities. Cash flows used in investing activities were $101.6
million in 1997, as compared to cash flows used in investing activities of
$291.9 million during 1996. During 1997, $110.9 million was used in the Ochoco
Acquisition and a $10.0 million receivable from an affiliate was repaid.
During 1996, $283.5 million was used in the Weyerhaeuser Acquisition and $10.0
million was paid to an affiliate. The results for 1996 also include $2.4
million in proceeds from logging equipment dispositions as a result of the
Company's discontinuance of its logging crews upon consummation of the
Weyerhaeuser Acquisition.
Financing Activities. Cash flows provided by financing activities were $69.3
million in 1997, as compared to cash flows provided by financing activities of
$306.0 million during 1996. During 1997, the Company refinanced $175.0 million
of long-term debt incurred in connection with the Weyerhaeuser Acquisition and
incurred an additional $110.0 million in long-term debt in connection with the
Ochoco Acquisition. The Company incurred $6.0 million of deferred financing
fees in connection with the refinancing of long-term debt and the incurrence
of financing for the Ochoco Acquisition. In addition, the Company distributed
$1.2 million to a member related to his 1997 estimated tax liability. The
Company received $163.2 million in net proceeds from the Initial Offering and
$218.3 million in proceeds, net of financing fees related to the issuance of
the Notes. Cash flows provided by financing activities during 1996 principally
represent borrowings under debt facilities and equity contributions from
members in connection with the Weyerhaeuser Acquisition. These 1996 cash flows
are partially offset by deferred financing fees incurred in connection with
obtaining financing for the Weyerhaeuser Acquisition and the Predecessor's
normal distributions of net operating and investment cash flows to
Weyerhaeuser.
On August 29, 1996, USTK entered into a $90.0 million revolving credit
facility and an $85.0 million term loan facility with several banks to finance
a portion of the Weyerhaeuser Acquisition, and Holdings incurred the $130.0
million in Holdings Debt pursuant to an agreement with several banks to
finance the remaining portion of the Weyerhaeuser Acquisition.
On July 14, 1997, the Company refinanced the debt incurred by USTK to
finance the Weyerhaeuser Acquisition pursuant to a loan agreement with a
commercial bank and on July 15, 1997, increased USTK's debt to finance the
Ochoco Acquisition. The refinancing resulted in an extraordinary loss on
extinguishment of debt of approximately $3.6 million in the third quarter of
1997 due to the write-off of existing unamortized deferred financing fees and
other related fees. As of December 31, 1997, the USTK Debt was $225.0 million,
representing 60.7 % of the Company's total recapitalization.
Capital expenditures for the year ended December 31, 1997 totaled
approximately $1.1 million. Capital expenditures incurred were mainly in the
nature of land management/silvicultural expenses and office equipment and
vehicle purchases. Capital expenditures were financed through cash flow
generated by operations. As the
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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 $1.8
million in 1998. Capital expenditures will consist primarily of capitalized
silvicultural expenses and miscellaneous equipment and computer hardware and
software expenses.
Distributions of Available Cash
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distribution, plus any Common Unit
Arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. Upon expiration of the Subordination Period, all
Subordinated Units will be converted on a one-on-one basis into Common Units
and will participate pro rata with all other Common Units in future
distributions of Available Cash. Under certain circumstances, up to 2,141,060
Subordinated Units may convert into Common Units prior to the expiration of
the Subordination Period. Common Units will not accrue arrearages with respect
to distribution for any quarter after the Subordination Period and
Subordinated Units will not accrue any arrearages with respect to
distributions for any quarter. See "Cash Distribution Policy."
Available Cash from Operating Surplus will generally be distributed 98% to
Unitholders and 2% to the General Partner. If distributions of Available Cash
from Operating Surplus exceed the Target Distribution Levels, the General
Partner will receive a percentage of such excess distributions that will
increase to 50% of the excess distributions above the highest Target
Distribution Level. See "Cash Distribution Policy--Incentive Distributions."
DESCRIPTION OF INDEBTEDNESS
Description of Notes
Concurrent with the closing of the Initial Offering, the Operating Company
issued $225.0 million aggregate principal amount of Notes in a public
offering registered under the Securities Act. The net proceeds of the sale of
the Notes were used, together with the proceeds of the sale of the Common
Units in the Initial Offering, borrowings under the Acquisition Facility and
cash on hand, to retire the Holdings Debt and the USTK Debt.
The following is a summary of the terms of the Notes, which were issued
pursuant to an Indenture (the "Indenture"), a form of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
This summary is qualified in its entirety by reference to the Indenture. The
Notes are unsecured general obligations of the Company and bear interest at 9
5/8% per annum from the date of issuance, payable semi-annually in arrears.
The Notes will mature 10 years from the date of issuance. The Notes do not
require any mandatory redemption or sinking fund payments prior to maturity
and are redeemable at the option of the Company, in whole or in part, at any
time on or after five years from the date of issuance at redemption prices
specified in the Indenture, plus accrued interest. Upon the occurrence of
certain events constituting a "change of control" (as defined in the
Indenture), the Company must offer to purchase the Notes, at a purchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase.
The Indenture contains various affirmative and restrictive covenants
applicable to the Operating Company and its subsidiaries, including
limitations on the ability of the Operating Company and its subsidiaries to,
among other things, (i) incur additional indebtedness (other than certain
permitted indebtedness) unless the Operating Company's Consolidated Fixed
Charge Coverage Ratio (as defined in the Indenture) is greater than 2.25 to
1.00, and (ii) make distributions to the Company, make investments (other than
permitted investments) in any person, create liens, engage in transactions
with affiliates, suffer to exist any restrictions on the ability of a
subsidiary to make distributions or repay indebtedness to the Company, engage
in sale and leaseback transactions, enter into a merger, consolidation or sale
of all or substantially all of its assets, sell assets or harvest timber in
excess of
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certain limitations or engage in a different line of business. Under the
Indenture, the Operating Company will be permitted to make cash distributions
to the Company so long as no default or event of default exists or would exist
upon making such distribution (a) if the Operating Company's Consolidated
Fixed Charge Coverage Ratio (as defined in the Indenture) is greater than 1.75
to 1.00, in an amount, in any quarter, equal to Available Cash (as defined in
the Indenture) for the immediately preceding fiscal quarter or (b) if the
Operating Company's Consolidated Fixed Charge Coverage Ratio is equal to or
less than 1.75 to 1.00, in an aggregate amount after the closing of this
offering not to exceed (i) $7.5 million less the aggregate of all restricted
payments made under this clause (b)(i) during the immediately preceding 16
fiscal quarters (or shorter period, if applicable, beginning on the issue date
of the Notes), plus (ii) the net proceeds of certain capital contributions
(including the sale of Units) received by the Company.
Description of Bank Credit Facility
Concurrent with the closing of the Initial Offering, the Operating Company
entered into the Bank Credit Facility with a group of 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 consists of a $75.0 million Acquisition Facility
and a $25.0 million Working Capital Facility. The Operating Company's
obligations under the Bank Credit Facility are unsecured general obligations,
rank pari passu with the Notes and are non-recourse to the General Partner.
The Bank Credit Facility bears interest at a rate based upon, at the Operating
Company's option, either the Offshore Rate or the Base Rate (each as defined
in the Bank Credit Facility) plus, in either case, the applicable margin. The
Working Capital Facility will expire after three years and all amounts
borrowed thereunder will be due and payable on such date. The Acquisition
Facility will revolve for three years, after which time, so long as no Default
or Event of Default (each as defined in the Bank Credit Facility) shall exist
and the representations contained in the Bank Credit Facility are true, the
Operating Company may elect to amortize any outstanding loans thereunder in 16
equal quarterly installments beginning one quarter after the conversion to a
term loan.
The Bank Credit Facility contains various affirmative and restrictive
covenants applicable to the Operating Company, including limitations on the
ability of the Operating Company to, among other things, (i) incur certain
additional indebtedness, (ii) incur any liens other than (a) liens on accounts
receivable and inventory to secure indebtedness under a refinancing facility
for the Working Capital Facility and (b) liens for purchase money financing of
acquired assets up to an aggregate $10.0 million, (iii) sell assets or harvest
timber in excess of certain limitations (which limitations are similar to
those under the Indenture) and (iv) make investments, engage in transactions
with affiliates, and enter into a merger, consolidation or sale of assets. The
Bank Credit Facility requires that the Operating Company maintain at all times
the following financial ratios: (i) Minimum Pro Forma EBITDDA (as defined in
the Bank Credit Facility) to Pro Forma Interest Expense (as defined in the
Bank Credit Facility) of 2.10 to 1.0 (calculated on a four quarter rolling
basis) from the closing date through June 30, 1998, increasing to 2.25 to 1.0
thereafter and through June 30, 1999 and further increasing to 2.35 to 1.0
thereafter, (ii) Maximum Funded Debt (as defined in the Bank Credit Facility)
to Pro Forma EBITDDA (as defined in the Bank Credit Facility) of not more than
5.25 to 1.0 (calculated on a four quarter rolling basis) from the closing date
through June 30, 1998, reducing to 4.75 to 1.0 thereafter and through June 30,
1999, and further reducing to 4.50 to 1.0 thereafter and (iii) Minimum Asset
Value (as defined in the Bank Credit Facility) to Funded Debt Ratio (as
defined in the Bank Credit Facility) of 175% measured on a quarterly basis
based on quarter end numbers. As of December 31, 1997, the Company was in
compliance with such financial covenants.
Under the Bank Credit Facility, so long as no Event of Default (as defined
in the Bank Credit Facility) exists or would result, the Operating Company
will be permitted to make quarterly cash distributions to the Company in an
amount not to exceed Available Cash (as defined in the Bank Credit Facility)
in the preceding quarterly period. Available Cash shall reflect a reserve
equal to 50% of the interest projected to be paid on the Notes in the next
succeeding quarter, as well as 100% of the aggregate amount of all accrued and
unpaid interest in respect of the Bank Credit Facility on the date of
determination. In addition, in the third, second and first quarters preceding
a quarter in which a scheduled principal payment is to be made on the Notes,
Available Cash
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will be required to reflect a reserve equal to 25%, 50% and 75%, respectively,
of the principal amount to be repaid on such date. The Bank Credit Facility
also requires Available Cash to reflect a reserve for certain net proceeds
from asset sales and excess harvests pending reinvestment.
CONTINGENCIES
Revenues, net income and cash flow from the Company's operations will be
dependent to a significant extent on its ability to harvest timber at adequate
levels. There can be no assurance that the Company will in the future achieve
harvest levels necessary to maintain or increase revenues, net income or cash
flows.
Weather conditions, timber growth cycles, access limitations and regulatory
requirements associated with the protection of wildlife and water resources or
any shortage of contract loggers may restrict harvesting of the Timberlands,
as may other factors, including damage by fire, insect infestation, disease,
prolonged drought and natural disasters. Although damage from such causes
usually is localized and affects only a limited percentage of the timber,
there can be no assurance that any damage to the Timberlands will, in fact, be
so limited. The risks to the Company described above are somewhat heightened
because of the concentration of the Timberlands in central Oregon. As is
typical in the forest products industry, the Company does not maintain
insurance coverage with respect to damage to its timberlands. Even if such
insurance were available, the cost would be prohibitive. The Company believes
that any losses that it has experienced from the circumstances described above
have not been significant enough to warrant maintaining such insurance.
EFFECTS OF INFLATION
Prices for the Company's stumpage and logs may be subject to sharp cyclical
fluctuations due to market or other economic conditions, including the level
of construction activity but generally do not directly follow inflationary
trends. Costs of forest operations and general and administrative expenses
generally tend to reflect inflationary trends.
OTHER
Pursuant to an agreement dated as of July 29, 1997 between John J. Stephens,
the former President and Chief Executive Officer and a former Director of the
General Partner and one of the Founding Directors, and USTK, Old Services,
Mr. Rudey and certain of his affiliates, Mr. Stephens' interest in Old
Services was redeemed for 95,238 Subordinated Units upon the consummation of
the Transactions and $1.0 million payable in January 1998. Pursuant to an
agreement dated as of July 29, 1997 between George R. Hornig, a Director of
the General Partner and one of the Founding Directors, and USTK, Old Services,
Mr. Rudey and certain of his affiliates, Mr. Hornig's interest in Old Services
was redeemed upon the closing of the Transactions for 48,160 Subordinated
Units.
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BUSINESS AND PROPERTIES
GENERAL
The Company's business consists of the growing of trees and the sale of logs
and standing timber. The Company owns approximately 633,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 1998 to
be approximately 2.1 BBF in Oregon east of the Cascade Range. Logs harvested
from the Timberlands are sold to unaffiliated domestic conversion facilities.
These logs are processed for sale as lumber, plywood and other wood products,
primarily for use in new residential home construction, home remodeling and
repair and general industrial applications. The Company also owns and operates
its own seed orchard and produces approximately five million conifer seedlings
annually from its nursery, approximately half of which are used for its own
internal reforestation programs, with the balance sold to other forest
products companies.
The Timberlands include substantial holdings of merchantable, good quality
timber. The Timberlands' merchantable timber consists of Ponderosa Pine
(approximately 44%) and Douglas fir (approximately 13%), 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 180,000 acres are
actively managed tree farms or Plantations. The Plantations were first
established by Weyerhaeuser in the early 1960s and acreage has been planted
each year since then. Currently, the Plantations contain age classes ranging
generally from two to 36 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.
On November 19, 1997, the Company acquired substantially all of the equity
interests in USTK and the business and assets of Old Services and completed
the Initial Offering. In August 1996, 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 for a cash
purchase price of $281.5 million. Most of the Klamath Falls Timberlands had
been owned by Weyerhaeuser for more than 50 years. The Company recently sold
approximately 13,000 acres from the Klamath Falls Timberlands. On July 15,
1997, USTK acquired the Ochoco Timberlands, containing an estimated
merchantable timber volume of approximately 280 MMBF and related assets, for a
cash purchase price of approximately $110.9 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.
During the period from January 1, 1994 through the acquisition of the
Klamath Falls Timberlands by USTK, approximately 58% of the logs harvested
from the Klamath Falls Timberlands had been delivered to a plywood mill owned
by Weyerhaeuser at Klamath Falls, Oregon. In recent years, substantially all
of the timber harvested from the Ochoco Timberlands had been delivered to
Ochoco's mills. The Company does not currently own any conversion facilities
nor does it intend in the future to own any such facilities on a long-term
basis; consequently, all of the Company's sales are made to unaffiliated third
parties. Concurrent with USTK's acquisition of the Klamath Falls Timberlands,
USTK arranged for Collins, a privately owned forest products company located
within the Klamath Falls Timberlands area, to purchase Weyerhaeuser's Klamath
Falls mill facilities. The Company has entered into the Collins Supply
Agreement, a 10-year log supply agreement with Collins providing for the
purchase by the plywood mill and delivery by the Company of a minimum of 34
MMBF of logs each year (approximately 25% of the Company's estimated annual
harvest in the next three years) at market prices. The Collins Supply
Agreement is extendable by Collins for two additional five-year terms. In
addition to its sales under the Collins Supply Agreement, the Company sells
logs to conversion facilities located in the area
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surrounding the Timberlands and operated by third parties. There are currently
more than 50 primary conversion facilities located within a 150 mile radius of
the Company's base of operations in Klamath Falls.
The Company believes that it is well positioned to compete successfully in
the timber business for the following reasons: (i) the Company has substantial
holdings of timber properties which include over 2.1 BBF of merchantable, good
quality timber, approximately 180,000 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 29
years of experience in the forest products industry, including experience in
identifying, evaluating, completing and integrating acquisitions of timber
properties; (iv) the Company's lean operating structure allows it to
efficiently manage its Timberlands, and should enable it to acquire additional
timberlands without commensurate increases in overhead; and (v) the Company's
GIS enables the Company to evaluate the optimal timing and patterns of the
harvest of its Timberlands and evaluate and integrate acquisitions of
additional timberlands.
BUSINESS STRATEGY
The Company's business strategy is to manage its Timberlands in a manner
that will enable it to pay the Minimum Quarterly Distribution on all the Units
and to increase the per Unit value of the Company's assets and cash flow.
Management intends to pursue this strategy in a number of ways:
.Continue to increase productivity of the timberlands
.Maximize investment in Ochoco Timberlands
.Pursue accretive acquisition opportunities
.Implement flexible marketing strategies
.Consummate land sales
TRANSACTION BACKGROUND
USTK and Old Services were formed in mid-1996 to own and operate the Klamath
Falls Timberlands. USTK acquired the Klamath Falls Timberlands from
Weyerhaeuser in August 1996 for consideration of $281.5 million plus
approximately $11.0 million of fees and expenses. To finance such acquisition,
USTK entered into a $90.0 million revolving credit facility and an $85.0
million term loan facility with a group of banks. In addition, Holdings
incurred the $130.0 million in Holdings Debt pursuant to an agreement with a
group of banks and the members of Holdings contributed $10.0 million of equity
capital to Holdings. Holdings then contributed $140.0 million of equity
capital to USTK. Included among the fees incurred in connection with the
Weyerhaeuser Acquisition was a one-time $4.9 million advisory fee paid to
affiliates of the Company. In addition, Weyerhaeuser guaranteed the Holdings
Debt and will receive the Guarantee Fees in connection therewith upon the
closing of the Transactions. The Company paid $2.8 million in management fees
to an affiliate of the Company for management services rendered in connection
with the initial formation of USTK and Old Services. During the period from
August 30, 1996 through December 31, 1996, the Company paid $10.0 million to
an affiliate of the Company; however, such amount, with related interest, was
repaid to the Company in February 1997.
On July 15, 1997, USTK acquired the Ochoco Timberlands from Ochoco for
consideration of approximately $110.9 million plus approximately $6.4 million
of bank fees and other expenses. Contemporaneously therewith, USTK entered
into a loan agreement with a commercial bank to refinance the USTK Debt
incurred in connection
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with the Weyerhaeuser Acquisition and to finance the Ochoco Acquisition. This
debt consists of a $200.0 million seven-year amortizing facility and an $85.0
million revolving credit facility. All of the Company's outstanding
indebtedness was paid in full at the closing of the Initial Offering. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Prior to the Acquisition and the Initial Offering, all of the Timberlands
were owned by USTK while all of the management staff, operating equipment and
systems and nursery operations resided at Old Services. Old Services conducted
all of the marketing activities relating to the Timberlands pursuant to a
cutting contract with USTK. Since the closing of the Transactions, all of the
Timberlands and related assets are now owned, and all of the marketing
activities are conducted, by the Operating Company while all management is
employed by the General Partner.
THE TIMBERLANDS
Timber Inventory
The Company currently owns and manages approximately 633,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated, as of January 1, 1998,
to be approximately 2.1 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 and Douglas fir, species which have
historically commanded premium prices over other softwood species, as well as
Lodgepole Pine, White Fir and other species. The Company believes that the
Timberlands are suitable and adequate for current operations.
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 180,000
acres of the 633,000 acre total consist of actively managed pine Plantations
with stands ranging in age from two to 36 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."
Merchantable Timber Inventory by Species
The Company maintains data regarding estimated merchantable timber inventory
by species within the Timberlands. All volumes are based on information
developed by Company personnel. As of January 1, 1998, the total timber
inventory amounted to 2,106.9 MMBF. The Company's combined timber inventory by
MMBF and percentage is Ponderosa Pine 918.4 (44%), Lodgepole Pine 395.2 (19%),
White Fir 408.8 (19%), Douglas fir 285.7 (13%) and other species 98.8 (5%).
Other species include Cedar, Sugar Pine, Western Larch and Grand Fir.
Size and Species Distribution of Merchantable Timber
The Company's Timberlands are well diversified, not only by species mix but
also by size distribution. Timber on the Timberlands generally reaches
merchantable size between 40 and 50 years in natural stands and between 25 and
35 years in the Plantations. The Company maintains data as to the estimated
volume distribution of merchantable timber on the Timberlands by species and
by diameter at breast-height ("DBH"). As of January 1, 1998, approximately 814
MMBF, or 39%, of the merchantable timber had a DBH of 16 or more inches.
Acreage Distribution by Age Class on Plantations
The Company also maintains data as to the acreage distribution of timber on
the Plantations by age class. As of January 1, 1998, the Plantations totaled
180,000 acres. Of the total acreage, 65,400 acres range from 1 to 15 years of
age, 111,700 acres range from 16 to 25 years of age, and 2,900 acres are 26
years of age or older.
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Timber Growth
Timber growth rates reflect timberland productivity and the rate of return
on a timber investment. Growth rate is an important factor in determining when
to harvest timber and the harvest potential of timberlands over the long term.
Merchantable timber is economically mature for harvesting when its current
growth rate falls below the desired rate of return on the investment in the
standing trees. The average growth rate from regeneration to economic maturity
measures the capacity of the land for timber production. The Company's older
and natural stands on the Timberlands that are expected to provide the near
term harvest have a current average growth rate of approximately 160 board
feet per acre per annum. The younger Plantations are growing at a rate that is
expected to average at least 315 board feet per acre per annum to economic
maturity in 50 to 60 years. This growth rate is based on calculated volumes at
the time of maturity. The Company has achieved higher growth rates on the
Plantations by planting seedlings which are able to begin growing immediately
(as compared to the slower natural regeneration process), by eliminating
competing non-timber growth from the Timberlands and by applying modern
forestry practices to assist the growth of the timber. Management can take
actions that help to enhance growth rate in the natural stands as well. For
example, selective harvesting in the slower growing natural stands opens up
the timber stand allowing for more vigorous growth of the remaining trees.
When it is no longer possible to maintain acceptable growth rates in these
stands they will be harvested entirely and converted to faster growing
plantations.
Harvest Plans
The Company strives to manage all of its Timberlands, including the
Plantations, in an economically prudent and environmentally sensitive manner
in order to maximize their value over time. Integral to this management
process are the Company's long-term harvest plans. The Company prepares its
harvest plans annually based on analyses of the size and age class
distribution of the Timberlands and the economic maturity of each harvest
tract. A tract is considered ready to be harvested when the expected value of
future tree growth on such tract falls below a target rate of return. The
factors the Company considers in determining its long-term harvest plans
include, among other things, current and expected market conditions,
competition, customer requirements, the age, size and species distribution of
the Company's timber, assumptions about timber growth rates which are
improving over time as a result of technological, biological and genetic
advances that improve forest management practices, 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. The Company harvested 139 MMBF in 1997
and plans to harvest approximately 146 MMBF in 1998. Under the current harvest
plans, the Company intends to harvest aggressively over approximately the next
eleven years after which time the harvest level is expected to decline to a
level which the Company considers to be more sustainable over the long term.
The Company believes these harvest plans can be achieved; however, since
harvest plans are based on certain assumptions, many of which are beyond the
Company's control, there can be no assurance that the Company will be able to
harvest the volumes projected in its harvest plans. While the Company's debt
obligations place certain limitations on the harvest plans, the Company
believes that it has sufficient flexibility to permit modifications in
response to fluctuations in the market for logs and lumber and the other
factors described above. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." If the Company's current
harvest plans are pursued unaltered for the next 12 years, if it consummates
the land sales contemplated by its strategic plan and if its other strategic
assumptions prove to be accurate, the Company expects that its timber
inventory would decline by the end of 2009 and that its more valuable species
of timber would decline as a percentage of its total timber inventory by such
date. The Company expects that its inventory would remain relatively stable
thereafter. Long term harvest plans, growth rates and forest inventory levels
will be reviewed during 1998 and 1999. Such harvest plans, land sales and
other strategic assumptions do not take into account any acquisition that the
Company may consummate during such period. See "--Business Strategy," "--
Timber Inventory," and "--Resource Management--Land Sales."
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Access
The Timberlands are accessible by a system of approximately 5,000 miles of
Company-owned and established roadways or low-maintenance roads. The Company
uses third-party road crews to conduct construction and maintenance on its
timberlands. The Company regularly enters into reciprocal road-use agreements
with the USFS and the BLM and cooperates with such agencies in numerous cost-
sharing arrangements regarding jointly used roads. See "--Federal and State
Regulation."
Sales and Markets
Once a block of timberland is ready to be harvested, the Company solicits
offers from its customers for delivery of logs. After a price and volume have
been agreed to among the parties, the Company either (i) contracts a third
party to harvest the acreage and deliver to a roadside site on the
Timberlands, where a contracted trucking company picks up the logs and
delivers them to the customer, or (ii) sells the timber on a stumpage basis
where the customer arranges to harvest and deliver the logs. When the Company
sells timber on a stumpage basis, depending on the length of the contract, it
may either receive payment in full upon the execution of the contract, or may
receive a portion of the payment upon execution of the contract and the
balance of payment when the timber is cut. In a stumpage sale, the Company
generally 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
78% of the Company's revenues in 1997. Timber deeds and timber and timberland
sales accounted for approximately 19.8% of the Company's revenues for 1997.
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 1.9% of the Company's revenues in 1997. The
market price of chips has historically been volatile, rising and falling with
the price of pulp. Sales of seedlings accounted for the remaining 0.3% of the
Company's revenues in 1997.
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 and chips from such timberlands to
22 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. The Collins Supply Agreement is extendable by
Collins for two additional five-year terms. In 1997, timber sales to Collins,
Crown Pacific Partners L.P. and Boise Cascade Corporation accounted for
approximately 23%, 21%, and 15%, respectively, of the Company's revenue.
Collins made its purchases pursuant to the Collins Supply Agreement, while the
other purchases were made pursuant to short-term arrangements. Although the
loss of one or more of such customers or other significant customers could
have a material adverse effect on the Company's results of operations, the
Company believes that the capacity for processing wood fiber in the Company's
markets currently exceeds the supply and that, therefore, such customers could
readily be replaced. Prior to the Company's acquisition of the Ochoco
Timberlands, virtually all of the logs sold from such timberlands were sold to
Ochoco's own facilities. Since the Ochoco Acquisition in July 1997, all of the
sales from the Ochoco
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Timberlands have been and will be made to unaffiliated customers. See "Risk
Factors--Risks Inherent in the Company's Business--Dependence on Certain Key
Customers." There are currently more than 50 primary conversion facilities
located within a 150-mile radius of the Company's base of operations in
Klamath Falls, Oregon.
Seasonality
Log and stumpage sales volumes are generally at their lowest levels in the
first and second quarter of each year. Heavy snowfalls in higher elevations
prevent access to many areas of the Company's Timberlands in the first
quarter. This limited access, along with spring break-up conditions in March
or April (when warming weather thaws and softens roadbeds) restricts logging
operations to lower elevations and areas with rockier soil types. The result
of these constraints is that sales volumes are typically at their lowest in
the first quarter, improving in the second quarter and at their highest during
the third and fourth quarter. Most customers in the region react to this
seasonality by carrying high log inventories at the end of the calendar year
at a level that provides sufficient inventory to carry them to the second
quarter of the following year.
Contributing to this seasonality of log volumes is the market demand for
lumber and related products which is typically lower in the first or winter
quarter when activity in the construction industry is slow, but increasing
during the spring, summer and fall quarters. Log and stumpage prices generally
increase in the spring with this build up of construction activity matching
the timing of re-entry to all forested areas and increased logging activity.
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.
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Harvesting on the Timberlands is conducted using both selective and
regeneration harvesting. In selective harvesting, a partial harvest provides
merchantable timber and opens up the stand for supplemental growth on the
remaining stand. Harvest entries are separated by approximately 10 to 15 years
and each entry is prescribed for volume to be removed, spacing to be provided,
and diameter limits to be harvested. In regeneration harvesting, which is used
to harvest approximately 30% of the Company's timber, all merchantable volume
is removed in a single harvest. After an area has been regeneration harvested,
the Company employs a reforestation contractor to plant two-year-old seedlings
at a density of approximately 350 trees per acre. The Company also attempts to
protect and maintain the ecosystem within the Timberlands while providing for
a reasonable harvest. For example, the Company typically leaves a mix of green
and dead trees at the harvest site, including some large trees, snags and
downed logs to enrich and protect the soil for successive generations of trees
and to provide habitats for a variety of wildlife species.
Particular forestry practices vary by geographic region and depend upon
factors such as soil productivity, weather, terrain, tree size, age and
stocking. The rain, site and soil conditions on the east side of the Cascade
Range, for example, permit management to harvest on an optimal rotation, or
harvest cycle, of 50 to 60 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 due to strong markets for wood chips.
The Company's policy is to ensure that every acre harvested is reforested in
order to enhance the long-term value of its timberlands. Based on the
geographic and climatic conditions of a given harvest site, harvested areas
may be regenerated naturally, by leaving mature trees to reseed the area, or
replanted with seedlings. Natural regeneration methods are widely used on
approximately 70% of the Company's harvested land. Approximately 28% of the
Timberlands acreage currently consist of Plantations. The Company expects to
convert approximately 3,000 to 6,000 acres of natural stands to Plantations
annually. During 1997, the Company planted approximately 2.7 million
seedlings. The Company uses genetically improved seedlings (representing
approximately 90% to 95% of seedlings planted) to grow trees with desirable
traits such as superior growth characteristics, good form and disease
resistance, resulting in greater wood volume over a rotation than that
generated by naturally regenerated seedlings. The seedlings are grown in the
Company's nursery, which uses seeds from the Company's seed orchard, which was
established in 1973. Such seeds are generated by trees that are created by
grafting selected superior genetic stock to mature root stock.
Geographic Information System
The GIS is a computer software program that the Company acquired from
Weyerhaeuser as part of the acquisition of the Klamath Falls Timberlands. The
GIS data, which has been compiled over a period of four years, includes
detailed topographical field maps for every stand within the Timberlands
(including data for the Ochoco Timberlands which was recently added by the
Company), setting forth the characteristics, including age, species, size and
other characteristics for the timber growing on each such stand. Using the
data in the GIS, the Company can use a computer model to "grow" the timber
over time, enabling it to generate long-term harvest plans and to update its
inventory annually. To maintain the integrity of the data in the GIS, the
Company performs a detailed ground survey of the remaining timber inventory on
a tract after each harvest and updates the data in the GIS for that tract.
With the aid of the GIS, the Company is able to actively manage the
Timberlands, track its inventory and develop site-specific harvest plans on
multiple scales, adding additional layers of detail, such as the location of
roadways or wildlife nesting areas, as required. The GIS also permits the
Company to analyze the impact that new legislation may have on its timberlands
by inputting the proposed constraints imposed by such legislation in light of
the particular field characteristics of its Timberlands. For example, the
Company has recently analyzed the impact on its Timberlands of the potential
listing of the bull trout as an endangered species under the Endangered
Species Act, by using the GIS to review the particular characteristics of the
streams and rivers located on its properties for suitability for bull trout
habitat, and by
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overlaying the proposed regulatory restraints on harvest at the sites it
determined might be suitable habitat for bull trout. The GIS will also be used
to evaluate potential acquisition opportunities.
Although GIS systems are generally available for purchase, many of the
Company's competitors do not utilize GIS systems, mainly due to the relatively
high initial cost and to the length of time necessary to collect sufficient
data to optimize the use of the GIS. Thus, the Company believes the GIS gives
it an advantage over its competitors.
Land Sales
In October 1997, the Company sold approximately 13,000 acres from the
Klamath Falls Timberlands. The Company expects to sell additional timberland
parcels in the future. The Company has identified a tract of approximately
23,000 acres that it intends to sell within the next five years and
anticipates that a majority of this tract will be offered for sale in 1998.
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,
northern goshawk and various anadromous fish species. Currently, the Company
has identified several spotted owl, bald eagle and northern goshawk nesting
areas affecting the Timberlands and the presence of bull trout in certain of
its streams, which may affect harvesting on approximately 26,000 acres.
In 1990, the United States Fish and Wildlife Service (the "USFWS") listed
the northern spotted owl as a threatened species throughout its range in
Washington, Oregon and California. At the time of the listing, the USFWS
issued suggested guidelines ("Guidelines") to be followed by landowners in
order to comply with the Endangered Species Act's prohibition against harming
or harassing owls. The Guidelines recommend several measures, including the
restriction of harvest activities in areas within a certain proximity of known
owl activity centers. The USFWS also proposed a rule for the conservation of
the owl on non-federal land. Such proposed rule was subsequently withdrawn.
The Oregon Forest Practices Act and related regulations also protect
endangered species and has specific provisions governing habitat protection
for the spotted owl, the bald eagle and other threatened species.
Weyerhaeuser regularly surveyed for bald eagles on its properties and
submitted the results of its surveys and its annual site management plan for
each known eagle site to the Oregon Department of Fish and Wildlife. The
latest survey showed that there were approximately 80 eagle sites on the
Klamath Falls Timberlands. The Company observes the harvesting restrictions
around the eagle sites. In addition, commencing in 1990, Weyerhaeuser utilized
independent wildlife consultants to survey for the presence of northern
spotted owls on or affecting the Klamath Falls Timberlands. The surveys have
been conducted every year in order to (i) meet the regulatory requirements for
timber harvest and other management activities, (ii) monitor existing sites
and determine the current status of such sites, (iii) determine if areas
identified as containing suitable habitat are supporting owls and (iv)
investigate potential spotted owl sightings. The most recent of such surveys
was completed in July 1997, and identified approximately 27 northern spotted
owl sites affecting the Klamath Falls Timberlands, three of which are located
on the Klamath Falls Timberlands. The Company has continued these practices
for the Klamath Falls 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
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interpretation, would materially adversely affect the Company's ability to
harvest the Timberlands in accordance with current harvest plans. There can be
no assurance, however, that species within the Timberlands may not
subsequently receive protected status under the Endangered Species Act or that
currently protected species may not be discovered in significant numbers
within the Timberlands. Additionally, there can be no assurance that future
legislative, administrative or judicial activities related to protected
species will not adversely affect the Company or its ability to continue its
activities and operations as currently conducted.
Timberlands
The operation of the Timberlands is subject to specialized statutes and
regulations in the State of Oregon, which has enacted laws which regulate
forestry operations, including the Forest Practices Act, which addresses many
growing, harvesting and processing activities on forest lands. Among other
requirements, these laws restrict the size and spacing of harvest units, and
impose certain reforestation obligations on the owners of forest lands. The
State of Oregon requires a company to provide prior notification before
beginning harvesting activity. 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.
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Access to Timberlands May be Limited by Federal Regulation
A substantial portion of the Timberlands consists of sections of land that
are intermingled with or adjacent to sections of federal land managed by the
USFS and the BLM. Removal of trees from those portions of the Timberlands
requires transportation of the logs by truck across logging and general
purpose roads. In many cases, access is only, or most economically, achieved
through a road or roads built across adjacent federal land pursuant to a
reciprocal right-of-way ("RROW"). Removal of federal timber often requires
similar access across the Timberlands. Recent litigation (not involving the
Company) before the United States Court of Appeals for the Ninth Circuit held
that the BLM was not required to consult with the USFWS, which administers the
Endangered Species Act, prior to approving a private landowner's proposal to
build an access road across federal land pursuant to an existing RROW entered
into prior to the enactment of the Endangered Species Act wherein the BLM did
not have discretion to disapprove a road segment due to endangered species
concerns. A reversal on appeal or a rehearing of that case, or future federal
law or regulation requiring the BLM to consult with the USFWS in connection
with an RROW, could materially adversely affect the Company's ability to
harvest the 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, 1998, the Company had 32 salaried employees, including
employees of the General Partner that manage the business 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 manages and operates the activities of the Company.
Unitholders do not directly or indirectly participate in the management or
operation of the Company or have actual or apparent authority to enter into
contracts on behalf of, or to otherwise bind, the Company. Notwithstanding any
limitation on its obligations or duties, the General Partner will be liable,
as the general partner of the Company, for all debts of the Company (to the
extent not paid by the Company), except to the extent that indebtedness or
other obligations incurred by the Company are made specifically non-recourse
to the General Partner. Whenever possible, the General Partner intends to make
any such indebtedness or other obligations non-recourse to the General
Partner.
In January 1998, the General Partner appointed Spencer R. Stuart and Thomas
C. Theobald, two members of the Board of Directors who are neither officers,
employees or security holders of the General Partner nor directors, officers
or employees of any affiliate of the General Partner to serve on the Conflicts
Committee. The Conflicts Committee has 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 also has
an audit committee (the "Audit Committee") composed of the two independent
directors as well as Robert F. Wright, which reviews the external financial
reporting of the Company, recommends engagement of the Company's independent
public accountants and reviews the Company's procedures for internal auditing
and the adequacy of the Company's internal accounting controls. The Board of
Directors also has a compensation committee (the "Compensation Committee"),
which consists of five directors, including the two independent directors,
which determines the compensation of the officers of the General Partner and
administers its employee benefit plans. In addition, the Board of Directors
has a Long-Term Incentive Plan Committee (the "LTIP Committee"), which
initially consists of three directors, including the two independent directors
and Robert F. Wright, which acts with respect to the Company's Long-Term
Incentive Plan.
As is commonly the case with publicly traded limited partnerships, the
Company does not directly employ any of the persons responsible for managing
or operating the Company. In general, the management of USTK manages and
operates the Company's business as officers and employees of the General
Partner and its affiliates. The Unitholders do not directly or indirectly
participate in the management or operation of the Company.
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE GENERAL PARTNER
The following table sets forth certain information with respect to the
members of the Board of Directors of the General Partner, its executive
officers and certain key employees. Executive officers and directors are
elected for one-year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH GENERAL PARTNER
- ---- --- -----------------------------
<S> <C> <C>
John M. Rudey................. 54 Chairman and Director(1)
Allen E. Symington............ 58 President and Chief Financial Officer and
Director(2)
Robert E.L. Michie, Jr........ 50 Vice President - Operations
John C. McDowell.............. 48 Vice President - Finance and Controller
Aubrey L. Cole................ 74 Director(3)
George R. Hornig.............. 43 Director(4)
Spencer R. Stuart............. 75 Director(5)
Thomas C. Theobald............ 60 Director(6)
Robert F. Wright.............. 72 Director(7)
</TABLE>
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<TABLE>
<CAPTION>
NAME AGE POSITION WITH GENERAL PARTNER
- ---- --- -----------------------------
<S> <C> <C>
Walter L. Barnes................... 55 Harvesting Manager
Robert A. Broadhead................ 46 Marketing Manager
Martin Lugus....................... 57 General Manager
Kurt A. Muller..................... 39 Planning Manager
Christopher J. Sokol............... 48 Forestry Manager
</TABLE>
- --------
(1) Member of the Executive (Chairman), Nominating (Chairman), Finance and
Compensation (Chairman) Committees.
(2) Member of the Executive and Finance Committees.
(3) Member of the Executive and Nominating Committees.
(4) Member of the Executive and Finance Committees.
(5) Member of the Audit, Conflicts (Chairman), Compensation and LTIP
Committees.
(6) Member of the Audit, Conflicts, Compensation, Finance (Chairman) and LTIP
Committees.
(7) Member of the Nominating, Finance, Compensation, Audit (Chairman) and LTIP
(Chairman) Committees.
John M. Rudey serves 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.
Allen E. Symington serves as President and Chief Financial Officer and a
Director of the General Partner. From 1996-98, Mr. Symington was Vice
President, Finance of Simpson Timber Investment Company ("Simpson") (a private
timberlands owner and forest products manufacturer) and from 1995-1996 he
served as Vice President--Investments and Treasurer. Mr. Symington joined
Simpson in 1962 and served in various capacities. Mr. Symington is currently
Vice Chairman of the Washington State Employees Retirement Board and a
director of Enterprises International (a company which produces manufacturing
equipment for the pulp and paper industry). Mr. Symington holds a B.S. in
Forest Products with a minor in Business and Finance from the University of
Washington.
Robert E.L. Michie, Jr. serves as Vice President - Operations of the General
Partner. From 1989-98, Mr. Michie was the Timberlands Manager of Simpson
Timber Company, managing its timberland properties in Oregon and Washington.
Prior to joining Simpson, Mr. Michie served in various capacities with Crown
Zellerbach Corporation and its successor, Cavenham Forest Industries, Inc. Mr.
Michie holds a B.S. in Industrial Engineering from Texas Tech University and
an M.B.A. in Management from the University of Alaska.
John C. McDowell serves as Vice President - Finance and Controller of the
General Partner. From 1989-97, Mr. McDowell served as Vice President -
Controller for Simpson, and from 1986-88 he served as Assistant Treasurer for
Simpson. From 1982-85, Mr. McDowell was Vice President - Controller for Simlog
Leasing Company. From 1980-81, Mr. McDowell served as Controller for Farmer
Construction Company; and from 1974-79, Mr. McDowell was an Audit Manager for
Ernst & Young. Mr. McDowell holds a B.A. in Business Administration from the
University of Washington and is a Certified Public Accountant.
Aubrey L. Cole serves 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 serves 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
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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, Meagher & 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.
Spencer R. Stuart serves as a Director of the General Partner. Mr. Stuart
currently serves as honorary Chairman of Spencer Stuart &
Associates/Management Consultants - Executive Searches, an international
executive search and management consulting firm, which he founded in 1956, and
from which he retired as Chairman and Chief Executive Officer in 1974. From
1990-92, Mr. Stuart was Chairman of Dean Witter Council of Management
Advisors, a division of Dean Witter Investment Banking. Mr. Stuart is a
director of Enhance Financial Services Group, Inc., Enhance Reinsurance
Company and Asset Guaranty Inc. Mr. Stuart holds a B.S. from Haverford
College.
Thomas C. Theobald serves as a Director of the General Partner. Since 1994,
Mr. Theobald has been a Managing Director of William Blair Capital Partners,
L.L.C. From 1987-94, Mr. Theobald served as Chairman and Chief Executive
Officer of Continental Bank Corporation. From 1960-87, Mr. Theobald was Vice
Chairman of Citicorp and Citibank N.A. Mr. Theobald holds a B.A. from Holy
Cross College and an M.B.A. from Harvard Graduate School of Business. Mr.
Theobald is also a director of the following companies: Xerox Corporation,
Mutual Life Insurance Company of New York, Anixter International, LaSalle U.S.
Realty Income and Growth Fund, Stein Roe Funds and LaSalle Partners.
Robert F. Wright serves 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), Deotexas Inc. (a
development stage company) and Williams Real Estate Co., Inc. (a real estate
company).
Walter L. Barnes serves as Harvesting Manager of the General Partner,
responsible for all solid wood logging and fiber operations. From 1993-1996,
prior to joining the Company, Mr. Barnes acted as the Operations Harvest
Manager for Weyerhaeuser. 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 serves as Marketing Manager of the General Partner,
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 serves as General Manager of the General Partner, 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 serves as Planning Manager of the General Partner,
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 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.
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Christopher J. Sokol serves as Forestry Manager of the General Partner,
responsible for forestry operations, environmental relationships, harvest
prescriptions and nursery/orchard operations. Prior to joining the Company in
1996, 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 does 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 are reimbursed
for all expenses incurred on behalf of the Company, including the costs of
employee, officer and director 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 has entered into employment agreements with Messrs.
Rudey, Symington, Michie and McDowell (the "Executives"). The summary of the
Employment Agreements which follows does not purport to be complete and is
qualified in its entirety by reference to the forms of Employment Agreement,
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. Each agreement has a term of approximately five years
and includes 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,
in the case of Messrs. Rudey and Symington, his resignation or removal from
the Board, and, unless the Executive is terminated without "Cause," or the
Executive terminates his employment for "Good Reason" or due to disability,
the noncompete provisions will continue for a period of 12 months after the
termination of such employment.
The agreements provide for an annual base salary of $300,000, $260,000,
$175,000 and $145,000 for each of Messrs. Rudey, Symington, Michie and
McDowell, 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. Each of
Messrs. Symington, Michie and McDowell has been guaranteed a minimum bonus
equal to 50% of his base salary for each of 1998 and 1999. Each of the
Executives also participates in the Long-Term Incentive Plan and Management
Incentive Plan of the General Partner, as defined and described below. The
Executives will also be entitled to participate in such other benefit plans
and programs as the General Partner may provide for its employees in general.
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
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salary for the remainder of the employment term under the Employment Agreement
or 12 months, whichever is less, 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 and Symington, failure of the General Partner's members to elect
or re-elect the Executive to the Board of Directors (if applicable), (ii)
failure of the General Partner to vest in the Executive the position, duties
and responsibilities contemplated by his Employment Agreement, (iii) failure
of the General Partner to pay any portion of the individual's compensation,
(iv) any material breach by the General Partner of any material provision of
the Employment Agreement and (v) a material reduction in the individual's
duties, responsibilities or status upon a "change of control" as defined in
the Employment Agreement. "Cause" is defined generally as: (i) any felony
conviction, (ii) any material breach by the Executive of a material written
agreement between the Executive and the Company, (iii) any breach caused by
the Executive of the Partnership Agreement, (iv) any willful misconduct by the
Executive materially injurious to the Company, (v) any willful failure by the
Executive to comply with any material policies, procedures or directives of
the Board of Directors of the General Partner or (vi) any fraud,
misappropriation of funds, embezzlement or other similar acts of misconduct
with respect to the Company.
Long-Term Incentive Plan
The General Partner has adopted the U.S. Timberlands Company, L.P. Amended
and Restated 1997 Long-Term Incentive Plan (the "Long-Term Incentive Plan")
for key employees and directors of the General Partner and its affiliates. 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
consists of two components, a unit option plan (the "Unit Option Plan") and a
restricted unit plan (the "Restricted Unit Plan"). The Long-Term Incentive
Plan currently permits the grant of Restricted Units and Unit Options covering
an aggregate of 857,748 Common Units.
Unit Option Plan. The Unit Option Plan currently permits the grant of
options ("Unit Options") covering 857,748 Common Units. From these, 721,867
Unit Options have been granted to key employees and directors, subject to the
vesting conditions described below and subject to other customary terms and
conditions, as follows: (i) Unit Options covering 107,218 Common Units have
been granted to each of Messrs. Rudey, Symington and Hornig, (ii) Unit Options
covering 64,332 Common Units have been granted to Mr. Michie, (iii) Unit
Options covering 50,000 Common Units have been granted to each of Mr. Stuart
and Mr. Theobald and (iv) Unit Options covering 34,310 Common Units have been
granted to Mr. McDowell. Unit Options covering 201,571 Common Units have been
allocated among five other key employees of the General Partner. A total of
twelve individuals are currently eligible to receive awards under the Unit
Option Plan. Unit Options covering the remaining 135,881 Common Units under
the Unit Option Plan have been 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 LTIP Committee shall determine.
Unit Options granted at the closing of the Initial Offering have an exercise
price equal to $21.00 while Unit Options granted at a subsequent date have an
exercise price equal to the closing sale price of the Common Units on Nasdaq
on the date of grant. Unit Options granted during the Subordination Period
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).
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Upon exercise of a Unit Option, the General Partner will acquire Common
Units in the open market at a price equal to the then-prevailing price on the
principal national securities exchange upon which the Common Units are then
traded, or directly from the Company or any other person, or use Common Units
already owned by the General Partner, or any combination of the foregoing. The
General Partner will be entitled to reimbursement by the Company for the
difference between the cost incurred by the General Partner in acquiring such
Common Units and the proceeds received by the General Partner from an optionee
at the time of exercise. Thus, the cost of the Unit Options will be borne by
the Company. If the Company issues new Common Units upon exercise of the Unit
Options, the total number of Units outstanding will increase and the General
Partner will remit the proceeds received from the optionee to the Company.
The Unit Option Plan has been designed to furnish additional compensation to
key executives and key directors and to increase their proprietary interest in
the future performance of the Company measured in terms of growth in the
market value of Common Units.
Restricted Unit Plan. A Restricted Unit is a "phantom" unit that entitles
the grantee to receive a Common Unit upon the vesting of the phantom unit. No
grants have been made under the Restricted Unit Plan. The LTIP Committee may,
in the future, determine to make grants under such plan to key employees and
directors containing such terms as the Committee shall determine. Restricted
Units granted during the Subordination Period will vest automatically upon,
and in the same proportions as, the conversion of the Subordinated Units to
Common Units. Common Units to be delivered upon the "vesting" of rights may be
Common Units acquired by the General Partner in the open market, Common Units
already owned by the General Partner, Common Units acquired by the General
Partner directly from the Company or any other person, or any combination of
the foregoing. The General Partner will be entitled to reimbursement by the
Company for the cost incurred in acquiring such Common Units. If the Company
issues new Common Units, the total number of Units outstanding will increase
and the Company will receive no remuneration.
The issuance of the Common Units pursuant to the Restricted Unit Plan is
intended to serve as a means of incentive compensation for performance and not
primarily as an opportunity to participate in the equity appreciation in
respect of the Common Units. Therefore, no consideration will be payable by
the plan participants upon vesting and issuance of the Common Units.
The General Partner's Board of Directors in its discretion may terminate the
Long-Term Incentive Plan at any time with respect to any Common Units or Unit
Options for which a grant has not theretofore been made. The General Partner's
Board of Directors will also have the right to alter or amend the Long-Term
Incentive Plan or any part thereof from time to time; provided, however, that
no change in any outstanding grant may be made that would impair the rights of
the participant without the consent of such participant.
Management Incentive Plan
The General Partner intends to adopt the U.S. Timberlands Company, L.P.
Management Incentive Plan (the "Management Incentive Plan"). The Management
Incentive Plan is designed to enhance the financial performance of the General
Partner's key operating managers by rewarding them with cash awards for
achieving annual financial performance objectives. The Management Incentive
Plan will be administered by the Compensation Committee. Individual
participants and payments, if any, for each calendar year will be determined
by and in the discretion of the Compensation Committee. In no event will
incentive payments be made with respect to any year unless (i) distributions
of Available Cash from Operating Surplus on the Common Units and Subordinated
Units with respect to such year equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the outstanding Common Units and Subordinated
Units during such year, (ii) the Adjusted Operating Surplus generated during
such year has equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and Subordinated Units that were
outstanding during such year on a fully diluted basis and the related
distribution on the General Partner's 2% interest, and (iii) there are no
outstanding Common Unit Arrearages. Any incentive payments will be at the
discretion of the Compensation Committee, and the General Partner will be able
to amend or change the Management Incentive Plan at any time.
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COMPENSATION OF DIRECTORS
No additional remuneration will be paid to employees who also serve as
directors. Each independent director receives $50,000 annually, for which they
each agree to participate in four regular meetings of the Board of Directors
and four Audit/Conflicts Committee meetings. Each other non-employee director
will receive $50,000 annually (to be paid in cash or Subordinated Units, as
determined by each director), for which they each agree to participate in four
regular meetings of the Board of Directors. Each non-employee director will
receive $1,250 for each additional meeting in which he participates. In
addition, each non-employee director will be reimbursed for his out-of-pocket
expenses in connection with attending meetings of the Board of Directors or
committees thereof. Each director will be fully indemnified by the Company for
his actions associated with being a director to the extent permitted under
Delaware law.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of the date of this Prospectus the
beneficial ownership of Units 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.
Following the sale of Securities covered by this Prospectus, neither Rudey
Timber Company, L.L.C., U.S. Timberlands Management Company, L.L.C. or
Holdings will own any Subordinated Units. See "Selling Unitholders."
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
COMMON COMMON SUBORDINATED SUBORDINATED PERCENTAGE OF
UNITS UNITS UNITS UNITS TOTAL UNITS
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED OWNED
- ------------------------ ------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Rudey Timber Company,
L.L.C.(1).............. - -% 2,894,157 67.6% 22.5%
U.S. Timberlands
Management Company,
L.L.C.(2).............. - - 1,244,565 29.1 9.7
U.S. Timberlands
Holdings, L.L.C.(3).... - - 2,894,157 67.6 22.5
John M. Rudey(4)........ 2,000 * 4,138,722 96.7 32.2
Allen E. Symington(5)... 300 * - - -
Robert E.L. Michie(5)... - - - - -
John C. McDowell(5)..... - - - - -
George R. Hornig(6)..... - - 48,160 1.1 *
Robert F. Wright(7)..... - - - - -
Aubrey L. Cole(8)....... - - - - -
Spencer R. Stuart(9).... - - - - -
Thomas C. Theobald(10).. 5,000 * - - -
All directors and
executive officers as a
group (9 persons)(11).. 7,300 *% 4,146,882 97.8% 32.6%
</TABLE>
- --------
* Less than 1% of class.
(1) Current address is 625 Madison Avenue, Suite 10-B, New York, New York
10022. Includes all 2,894,157 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.
(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 1,244,565 Subordinated Units owned by Old Services and
2,894,157 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 1301 Fifth Avenue, Suite 3725, Seattle, Washington
98101.
(6) Current address is 1220 Park Avenue, New York, New York 10128.
(7) Current address is 57 West 57th Street, Suite 704, New York, New York
10019.
(8) Current address is 16825 Northchase Drive, Suite 800, Houston, Texas
77060.
(9) Current address is 1725 Buttonbush Circle, Palm City, Florida 34990.
(10) Current address is 222 West Adams Street, Suite 3300, Chicago, Illinois
60606.
(11) Includes interests directly and indirectly owned by such persons. With
respect to beneficial ownership which may be attributable to Mr. Rudey,
see footnote (4).
All of the outstanding member interests in the General Partner are owned by
management, directors and related persons and entities. The members of the
General Partner are parties to 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. See "Certain Relationships and Related
Transactions--Repurchase of Certain Member Interests; Severance Payments."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RIGHTS OF THE GENERAL PARTNER
After the sale of the Securities, neither Old Services nor Holdings,
affiliates of the General Partner, will own any Units. However, through the
General Partner's ability to manage and operate the Company , the General
Partner has the ability to control the management of the Company.
CONSULTING AGREEMENTS
The General Partner has entered into consulting agreements with each of
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 provides
consulting services to the General Partner. Each such agreement provides 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. See
"Management--Executive Compensation--Employment Agreements." Each consulting
agreement will be reviewed annually by a majority of the directors who do not
have consulting agreements.
RELATED PARTY TRANSACTIONS
Pursuant to an agreement dated as of July 29, 1997 between John J. Stephens,
a Founding Director and the former President and Chief Executive Officer of
the General Partner, and USTK, Old Services, Mr. Rudey and certain of his
affiliates, Mr. Stephen's interest in Old Services was redeemed for 95,238
Subordinated Units upon the consummation of the Transactions and $1.0 million
paid 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 was redeemed upon the
closing of the Transactions for 48,160 Subordinated Units.
REPURCHASE OF CERTAIN MEMBER INTERESTS; SEVERANCE PAYMENTS
On January 5, 1998, the General Partner made certain changes in senior
management. In connection therewith, Edward J. Kobacker, the former Executive
Vice President and Chief Operating Officer and a former Director of the
General Partner, became entitled to receive approximately $700,000 in
severance payments pursuant to his employment agreement. In addition, pursuant
to the terms of the General Partner's operating agreement, the member
interests of each of Mr. Stephens, Mr. Kobacker and John H. Beuter, a former
Director of the General Partner, were subject to repurchase at an aggregate
price of $385,000 payable in three equal annual installments commencing
February 1, 1998. The Company will reimburse the General Partner for such
repurchase payments.
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Certain conflicts of interest exist and may arise in the future as a result
of the relationships between the General Partner and its members, on the one
hand, and the Company and its limited partners, on the other hand. The
directors and officers of the General Partner have fiduciary duties to manage
the General Partner, including its investments in its subsidiaries and
affiliates, in a manner beneficial to its members. At the same time, the
General Partner has a fiduciary duty to manage the Company in a manner
beneficial to the Company and the Unitholders. The Partnership Agreement
contains provisions that allow the General Partner to take into account the
interests of parties in addition to the Company in resolving conflicts of
interest, thereby limiting its fiduciary duty to the Unitholders, as well as
provisions that may restrict the remedies available to Unitholders for actions
taken that might, without such limitations, constitute breaches of fiduciary
duty. The duty of the directors and officers of the General Partner to its
members may, therefore, come into conflict with the duties of the General
Partner to the Company and the Unitholders. The Conflicts Committee of the
Board of Directors of the General Partner will, at the request of the General
Partner, review conflicts of interest that may arise between the General
Partner or its affiliates, on the one hand, and the Company, on the other. See
"Management--Company Management" and "--Fiduciary and Other Duties."
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Revised Uniform Limited Partnership Act (the
"Delaware Act") that allow the fiduciary duties of a general partner to be
waived or restricted by a partnership agreement have not been resolved in a
court of law, and the General Partner has not obtained an opinion of counsel
covering the provisions set forth in the Partnership Agreement that purport to
waive or restrict fiduciary duties of the General Partner. Unitholders should
consult their own legal counsel concerning the fiduciary responsibilities of
the General Partner and its officers and directors and the remedies available
to the Unitholders.
Conflicts of interest could arise with respect to the situations described
below, among others:
Common and Subordinated Unitholders Will Have No Right to Enforce Obligations
of the General Partner and Its Affiliates Under Agreements with the Company
The agreements between the Company and the General Partner do not grant to
the Unitholders, separate and apart from the Company, the right to enforce the
obligations of the General Partner and its affiliates in favor of the Company.
Therefore, the Company will be primarily responsible for enforcing such
obligations.
Contracts Between the Company, on the One Hand, and the General Partner and
Its Affiliates, on the Other, Will Not be the Result of Arm's-Length
Negotiations
Under the terms of the Partnership Agreement, the Company is not restricted
from paying the General Partner or its affiliates for any services rendered
(provided such services are rendered on terms fair and reasonable to the
Company) or entering into additional contractual arrangements with any of them
on behalf of the Company. Neither the Partnership Agreement nor any of the
other agreements, contracts and arrangements between the Company, on the one
hand, and the General Partner and its affiliates, on the other, are or will be
the result of arm's-length negotiations. All of such transactions entered into
after the sale of the Common Units offered in this offering are to be on terms
which are fair and reasonable to the Company, provided that any transaction
shall be deemed fair and reasonable if (i) such transaction is approved by the
Conflicts Committee, (ii) its terms are no less favorable to the Company than
those generally being provided to or available from unrelated third parties or
(iii) taking into account the totality of the relationships between the
parties involved (including other transactions that may be particularly
favorable or advantageous to the Company), the transaction is fair to the
Company. The General Partner and its affiliates will have no obligation to
permit the Company to use any facilities or assets of the General Partner and
such affiliates, except as may be provided in contracts entered into from time
to time specifically dealing with such use, nor shall there be any obligation
of the General Partner and its affiliates to enter into any such contracts.
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Certain Actions Taken by the General Partner May Affect the Amount of Cash
Available for Distribution to Unitholders or Accelerate the Conversion of
Subordinated Units
Decisions of the General Partner with respect to the amount and timing of
timber harvests, stumpage sales, timber deed sales, property sales, cash
expenditures, participation in capital expansions and acquisitions,
borrowings, issuances of additional partnership interests and creation of
reserves in any quarter will affect whether, or the extent to which, there is
sufficient Available Cash from Operating Surplus to meet the Minimum Quarterly
Distribution and Target Distributions Levels on all Units in such quarter or
in subsequent quarters. The Partnership Agreement provides that any borrowings
by the Company or the approval thereof by the General Partner shall not
constitute a breach of any duty owed by the General Partner to the Company or
the Unitholders, including borrowings that have the purpose or effect,
directly or indirectly, of enabling the General Partner to receive
distributions on the Subordinated Units or the Incentive Distributions or
hasten the expiration of the Subordination Period or the conversion of the
Subordinated Units into Common Units. The Partnership Agreement provides that
the Company and the Operating Company may borrow funds from the General
Partner and its affiliates. The General Partner and its affiliates may not
borrow funds from the Company or the Operating Company. Furthermore, any
actions taken by the General Partner consistent with the standards of
reasonable discretion set forth in the definitions of Available Cash,
Operating Surplus and Capital Surplus will be deemed not to constitute a
breach of any duty of the General Partner to the Company or the Unitholders.
The Company Will Reimburse the General Partner and Its Affiliates for Certain
Expenses
Under the terms of the Partnership Agreement, the General Partner and its
affiliates will be reimbursed by the Company for certain expenses incurred on
behalf of the Company, including costs incurred in providing corporate staff
and support services to the Company. The Partnership Agreement provides that
the General Partner will determine the expenses that are allocable to the
Company in any reasonable manner determined by the General Partner in its sole
discretion. See "Management--Reimbursement of Expenses of the General Partner
and its Affiliates."
The General Partner Intends to Limit Its Liability with Respect to the
Company's Obligations
Whenever possible, the General Partner intends to limit the Company's
liability under contractual arrangements to all or particular assets of the
Company, with the other party thereto having no recourse against the General
Partner or its assets. The Partnership Agreement provides that any action by
the General Partner in so limiting the liability of the General Partner or
that of the Company will not be deemed to be a breach of the General Partner's
fiduciary duties, even if the Company could have obtained more favorable terms
without such limitation on liability.
Units Are Subject to the General Partner's Limited Call Right
The General Partner may exercise its right to call and purchase Units as
provided in the Partnership Agreement or assign such right to one of its
affiliates or to the Company. The General Partner may use its own discretion,
free of fiduciary duty restrictions, in determining whether to exercise such
right. As a consequence, a Subordinated Unitholder may have his Subordinated
Units purchased from him even though he may not desire to sell them, and the
price paid may be less than the amount the holder would desire to receive upon
sale of his Units. For a description of such right, see "The Partnership
Agreement--Limited Call Right."
The Company May Retain Separate Counsel for Itself or for the Holders of
Subordinated Units
The Subordinated Unitholders have not been represented by counsel in
connection with the preparation of the Partnership Agreement or other
agreements referred to herein. The attorneys, independent public accountants
and others who have performed services for the Company have been retained by
the General Partner and its affiliates, and may also perform services for the
General Partner and its affiliates. The Company may retain separate counsel
for itself or the holders of Subordinated Units in the event of a conflict of
interest arising
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between the General Partner and its affiliates, on the one hand, and the
Company or the holders of Subordinated Units, on the other, after the sale of
the Subordinated Units offered hereby, depending on the nature of such
conflict, but it does not intend to do so in most cases.
The General Partner's Affiliates May Compete with the Company Under Certain
Circumstances
The General Partner may not engage in any business or activity or incur any
debts or liabilities except in connection with or incidental to (i) its
performance as a general partner of the Company or one or more affiliates of
the Company, (ii) the acquiring, owning or disposing of debt or equity
securities of the Company or such affiliates, and (iii) permitting its
employees to perform services for its affiliates. Following the closing of the
sale of the Common Units offered hereby, the General Partner's affiliates will
be restricted from competing with the Company by engaging in the following
activities in North America ("Restricted Activities"): the (i) acquisition,
exchange, operation or sale of timber-producing real property or rights to
harvest timber, a principal purpose of which is producing logs or other forest
products, (ii) harvesting of timber other than harvesting which is incidental
to the ownership or operation of real property not owned or operated for a
principal purpose of producing logs or other forest products, (iii) sale,
exchange or purchase of logs other than sales, exchanges or purchases which
are incidental to the ownership or operation of real property not owned or
operated for a principal purpose of producing logs or other forest products,
and (iv) any and all other activities relating to the forest products industry
to the extent such activities compete with activities of the Company or the
Operating Company. Affiliates of the General Partner may, however, engage in
any other activity in competition with the Company and may engage in
Restricted Activities outside of North America. As a result, conflicts of
interest may arise between affiliates of the General Partner on the one hand,
and the Company, on the other. There can be no assurance that there will not
be competition between the Company and affiliates of the General Partner.
FIDUCIARY AND OTHER DUTIES
The General Partner will be accountable to the Company and the Unitholders
as a fiduciary. Consequently, the General Partner must exercise good faith and
integrity in handling the assets and affairs of the Company. In contrast to
the relatively well-developed law concerning fiduciary duties owed by officers
and directors to the shareholders of a corporation, the law concerning the
duties owed by a general partner to other partners and to partnerships is
relatively undeveloped. Neither the Delaware Act nor case law defines with
particularity the fiduciary duties owed by a general partner to limited
partners or a limited partnership, but the Delaware Act provides that Delaware
limited partnerships may, in their partnership agreements, restrict or expand
the fiduciary duties that might otherwise be applied by a court in analyzing
the standard of duty owed by a general partner to limited partners and the
partnership.
Fiduciary duties are generally considered to include an obligation to act
with the highest good faith, fairness and loyalty. Such duty of loyalty, in
the absence of a provision in a partnership agreement providing otherwise,
would generally prohibit a general partner of a Delaware limited partnership
from taking any action or engaging in any transaction as to which it has a
conflict of interest. In order to induce the General Partner to manage the
business of the Company, the Partnership Agreement, as permitted by the
Delaware Act, contains various provisions intended to have the effect of
restricting the fiduciary duties that might otherwise be owed by the General
Partner to the Company and its partners and waiving or consenting to conduct
by the General Partner and its affiliates that might otherwise raise issues as
to compliance with fiduciary duties or applicable law.
The Partnership Agreement provides that in order to become a limited partner
of the Company, a holder of Common Units is required to agree to be bound by
the provisions thereof, including the provisions discussed above. This is in
accordance with the policy of the Delaware Act favoring the principle of
freedom of contract and the enforceability of partnership agreements. The
failure of a limited partner or assignee to sign a partnership agreement does
not render the partnership agreement unenforceable against such person.
The Partnership Agreement provides that whenever a conflict arises between
the General Partner or its affiliates, on the one hand, and the Company or any
other partner, on the other, the General Partner shall resolve
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such conflict. The General Partner in general shall not be in breach of its
obligations under the Partnership Agreement or its duties to the Company or
the Unitholders if the resolution of such conflict is fair and reasonable to
the Company, and any resolution shall conclusively be deemed to be fair and
reasonable to the Company if such resolution is (i) approved by the Conflicts
Committee (although no party is obligated to seek such approval and the
General Partner may adopt a resolution or course of action that has not
received such approval), (ii) on terms no less favorable to the Company than
those generally being provided to or available from unrelated third parties or
(iii) fair to the Company, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Company). In resolving
such conflict, the General Partner may (unless the resolution is specifically
provided for in the Partnership Agreement) consider the relative interests of
the parties involved in such conflict or affected by such action, any
customary or accepted industry practices or historical dealings with a
particular person or entity and, if applicable, generally accepted accounting
practices or principles and such other factors as its deems relevant. Thus,
unlike the strict duty of a fiduciary who must act solely in the best
interests of his beneficiary, the Partnership Agreement permits the General
Partner to consider the interests of all parties to a conflict of interest,
including the interests of the General Partner. In connection with the
resolution of any conflict that arises, unless the General Partner has acted
in bad faith, the action taken by the General Partner shall not constitute a
breach of the Partnership Agreement, any other agreement or any standard of
care or duty imposed by the Delaware Act or other applicable law. The Company
also provides that in certain circumstances the General Partner may act in its
sole discretion, in good faith or pursuant to other appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself and all other similarly situated limited partners (a class action)
to recover damages from a general partner for violations of its fiduciary
duties to the limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by
law, as required to permit the General Partner and its officers and directors
to act under the Partnership Agreement or any other agreement contemplated
therein and to make any decisions pursuant to the authority prescribed in the
Partnership Agreement, so long as such action is reasonably believed by the
General Partner to be in, or not inconsistent with, the best interests of the
Company. Further, the Partnership Agreement provides that the General Partner
and its officers and directors will not be liable for monetary damages to the
Company, the limited partners or assignees for errors of judgment or for any
acts or omissions if the General Partner and such other persons acted in good
faith.
In addition, under the terms of the Partnership Agreement, the Company is
required to indemnify the General Partner and its officers, directors,
employees, affiliates, partners, members, agents and trustees, to the fullest
extent permitted by law, against liabilities, costs and expenses incurred by
the General Partner or such other persons, if the General Partner or such
persons acted in good faith and in a manner they reasonably believed to be in,
or not opposed to, the best interests of the Company and, with respect to any
criminal proceedings, had no reasonable cause to believe their conduct was
unlawful. See "The Partnership Agreement--Indemnification." Thus, the General
Partner could be indemnified for its negligent acts if it meets such
requirements concerning good faith and the best interests of the Company.
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DESCRIPTION OF THE SUBORDINATED UNITS
The Company is subject to the reporting and certain other requirements of
the Securities Exchange Act of 1934, as amended. The Company is required to
file periodic reports containing financial and other information with the
Commission.
Purchasers of Subordinated Units covered by this Prospectus and subsequent
transferees of Subordinated Units (or their brokers, agents or nominees on
their behalf) who wish to become Unitholders of record will be required to
execute Transfer Applications, the form of which is included as Appendix B to
this Prospectus, before the purchase or transfer of such Subordinated Units
will be registered on the records of the Transfer Agent and before cash
distributions or federal income tax allocations can be made to the purchaser
or transferee. The Company will be entitled to treat the nominee holder of a
Subordinated Unit as the absolute owner thereof, and the beneficial owner's
rights will be limited solely to those that it has against the nominee holder
as a result of or by reason of any understanding or agreement between such
beneficial owner and nominee holder.
THE UNITS
The Units represent limited partner interests in the Company, which entitle
the holders thereof to participate in Company distributions and exercise the
rights or privileges available to limited partners under the Partnership
Agreement. For a description of the relative rights and preferences of holders
of Common Units and Subordinated Units in and to Company distributions,
together with a description of the circumstances under which Subordinated
Units may convert into Common Units, see "Cash Distribution Policy." For a
description of the rights and privileges of limited partners under the
Partnership Agreement, see "The Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
Duties
American Stock Transfer & Trust Company will serve as registrar and transfer
agent (the "Transfer Agent") for the Common Units and Subordinated Units and
will receive a fee from the Company for serving in such capacities. All fees
charged by the Transfer Agent for transfers of Units will be borne by the
Company and not by the Unitholders, except that fees similar to those
customarily paid by stockholders for surety bond premiums to replace lost or
stolen certificates, taxes and other governmental charges, special charges for
services requested by a Unitholder and other similar fees or charges will be
borne by the affected holder. There will be no charge to holders for
disbursements of the Company's cash distributions. The Company will indemnify
the Transfer Agent, its agents and each of their respective shareholders,
directors, officers and employees against all claims and losses that may arise
out of acts performed or omitted in respect of its activities as such, except
for any liability due to any negligence, gross negligence, bad faith or
intentional misconduct of the indemnified person or entity.
Resignation or Removal
The Transfer Agent may at any time resign, by notice to the Company, or be
removed by the Company, such resignation or removal to become effective upon
the appointment by the Company of a successor transfer agent and registrar and
its acceptance of such appointment. If no successor has been appointed and
accepted such appointment within 30 days after notice of such resignation or
removal, the General Partner is authorized to act as the transfer agent and
registrar until a successor is appointed.
TRANSFER OF SUBORDINATED UNITS
Until a Subordinated Unit has been transferred on the books of the Company,
the Company and the Transfer Agent, notwithstanding any notice to the
contrary, may treat the record holder thereof as the absolute owner for
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all purposes, except as otherwise required by law or stock exchange
regulations. The transfer of the Subordinated Units to persons that purchase
directly from the Underwriters will be accomplished through the completion,
execution and delivery of a Transfer Application by such investor in
connection with such Subordinated Units. Any subsequent transfers of a
Subordinated Unit will not be recorded by the Transfer Agent or recognized by
the Company unless the transferee executes and delivers a Transfer
Application. By executing and delivering a Transfer Application (the form of
which is set forth on the reverse side of the certificates representing the
Subordinated Units), the transferee of Subordinated Units (i) becomes the
record holder of such Subordinated Units and shall constitute an assignee
until admitted into the Company as a substitute limited partner, (ii)
automatically requests admission as a substituted limited partner in the
Company, (iii) agrees to be bound by the terms and conditions of, and
executes, the Partnership Agreement, (iv) represents that such transferee has
the capacity, power and authority to enter into the Partnership Agreement, (v)
grants powers of attorney to officers of the General Partner and any
liquidator of the Company as specified in the Partnership Agreement, and (vi)
makes the consents and waivers contained in the Partnership Agreement. An
assignee will become a substituted limited partner of the Company in respect
of the transferred Subordinated Units upon the consent of the General Partner
and the recordation of the name of the assignee on the books and records of
the Company. Such consent may be withheld in the sole discretion of the
General Partner.
Subordinated Units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission
as a substituted limited partner in the Company in respect of the transferred
Subordinated Units. A purchaser or transferee of Subordinated Units who does
not execute and deliver a Transfer Application obtains only (a) the right to
assign the Subordinated Units to a purchaser or other transferee and (b) the
right to transfer the right to seek admission as a substituted limited partner
in the Company with respect to the transferred Subordinated Units. Thus, a
purchaser or transferee of Subordinated Units who does not execute and deliver
a Transfer Application will not receive cash distributions or federal income
tax allocations unless the Subordinated Units are held in a nominee or "street
name" account and the nominee or broker has executed and delivered a Transfer
Application with respect to such Subordinated Units, and may not receive
certain federal income tax information or reports furnished to record holders
of Subordinated Units. The transferor of Subordinated Units will have a duty
to provide such transferee with all information that may be necessary to
obtain registration of the transfer of the Subordinated Units, but a
transferee agrees, by acceptance of the certificate representing Subordinated
Units, that the transferor will not have a duty to insure the execution of the
Transfer Application by the transferee and will have no liability or
responsibility if such transferee neglects to or chooses not to execute and
forward the Transfer Application to the Transfer Agent. See "The Partnership
Agreement--Status as Limited Partner or Assignee."
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THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of the material provisions of the
Partnership Agreement. The form of the Partnership Agreement for the Company
is filed as an exhibit to the Registration Statement of which this Prospectus
constitutes a part. The form of Operating Agreement for the Operating Company
(the "Operating Company Agreement") is also filed as an exhibit to the
Registration Statement. The Company will provide prospective investors with a
copy of the form of the Partnership Agreement and the Operating Company
Agreement upon request at no charge. The discussions presented herein and
below of the material provisions of the Partnership Agreement are qualified in
their entirety by reference to the Partnership Agreement for the Company and
the Operating Company Agreement for the Operating Company. The Company is a
98.9899% non-managing member of the Operating Company, which owns the
Company's business. The General Partner serves 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 manages and operates the Company's business. Unless the
context otherwise requires, references herein to the "Partnership Agreement"
constitute references to the Partnership Agreement and the Operating Company
Agreement, collectively.
Certain provisions of the Partnership Agreement are summarized elsewhere in
this Prospectus under various headings. With regard to the transfer of
Subordinated Units, see "Description of the Common Units--Transfer of
Subordinated Units." With regard to distributions of Available Cash, see "Cash
Distribution Policy." With regard to allocations of taxable income and taxable
loss, see "Tax Considerations." Prospective investors are urged to review
these sections of this Prospectus and the Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Company was organized in June 1997, as a Delaware limited partnership.
The Operating Company was organized in 1996 to acquire the Klamath Falls
Timberlands. The General Partner owns 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) own a 98% interest in the Company and the Operating
Company on a combined basis. The Company will dissolve on December 31, 2087,
unless sooner dissolved pursuant to the terms of the Partnership Agreement.
PURPOSE
The purpose of the Company under the Partnership Agreement is limited to
serving as the non-managing member of the Operating Company and engaging in
any business activity that may be engaged in by the Operating Company. The
Operating Company Agreement provides that the Operating Company may, directly
or indirectly, engage in (i) any activity engaged in by USTK immediately prior
to this offering, (ii) any other activity approved by the General Partner but
only to the extent that the General Partner reasonably determines that, as of
the date of the acquisition or commencement of such activity, such activity
generates "qualifying income" (as such term is defined in Section 7704 of the
Code) or (iii) any activity that enhances the operations of an activity that
is described in (i) or (ii) above. Although the General Partner has the
ability under the Partnership Agreement to cause the Company and the Operating
Company to engage in activities other than the ownership or operation of
timber-producing real property, the General Partner has no current intention
of doing so. The General Partner is authorized in general to perform all acts
deemed necessary to carry out such purposes and to conduct the business of the
Company.
POWER OF ATTORNEY
Each Limited Partner, and each person who acquires a Unit from a Unitholder
and executes and delivers a Transfer Application with respect thereto, grants
to the General Partner and, if a liquidator of the Company has
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been appointed, such liquidator, a power of attorney to, among other things,
execute and file certain documents required in connection with the
qualification, continuance or dissolution of the Company or the amendment of
the Partnership Agreement in accordance with the terms thereof and to make
consents and waivers contained in the Partnership Agreement.
CAPITAL CONTRIBUTIONS
For a description of the initial capital contributions made to the Company,
see "Formation of the Company." The Unitholders are not obligated to make
additional capital contributions to the Company, except as described below
under "--Limited Liability."
LIMITED LIABILITY
Assuming that a Limited Partner does not participate in the control of the
business of the Company within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Company in respect of his Units plus his share of any undistributed
profits and assets of the Company. If it were determined, however, that the
right or exercise of the right by the Limited Partners as a group to remove or
replace the General Partner, to approve certain amendments to the Partnership
Agreement or to take other action pursuant to the Partnership Agreement
constituted "participation in the control" of the Company's business for the
purposes of the Delaware Act, then the Limited Partners could be held
personally liable for the Company's obligations under the laws of the State of
Delaware to the same extent as the General Partner with respect to persons who
transact business with the Company reasonably believing, based on the Limited
Partner's conduct, that the Limited Partner is a general partner.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to specific
property of the partnership, exceed the fair value of the assets of the
limited partnership. For the purpose of determining the fair value of the
assets of a limited partnership, the Delaware Act provides that the fair value
of property subject to liability for which recourse of creditors is limited
shall be included in the assets of the limited partnership only to the extent
that the fair value of that property exceeds that nonrecourse liability. The
Delaware Act provides that a limited partner who receives such a distribution
and knew at the time of the distribution that the distribution was in
violation of the Delaware Act shall be liable to the limited partnership for
the amount of the distribution for three years from the date of the
distribution. Under the Delaware Act, an assignee who becomes a substituted
limited partner of a limited partnership is liable for the obligations of his
assignor to make contributions to the partnership, except the assignee is not
obligated for liabilities unknown to him at the time he became a limited
partner and which could not be ascertained from the partnership agreement.
The Company expects that the Operating Company will initially conduct
business in one state. Maintenance of limited liability may require compliance
with legal requirements in such jurisdictions in which the Operating Company
conducts business, including qualifying the Operating Company to do business
there. Limitations on the liability of limited partners for the obligations of
a limited partnership have not been clearly established in many jurisdictions.
If it were determined that the Company was, by virtue of its member interest
in the Operating Company or otherwise, conducting business in any state
without compliance with the applicable limited partnership statute, or that
the right or exercise of the right by the Limited Partners as a group to
remove or replace the General Partner, to approve certain amendments to the
Partnership Agreement, or to take other action pursuant to the Partnership
Agreement constituted "participation in the control" of the Company's business
for the purposes of the statutes of any relevant jurisdiction, then the
Limited Partners could be held personally liable for the Company's obligations
under the law of such jurisdiction to the same extent as the General Partner
under certain circumstances. The Company will operate in such manner as the
General Partner deems reasonable and necessary or appropriate to preserve the
limited liability of the Limited Partners.
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ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the Company to issue an unlimited
number of additional limited partner interests and other equity securities of
the Company for such consideration and on such terms and conditions as are
established by the General Partner in its sole discretion without the approval
of any Limited Partners; provided that, during the Subordination Period,
except as provided in the next sentence below, the Company may not issue
equity securities of the Company ranking prior or senior to the Common Units
or an aggregate of more than 7,458,684 additional Common Units (excluding the
1,118,803 Common Units issued upon the exercise of the underwriters' over-
allotment option in connection with the Initial Offering and Common Units
issued upon conversion of Subordinated Units, pursuant to employee benefit
plans, upon conversion of the general partner interests and Incentive
Distribution Rights as a result of a withdrawal of the General Partner and
subject to adjustment in the event of a combination or subdivision of Common
Units) or an equivalent number of securities ranking on a parity with the
Common Units without the approval of the holders of at least a Unit Majority.
During the Subordination Period, the Company may also issue an unlimited
number of additional Common Units or parity securities without the approval of
the Unitholders if the proceeds from such issuance are used exclusively to
repay up to $50.0 million in indebtedness of a member of the Partnership
Group, in each case only where the aggregate amount of distributions that
would have been paid with respect to such newly issued Units (including Units
deemed issued as described in the following sentence) and the related
additional distributions that would have been made to the General Partner in
respect of the (actual or pro forma) four-quarter period ending prior to the
first day of the quarter in which the issuance is to be consummated (assuming
such additional Units had been outstanding throughout such period and that
distributions equal to the distributions that were actually paid on the
outstanding Units during the period were paid on such additional Units) did
not exceed the interest costs actually incurred during such period on the
indebtedness that is to be repaid (or, if such indebtedness was not
outstanding throughout the entire period, would have been incurred had such
indebtedness been outstanding for the entire period). In the event that the
Company is required to pay a prepayment penalty in connection with the
repayment of such indebtedness, for purposes of the foregoing test the number
of Common Units issued to repay such indebtedness shall be deemed increased by
the number of Common Units that would need to be issued to pay such penalty.
In accordance with Delaware law and the provisions of the Partnership
Agreement, the Company may also issue additional partnership interests that,
in the sole discretion of the General Partner, may have special voting rights
to which the other Units are not entitled.
Upon issuance of additional Partnership Securities (other than pursuant to
the over-allotment option), the General Partner will be required to make
additional capital contributions to the extent necessary to maintain its 2%
interest in the Company and Operating Company. Moreover, the General Partner
will have the right, which it may from time to time assign in whole or in part
to any of its affiliates, to purchase Common Units, Subordinated Units or
other equity securities of the Company from the Company whenever, and on the
same terms that, the Company issues such securities or rights to persons other
than the General Partner and its affiliates, to the extent necessary to
maintain the percentage interest of the General Partner and its affiliates in
the Company (including interests represented by Subordinated Units) that
existed immediately prior to each such issuance. The holders of Units will not
have preemptive rights to acquire additional Units or other partnership
interests that may be issued by the Company.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the General Partner, which consent may be given or withheld in its
sole discretion. In order to adopt a proposed amendment (other than certain
amendments discussed below), the General Partner is required to seek written
approval of the holders of the number of Units required to approve such
amendment or call a meeting of the Limited Partners to consider and vote upon
the proposed amendment, except as described below. Proposed amendments (unless
otherwise specified) must be approved by holders of a Unit Majority, except
that no amendment may be made which would (i) enlarge the obligations of any
Limited Partner without its consent, unless approved by at least a majority of
the type or class of Units so affected, (ii) enlarge the obligations of,
restrict in any way any action by or rights of, or reduce in any way the
amounts distributable, reimbursable or otherwise payable by the Company to the
General Partner or any of its affiliates without its consent, which consent
may be given or withheld in its
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sole discretion, (iii) change the term of the Company, (iv) provide that the
Company is not dissolved upon the expiration of its term or upon an election
to dissolve the Company by the General Partner that is approved by holders of
a Unit Majority or (v) give any person the right to dissolve the Company other
than the General Partner's right to dissolve the Company with the approval of
holders of a Unit Majority. Each of the foregoing provisions may be amended
with the approval of the holders of at least 90% of the Subordinated Units and
Common Units voting as a single class.
The General Partner may generally make amendments to the Partnership
Agreement without the approval of any Limited Partner or assignee to reflect
(i) a change in the name of the Company, the location of the principal place
of business of the Company, the registered agent or the registered office of
the Company, (ii) admission, substitution, withdrawal or removal of partners
in accordance with the Partnership Agreement, (iii) a change that, in the
discretion of the General Partner, is necessary or advisable to qualify or
continue the qualification of the Company as a limited partnership or a
partnership in which the Limited Partners have limited liability under the
laws of any state or to ensure that neither the Company nor the Operating
Company will be treated as an association taxable as a corporation or
otherwise taxed as an entity for federal income tax purposes, (iv) an
amendment that is necessary, in the opinion of counsel to the Company, to
prevent the Company, or the General Partner or its directors, officers, agents
or trustees, from in any manner being subjected to the provisions of the
Investment Company Act of 1940, as amended, the Investment Advisors Act of
1940, as amended, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, as amended, whether or not
substantially similar to plan asset regulations currently applied or proposed,
(v) subject to the limitations on the issuance of additional Common Units or
other limited or general partner interests described above, an amendment that,
in the discretion of the General Partner, is necessary or advisable in
connection with the authorization of additional limited or general partner
interests, (vi) any amendment expressly permitted in the Partnership Agreement
to be made by the General Partner acting alone, (vii) an amendment effected,
necessitated or contemplated by a merger agreement that has been approved
pursuant to the terms of the Partnership Agreement, (viii) any amendment that,
in the discretion of the General Partner, is necessary or advisable in
connection with the formation by the Company of, or its investment in, any
corporation, partnership or other entity (other than the Operating Company) as
otherwise permitted by the Partnership Agreement, (ix) a change in the fiscal
year and/or taxable year of the Company and changes related thereto, and (x)
any other amendments substantially similar to any of the foregoing.
In addition to the General Partner's right to amend the Partnership
Agreement as described above, the General Partner may make amendments to the
Partnership Agreement without the approval of any Limited Partner or assignee
if such amendments, in the discretion of the General Partner, (i) do not
adversely affect the Limited Partners in any material respect, (ii) are
necessary or advisable to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation of any
federal or state agency or judicial authority or contained in any federal or
state statute, (iii) are necessary or advisable to facilitate the trading of
the Common Units (including the division of any class or classes of
outstanding Partnership Securities into different classes to facilitate
uniformity of tax consequences within such classes of Partnership Securities)
or to comply with any rule, regulation, guideline or requirement of any
securities exchange on which the Common Units are or will be listed for
trading, compliance with any of which the General Partner deems to be in the
best interests of the Company and the Limited Partners, (iv) are necessary or
advisable in connection with any action taken by the General Partner relating
to splits or combinations of Units pursuant to the provisions of the
Partnership Agreement or (v) are required to effect the intent expressed in
this Prospectus or the intent of the Partnership Agreement or contemplated by
the Partnership Agreement.
The General Partner will not be required to obtain an Opinion of Counsel (as
defined below) in the event of the amendments described in the two immediately
preceding paragraphs. No other amendments to the Partnership Agreement will
become effective without the approval of holders of at least 90% of the Units
unless the Company obtains an Opinion of Counsel to the effect that such
amendment will not affect the limited liability under applicable law of any
limited partner in the Company or any member of the Operating Company.
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Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding Units in relation to other
classes of Units will require the approval of at least a majority of the type
or class of Units so affected. Any amendment that reduces the voting
percentage required to take any action is required to be approved by the
affirmative vote of limited partners constituting not less than the voting
requirement sought to be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The General Partner is generally prohibited, without the prior approval of
holders of a Unit Majority, from causing the Company to, among other things,
sell, exchange or otherwise dispose of all or substantially all of its assets
in a single transaction or a series of related transactions (including by way
of merger, consolidation or other combination) or approving on behalf of the
Company the sale, exchange or other disposition of all or substantially all of
the assets of the Operating Company; provided that the General Partner may
mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the Company's assets without such approval. The General
Partner may also sell all or substantially all of the Company's assets
pursuant to a foreclosure or other realization upon the foregoing encumbrances
without such approval. Furthermore, provided that certain conditions are
satisfied, the General Partner may merge the Company or any member of the
Partnership Group into, or convey some or all of the Partnership Group's
assets to, a newly formed entity if the sole purpose of such merger or
conveyance is to effect a mere change in the legal form of the Company into
another limited liability entity. The Unitholders are not entitled to
dissenters' rights of appraisal under the Partnership Agreement or applicable
Delaware law in the event of a merger or consolidation of the Company, a sale
of substantially all of the Company's assets or any other transaction or
event.
TERMINATION AND DISSOLUTION
The Company will continue until December 31, 2087, unless sooner terminated
pursuant to the Partnership Agreement. The Company will be dissolved upon (i)
the election of the General Partner to dissolve the Company, if approved by
the holders of a Unit Majority, (ii) the sale, exchange or other disposition
of all or substantially all of the assets and properties of the Company and
the Operating Company, (iii) the entry of a decree of judicial dissolution of
the Company or (iv) the withdrawal or removal of the General Partner or any
other event that results in its ceasing to be the General Partner (other than
by reason of a transfer of its general partner interest in accordance with the
Partnership Agreement or withdrawal or removal following approval and
admission of a successor). Upon a dissolution pursuant to clause (iv), the
holders of a Unit Majority may also elect, within certain time limitations, to
reconstitute the Company and continue its business on the same terms and
conditions set forth in the Partnership Agreement by forming a new limited
partnership on terms identical to those set forth in the Partnership Agreement
and having as general partner an entity approved by the holders of a Unit
Majority subject to receipt by the Company of an opinion of counsel to the
effect that (x) such action would not result in the loss of limited liability
of any Limited Partner and (y) neither the Company, the reconstituted limited
partnership nor the Operating Company would be treated as an association
taxable as a corporation or otherwise be taxable as an entity for federal
income tax purposes upon the exercise of such right to continue (hereinafter,
an "Opinion of Counsel").
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Company, unless the Company is reconstituted and
continued as a new limited partnership, the person authorized to wind up the
affairs of the Company (the "Liquidator") will, acting with all of the powers
of the General Partner that such Liquidator deems necessary or desirable in
its good faith judgment in connection therewith, liquidate the Company's
assets and apply the proceeds of the liquidation as provided in "Cash
Distribution Policy--Distributions of Cash Upon Liquidation." Under certain
circumstances and subject to certain limitations, the Liquidator may defer
liquidation or distribution of the Company's assets for a reasonable period of
time or distribute assets to partners in kind if it determines that a sale
would be impractical or would cause undue loss to the partners.
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WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
The General Partner has agreed not to withdraw voluntarily as a general
partner of the Company and the managing member of the Operating Company prior
to December 31, 2007 (with limited exceptions described below), without
obtaining the approval of the holders of a Unit Majority and furnishing an
Opinion of Counsel. On or after December 31, 2007, the General Partner may
withdraw as the General Partner (without first obtaining approval from any
Unitholder) by giving 90 days' written notice, and such withdrawal will not
constitute a violation of the Partnership Agreement. Notwithstanding the
foregoing, the General Partner may withdraw without Unitholder approval upon
90 days' notice to the Limited Partners if at least 50% of the outstanding
Common Units are held or controlled by one person and its affiliates (other
than the General Partner and its affiliates). In addition, the Partnership
Agreement permits the General Partner (in certain limited instances) to sell
or otherwise transfer all of its general partner interest in the Company
without the approval of the Unitholders. See "--Transfer of General Partner's
Interests and Incentive Distribution Rights."
Upon the withdrawal of the General Partner under any circumstances (other
than as a result of a transfer by the General Partner of all or a part of its
general partner interest in the Company), the holders of a Unit Majority may
select a successor to such withdrawing General Partner. If such a successor is
not elected, or is elected but an Opinion of Counsel cannot be obtained, the
Company will be dissolved, wound up and liquidated, unless within 180 days
after such withdrawal the holders of a Unit Majority agree in writing to
continue the business of the Company and to appoint a successor General
Partner. See "--Termination and Dissolution."
The General Partner may not be removed unless such removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding Units
(including Units held by the General Partner and its affiliates) and the
Company receives an Opinion of Counsel. Any such removal is also subject to
the approval of a successor general partner by the vote of the holders of not
less than a Unit Majority. The Partnership Agreement also provides that if the
General Partner is removed as general partner of the Company under
circumstances where Cause does not exist and Units held by the General Partner
and its affiliates are not voted in favor of such removal (i) the
Subordination Period will end and all outstanding Subordinated Units will
immediately convert into Common Units on a one-for-one basis, (ii) any
existing Common Unit Arrearages will be extinguished and (iii) the General
Partner will have the right to convert its general partner interest (and all
the Incentive Distribution Rights) into Common Units or to receive cash in
exchange for such interests.
Withdrawal or removal of the General Partner as a general partner of the
Company also constitutes withdrawal or removal, as the case may be, of the
General Partner as the managing member of the Operating Company.
In the event of removal of the General Partner under circumstances where
Cause exists or withdrawal of the General Partner where such withdrawal
violates the Partnership Agreement, a successor general partner will have the
option to purchase the general partner interest, managing member interest and
Incentive Distribution Rights of the departing General Partner (the "Departing
Partner") in the Company and the Operating Company for a cash payment equal to
the fair market value of such interests. Under all other circumstances where
the General Partner withdraws or is removed by the Limited Partners, the
Departing Partner will have the option to require the successor general
partner to purchase such interests of the Departing Partner and its Incentive
Distribution Rights for such amount. In each case, such fair market value will
be determined by agreement between the Departing Partner and the successor
general partner, or if no agreement is reached, by an independent investment
banking firm or other independent expert selected by the Departing Partner and
the successor general partner (or if no expert can be agreed upon, by an
expert chosen by agreement of the experts selected by each of them). In
addition, the Company will be required to reimburse the Departing Partner for
all amounts due the Departing Partner, including, without limitation, all
employee-related liabilities, including severance liabilities, incurred in
connection with the termination of any employees employed by the Departing
Partner for the benefit of the Company.
If the above-described option is not exercised by either the Departing
Partner or the successor general partner, as applicable, the Departing
Partner's general partner interest in the Company and managing member
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interest in the Operating Company and its Incentive Distribution Rights will
automatically convert into Common Units equal to the fair market value of such
interests as determined by an investment banking firm or other independent
expert selected in the manner described in the preceding paragraph.
TRANSFER OF GENERAL PARTNER'S INTERESTS AND INCENTIVE DISTRIBUTION RIGHTS
Except for a transfer by the General Partner of all, but not less than all,
of its general partner interest in the Company and managing member interest in
the Operating Company to (a) an affiliate of the General Partner or (b)
another person in connection with the merger or consolidation of the General
Partner with or into another person or the transfer by such General Partner of
all or substantially all of its assets to another person, the General Partner
may not transfer all or any part of its general partner interest in the
Company and managing member interest in the Operating Company to another
person prior to December 31, 2007, without the approval of the holders of at
least a Unit Majority; provided that, in each case, such transferee assumes
the rights and duties of the General Partner to whose interest such transferee
has succeeded, agrees to be bound by the provisions of the Partnership
Agreement, furnishes an Opinion of Counsel and agrees to acquire all (or the
appropriate portion thereof, as applicable) of the General Partner's interest
in the Operating Company and agrees to be bound by the provisions of the
Operating Company Agreement. The General Partner and its affiliates shall have
the right at any time, however, to transfer their Subordinated Units to one or
more persons without Unitholder approval. At any time, the members of the
General Partner may sell or transfer all or part of their interest in the
General Partner to an affiliate or a third party without the approval of the
Unitholders. The General Partner or its affiliates or a subsequent holder may
transfer its Incentive Distribution Rights to another person in connection
with its merger or consolidation with or into, or sale of all or substantially
all of its assets to, such person without the prior approval of the
Unitholders. Holders of Incentive Distribution Rights may also transfer such
rights to its affiliates without the prior approval of the Unitholders. Prior
to December 31, 2007, other transfers of the Incentive Distribution Rights
will require the affirmative vote of holders of at least a Unit Majority. On
or after December 31, 2007, the Incentive Distribution Rights will be freely
transferable.
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are intended to
discourage a person or group from attempting to remove the General Partner as
general partner of the Company or otherwise change the management of the
Company. If any person or group other than the General Partner and its
affiliates acquires beneficial ownership of 20% or more of any class of Units,
such person or group loses voting rights with respect to all of its Units. The
Partnership Agreement also provides that if the General Partner is removed as
a general partner of the Company under circumstances where Cause does not
exist and Units held by the General Partner and its affiliates are not voted
in favor of such removal, (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be
extinguished and (iii) the General Partner will have the right to convert its
partner interests (and all of its Incentive Distribution Rights) into Common
Units or to receive cash in exchange for such interests.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by persons
other than the General Partner and its affiliates, the General Partner will
have the right, which it may assign in whole or in part to any of its
affiliates or to the Company, to acquire all, but not less than all, of the
remaining limited partner interests of such class held by such unaffiliated
persons as of a record date to be selected by the General Partner, on at least
10 but not more than 60 days' notice. The purchase price in the event of such
a purchase shall be the greater of (i) the highest price paid by the General
Partner or any of its affiliates for any limited partner interests of such
class purchased within the 90 days preceding the date on which the General
Partner first mails notice of its election to purchase such limited partner
interests, and (ii) the Current Market Price as of the date three days prior
to the date such notice is mailed. As a consequence of the General Partner's
right to purchase outstanding limited partner interests, a holder of
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<PAGE>
limited partner interests may have his limited partner interests purchased
even though he may not desire to sell them, or the price paid may be less than
the amount the holder would desire to receive upon the sale of his limited
partner interests. The tax consequences to a Unitholder of the exercise of
this call right are the same as a sale by such Unitholder of his Subordinated
Units in the market. See "Tax Considerations--Disposition of Units."
MEETINGS; VOTING
Except as described below with respect to a Person or group owning 20% or
more of all Units, Unitholders or assignees who are record holders of Units on
the record date set pursuant to the Partnership Agreement will be entitled to
notice of, and to vote at, meetings of limited partners of the Company and to
act with respect to matters as to which approvals may be solicited. With
respect to voting rights attributable to Units that are owned by an assignee
who is a record holder but who has not yet been admitted as a limited partner,
the General Partner shall be deemed to be the limited partner with respect
thereto and shall, in exercising the voting rights in respect of such Units on
any matter, vote such Units at the written direction of such record holder.
Absent such direction, such Units will not be voted (except that, in the case
of Units held by the General Partner on behalf of Non-citizen Assignees (as
defined below), the General Partner shall distribute the votes in respect of
such Units in the same ratios as the votes of limited partners in respect of
other Units are cast).
The General Partner does not anticipate that any meeting of Unitholders will
be called in the foreseeable future. Any action that is required or permitted
to be taken by the Unitholders may be taken either at a meeting of the
Unitholders or without a meeting if consents in writing setting forth the
action so taken are signed by holders of such number of Units as would be
necessary to authorize or take such action at a meeting of all of the
Unitholders. Meetings of the Unitholders of the Company may be called by the
General Partner or by Unitholders owning at least 20% of the outstanding Units
of the class for which a meeting is proposed. Unitholders may vote either in
person or by proxy at meetings. The holders of a majority of the outstanding
Units of the class or classes for which a meeting has been called represented
in person or by proxy shall constitute a quorum at a meeting of Unitholders of
such class or classes, unless any such action by the Unitholders requires
approval by holders of a greater percentage of such Units, in which case the
quorum shall be such greater percentage.
Each record holder of a Unit has a vote according to his percentage interest
in the Company, although additional limited partner interests having special
voting rights could be issued by the Company. See "--Issuance of Additional
Securities." However, if at any time any person or group (other than the
General Partner and its affiliates) acquires, in the aggregate, beneficial
ownership of 20% or more of any class of Units then outstanding, such person
or group will lose voting rights with respect to all of its Units and such
Units may not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of Unitholders, calculating
required votes, determining the presence of a quorum or for other similar
Company purposes. The Partnership Agreement provides that Subordinated Units
held in nominee or street name account will be voted by the broker (or other
nominee) pursuant to the instruction of the beneficial owner unless the
arrangement between the beneficial owner and his nominee provides otherwise.
Except as otherwise provided in the Partnership Agreement, Common Units will
vote together with Subordinated Units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of Subordinated Units (whether or not
such record holder has been admitted as a limited partner) under the terms of
the Partnership Agreement will be delivered to the record holder by the
Company or by the Transfer Agent at the request of the Company.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "--Limited Liability," the Subordinated
Units will be fully paid, and Unitholders will not be required to make
additional contributions to the Company.
An assignee of a Subordinated Unit, subsequent to executing and delivering a
Transfer Application, but pending its admission as a substituted Limited
Partner in the Company, is entitled to an interest in the Company
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<PAGE>
equivalent to that of a Limited Partner with respect to the right to share in
allocations and distributions from the Company, including liquidating
distributions. The General Partner will vote and exercise other powers
attributable to Subordinated Units owned by an assignee who has not become a
substitute Limited Partner at the written direction of such assignee. See "--
Meetings; Voting." Transferees who do not execute and deliver a Transfer
Application will be treated neither as assignees nor as record holders of
Subordinated Units, and will not receive cash distributions, federal income
tax allocations or reports furnished to record holders of Subordinated Units.
See "Description of the Subordinated Units--Transfer of Subordinated Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Company is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the General Partner,
create a substantial risk of cancellation or forfeiture of any property in
which the Company has an interest because of the nationality, citizenship or
other related status of any Limited Partner or assignee, the Company may
redeem the Units held by such Limited Partner or assignee at their Current
Market Price (as defined in the Glossary). In order to avoid any such
cancellation or forfeiture, the General Partner may require each Limited
Partner or assignee to furnish information about his nationality, citizenship
or related status. If a Limited Partner or assignee fails to furnish
information about such nationality, citizenship or other related status within
30 days after a request for such information or the General Partner determines
after receipt of such information that the Limited Partner or assignee is not
an eligible citizen, such Limited Partner or assignee may be treated as a non-
citizen assignee ("Non-citizen Assignee"). In addition to other limitations on
the rights of an assignee who is not a substituted Limited Partner, a Non-
citizen Assignee does not have the right to direct the voting of his Units and
may not receive distributions in kind upon liquidation of the Company.
INDEMNIFICATION
The Partnership Agreement provides that the Company will indemnify the
General Partner, any Departing Partner, any Person who is or was an affiliate
of a General Partner or any Departing Partner, any Person who is or was a
member, partner, officer, director, employee, agent or trustee of a General
Partner or any Departing Partner or any affiliate of a General Partner or any
Departing Partner, or any Person who is or was serving at the request of a
General Partner or any Departing Partner or any affiliate of any such person,
any affiliate of a General Partner or any Departing Partner as an officer,
director, employee, member, partner, agent, fiduciary or trustee of another
Person ("Indemnitees"), to the fullest extent permitted by law, from and
against any and all losses, claims, damages, liabilities (joint or several),
expenses (including, without limitation, legal fees and expenses), judgments,
fines, penalties, interest, settlements and other amounts arising from any and
all claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be involved, or
is threatened to be involved, as a party or otherwise, by reason of its status
as an Indemnitee; provided that in each case the Indemnitee acted in good
faith and in a manner that such Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
proceeding, had no reasonable cause to believe its conduct was unlawful. Any
indemnification under these provisions will be only out of the assets of the
Company, and the General Partner shall not be personally liable for, or have
any obligation to contribute or loan funds or assets to the Company to enable
it to effectuate, such indemnification. The Company is authorized to purchase
(or to reimburse the General Partner or its affiliates for the cost of)
insurance against liabilities asserted against and expenses incurred by such
persons in connection with the Company's activities, regardless of whether the
Company would have the power to indemnify such person against such liabilities
under the provisions described above.
BOOKS AND REPORTS
The General Partner is required to keep appropriate books of the business of
the Company at the principal offices of the Company. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
For tax purposes, the fiscal year of the Company is the calendar year. For
financial reporting purposes, however, the fiscal year of the Company is a
fiscal year ending on December 31.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the General Partner will furnish or make available to
each record holder of Units (as of a record date selected by the General
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Partner) an annual report containing audited financial statements of the
Company for the past fiscal year, prepared in accordance with generally
accepted accounting principles. As soon as practicable, but in no event later
than 90 days after the close of each quarter (except the last quarter of each
fiscal year), the General Partner will furnish or make available to each
record holder of Units (as of a record date selected by the General Partner) a
report containing unaudited financial statements of the Company with respect
to such quarter and such other information as may be required by law.
The Company will furnish each record holder of a Unit information reasonably
required for tax reporting purposes within 90 days after the close of each
calendar year. Such information is expected to be furnished in summary form so
that certain complex calculations normally required of partners can be
avoided. The Company's ability to furnish such summary information to
Unitholders will depend on the cooperation of such Unitholders in supplying
certain information to the Company. Every Unitholder (without regard to
whether he supplies such information to the Company) will receive information
to assist him in determining his federal and state tax liability and filing
his federal and state income tax returns.
RIGHT TO INSPECT COMPANY BOOKS AND RECORDS
The Partnership Agreement provides that a Limited Partner can for a purpose
reasonably related to such Limited Partner's interest as a limited partner,
upon reasonable demand and at his own expense, have furnished to him (i) a
current list of the name and last known address of each partner, (ii) a copy
of the Company's tax returns, (iii) information as to the amount of cash, and
a description and statement of the agreed value of any other property or
services, contributed or to be contributed by each partner and the date on
which each became a partner, (iv) copies of the Partnership Agreement, the
certificate of limited partnership of the Company, amendments thereto and
powers of attorney pursuant to which the same have been executed, (v)
information regarding the status of the Company's business and financial
condition, and (vi) such other information regarding the affairs of the
Company as is just and reasonable. The Company may, and intends to, keep
confidential from the Limited Partners trade secrets or other information the
disclosure of which the Company believes in good faith is not in the best
interests of the Company or which the Company is required by law or by
agreements with third parties to keep confidential.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Company has agreed to register for resale
under the Securities Act and applicable state securities laws any Units or
other securities of the Company (including the Securities covered by this
Prospectus) proposed to be sold by the General Partner or any of its
affiliates if an exemption from such registration requirements is not
otherwise available for such proposed transaction. The Company is obligated to
pay all expenses incidental to such registration, excluding underwriting
discounts and commissions. See "Units Eligible for Future Sale."
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UNITS ELIGIBLE FOR FUTURE SALE
The Securities covered by this Prospectus will generally be freely
transferable without restriction or further registration under the Securities
Act, except that any Subordinated Units owned by an "affiliate" of the Company
(as that term is defined in the rules and regulations under the Securities
Act) may not be resold publicly except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption therefrom under
Rule 144 thereunder ("Rule 144") or otherwise. Rule 144 permits securities
acquired by an affiliate of the issuer in a public offering to be sold into
the market in an amount that does not exceed, during any three-month period,
the greater of (i) 1% of the total number of such securities outstanding or
(ii) the average weekly reported trading volume of the Units for the four
calendar weeks prior to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. A person who is not deemed to
have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned his Units for at least one
year would be entitled to sell such Units under Rule 144 without regard to the
public information requirements, volume limitations, manner of sale provisions
or notice requirements of Rule 144.
Prior to the end of the Subordination Period, the Company may not issue
equity securities of the Company ranking prior or senior to the Common Units
or an aggregate of more than 7,458,684 additional Common Units (excluding the
1,118,803 Common Units issued upon the exercise of the underwriters' over-
allotment option in connection with the Initial Offering and Common Units
issued upon conversion of Subordinated Units, in connection with the repayment
of certain indebtedness, or pursuant to employee benefit plans and subject to
adjustment in the event of a combination or subdivision of the Common Units),
or an equivalent amount of securities ranking on a parity with the Common
Units, without the approval of the holders of at least a Unit Majority. The
Partnership Agreement provides that, after the Subordination Period, the
Company may issue an unlimited number of limited partner interests of any type
without a vote of the Unitholders. The Partnership Agreement does not impose
any restriction on the Company's ability to issue equity securities ranking
junior to the Common Units at any time. Any issuance of additional Units or
certain other equity securities would result in a corresponding decrease in
the proportionate ownership interest in the Company represented by, and could
adversely affect the cash distributions to and market price of, Common Units
or Subordinated Units then outstanding. See "The Partnership Agreement--
Issuance of Additional Securities."
Pursuant to the Partnership Agreement, the General Partner and its
affiliates will have the right, upon the terms and subject to the conditions
therein, to cause the Company to register under the Securities Act and state
laws the offer and sale of any Units or other Partnership Securities that they
hold (including the Securities covered by this Prospectus). Subject to the
terms and conditions of the Partnership Agreement, such registration rights
allow the General Partner and its affiliates or its assignees holding any
Units to require registration of any such Units and to include any such Units
in a registration by the Company of other Units, including Units offered by
the Company or by any Unitholder. Such registration rights will continue in
effect for two years following any withdrawal or removal of the General
Partner as a general partner of the Company. In connection with any such
registration, the Company will indemnify each Unitholder participating in such
registration and its officers, directors and controlling persons from and
against any liabilities under the Securities Act or any state securities laws
arising from the registration statement or prospectus. The Company will bear
all costs and expenses of any such registration. In addition, the General
Partner and its affiliates may sell its Units in private transactions at any
time, subject to compliance with applicable laws.
The Company, the General Partner, the officers and directors of the General
Partner and their respective affiliates have agreed not to (i) offer, sell,
contract to sell or otherwise dispose of any Common Units or Subordinated
Units, any securities that are convertible into, or exercisable or
exchangeable for, or that represent the right to receive, Common Units or
Subordinated Units or any securities that are senior to or pari passu with
Common Units, or (ii) grant any options or warrants to purchase Common Units
or Subordinated Units (other than the grant of options to purchase Common
Units pursuant to the Long-Term Incentive Plan), for a period of 180 days
after the date of the date of the Prospectus issued in connection with the
Initial Offering (November 13, 1997) without the prior written consent of
Smith Barney Inc., except for (a) transfers to certain affiliates and to
certain family members and trusts for their benefit and (b) the issuance and
transfer of Common Units and Subordinated Units in the Transactions.
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SELLING UNITHOLDERS
The persons listed in the first column of the table below are the "Selling
Unitholders." The Selling Unitholders acquired their Subordinated Units in
connection with the formation of the Company. See "Formation of the Company."
The Selling Unitholders have pledged the Subordinated Units offered hereby to
Smith Barney Inc. as security for borrowings under a revolving line of credit
that provides for borrowings of up to $25.0 million. In the event Smith Barney
Inc. deems it necessary, in its sole discretion, to sell Subordinated Units,
this Prospectus may be used for any such sale(s).
The following table shows for each Selling Unitholder, as of the date of
this Prospectus, certain information with regard to beneficial ownership of
Subordinated Units of the Company:
<TABLE>
<CAPTION>
AMOUNT AND
AMOUNT OF PERCENT OF
CURRENT AMOUNT OF SUBORDINATED BENEFICIAL OWNERSHIP PERCENT OF
BENEFICIAL OWNERSHIP UNITS COVERED OF SUBORDINATED BENEFICIAL OWNERSHIP
OF SUBORDINATED BY THIS UNITS AFTER THIS OF TOTAL UNITS AFTER
NAME UNITS PROSPECTUS OFFERING(1) THIS OFFERING(2)
---- -------------------- ------------- -------------------- --------------------
<S> <C> <C> <C> <C>
U.S. Timberlands Hold-
ings, L.L.C. .......... 2,894,157 2,894,157 0 (0%) 0 (0%)
U.S. Timberlands Manage-
ment Company, L.L.C. .. 1,244,565 1,244,565 0 (0%) 0 (0%)
</TABLE>
- --------
(1) Based on the number of Subordinated Units outstanding at the date of this
Prospectus; assumes all of the Securities covered by this Prospectus are
sold by the Selling Unitholders.
(2) Based on the number of Units outstanding at the date of this Prospectus;
assumes all of the Securities covered by this Prospectus are sold by the
Selling Unitholders.
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MANNER OF OFFERING
The Securities covered by this Prospectus may be sold from time to time by
the Selling Unitholders or by pledgees, donees, transferees, or other
successors in interest to the Selling Unitholders (including Smith Barney
Inc., which holds such Subordinated Units under a pledge). See "Selling
Unitholders." The Company will not receive any of the proceeds from any such
sales. There presently are no arrangements or understandings, formal or
informal, pertaining to the distribution of the Subordinated Units described
herein.
The Selling Unitholders may sell the Securities covered by this Prospectus
from time to time in transactions (which may involve crosses and block
transactions) in the over-the-counter market, in negotiated transactions or
otherwise, at market prices prevailing at the time of the sale or at
negotiated prices. The Selling Unitholders may sell some or all of the
Subordinated Units in transactions involving broker-dealers, who may act
solely as agent and/or may acquire Subordinated Units as principal. Broker-
dealers participating in such transactions as agent may receive commissions
from the Selling Unitholders (and, if they act as agent for the purchaser of
such Subordinated Units, from such purchaser), such commissions may be at
negotiated rates where permissible under such rules. Participating broker-
dealers may agree with the Selling Unitholders to sell a specified number of
Subordinated Units at a stipulated price per Subordinated Unit and, to the
extent such broker-dealer is unable to do so acting as an agent for the
Selling Unitholders, to purchase as principal any unsold Subordinated Units at
the price required to fulfill the broker-dealer's commitment to the Selling
Unitholders. In addition, or alternatively, Subordinated Units may be sold by
the Selling Unitholders and/or by or through other broker-dealers in special
offerings, exchange distributions or secondary distributions, and in
connection therewith commissions in excess of the customary commission
prescribed by such governing rules may be paid to participating broker-
dealers, or, in the case of certain secondary distributions, a discount or
concession from the offering price may be allowed to participating broker-
dealers in excess of the customary commission. Broker-dealers who acquire
Subordinated Units as principal may thereafter resell such Subordinated Units
from time to time in transactions (which may involve crosses and block
transactions and which may involve sales to or through other broker-dealers,
including transactions of the nature described in the preceding two sentences)
in the over-the-counter market, in negotiated transactions or otherwise, at
market prices prevailing at the time of sale or at negotiated prices and in
connection with such resales may pay to or receive commissions from the
purchaser of such Subordinated Units.
The Company may agree to indemnify the Selling Unitholders as an underwriter
under the Securities Act against certain liabilities, including liabilities
arising under the Securities Act. The Selling Unitholders may indemnify any
broker-dealer that participates in transactions involving sales of the
Subordinated Units against certain liabilities, including liabilities arising
under the Securities Act.
The Selling Unitholders may resell the Securities covered by this Prospectus
only if such securities are qualified for sale under applicable state
securities or "blue sky" laws or exemptions from such registration and
qualification requirements are available.
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TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be
relevant to prospective Unitholders and, to the extent set forth below under
"--Legal Opinions and Advice," expresses the opinion of Andrews & Kurth
L.L.P., special counsel to the General Partner and the Company ("Counsel"),
insofar as it relates to matters of law and legal conclusions. This section is
based upon current provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed regulations thereunder and current
administrative rulings and court decisions, all of which are subject to
change. Subsequent changes in such authorities may cause the tax consequences
to vary substantially from the consequences described below. Unless the
context otherwise requires, references in this section to the Company are
references to both the Company and the Operating Company.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting the Company or the Unitholders. Moreover,
the discussion focuses on Unitholders who are individual citizens or residents
of the United States and has only limited application to corporations,
estates, trusts, non-resident aliens or other Unitholders subject to
specialized tax treatment (such as tax-exempt institutions, foreign persons,
individual retirement accounts, REITs or mutual funds). Accordingly, each
prospective Unitholder should consult, and should depend on, his own tax
advisor in analyzing the federal, state, local and foreign tax consequences
peculiar to him of the ownership or disposition of Subordinated Units.
LEGAL OPINIONS AND ADVICE
Counsel is of the opinion that, based on the accuracy of the representations
and subject to the qualifications set forth in the detailed discussion that
follows, for federal income tax purposes (i) the Company and the Operating
Company will each be treated as a partnership, and (ii) owners of Subordinated
Units (with certain exceptions, as described in "--Limited Partner Status"
below) will be treated as partners of the Company (but not the Operating
Company). In addition, all statements as to matters of law and legal
conclusions contained in this section, unless otherwise noted, reflect the
opinion of Counsel.
No ruling has been or will be requested from the Internal Revenue Service
(the "IRS") with respect to classification of the Company as a partnership for
federal income tax purposes, whether the Company's timber operations generate
"qualifying income" under Section 7704 of the Code or any other matter
affecting the Company or prospective Unitholders. An opinion of counsel
represents only that counsel's best legal judgment and does not bind the IRS
or the courts. Thus, no assurance can be provided that the opinions and
statements set forth herein would be sustained by a court if contested by the
IRS. Any such contest with the IRS may materially and adversely impact the
market for the Subordinated Units and the prices at which Subordinated Units
trade. In addition, the costs of any contest with the IRS will be borne
directly or indirectly by the Unitholders and the General Partner.
Furthermore, no assurance can be given that the treatment of the Company or an
investment therein will not be significantly modified by future legislative or
administrative changes or court decisions. Any such modification may or may
not be retroactively applied.
For the reasons hereinafter described, Counsel has not rendered an opinion
with respect to the following specific federal income tax issues: (i) the
treatment of a Unitholder whose Subordinated Units are loaned to a short
seller to cover a short sale of Subordinated Units (see "--Tax Treatment of
Operations--Treatment of Short Sales"), (ii) whether a Unitholder acquiring
Subordinated Units in separate transactions must maintain a single aggregate
adjusted tax basis in his Subordinated Units (see "--Disposition of
Subordinated Units--Recognition of Gain or Loss"), (iii) whether the Company's
monthly convention for allocating taxable income and losses is permitted by
existing Treasury Regulations (see "--Disposition of Subordinated Units--
Allocations Between Transferors and Transferees"), and (iv) whether the
Company's method for depreciating Section 743 adjustments is sustainable (see
"--Tax Treatment of Operations--Section 754 Election").
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PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his
allocable share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of
whether cash distributions are made. Distributions by a partnership to a
partner are generally not taxable unless the amount of any cash distributed is
in excess of the partner's adjusted basis in his partnership interest.
No ruling has been or will be sought from the IRS as to the status of the
Company or the Operating Company as a partnership for federal income tax
purposes. Instead the Company has relied on the opinion of Counsel that, based
upon the Code, the regulations thereunder, published revenue rulings and court
decisions, the Company and the Operating Company have been and will each be
classified as a partnership for federal income tax purposes.
In rendering its opinion, Counsel has relied on certain factual
representations made by the Company and the General Partner. Such factual
matters are as follows:
(a) Neither the Company nor the Operating Company has elected nor will
elect to be treated as an association or corporation;
(b) The Company has been operating in accordance with (i) all applicable
partnership statutes, (ii) the Partnership Agreement, and (iii) the
description thereof in this Prospectus;
(c) The Operating Company has been operating in accordance with (i) all
applicable limited liability company statutes, (ii) the Operating Company
Agreement, and (iii) the description thereof in this Prospectus;
(d) For each taxable year, more than 90% of the gross income of the
Company has been and will be (i) derived from the exploration, development,
production, processing, refining, transportation or marketing of any
mineral or natural resource, including timber, or (ii) other items of
"qualifying income" within the meaning of Section 7704(d) of the Code; and
(e) The General Partner has acted and will at all times act independently
of the limited partners.
Section 7704 of the Code provides that publicly-traded partnerships will, as
a general rule, be taxed as corporations. However, an exception (the
"Qualifying Income Exception") exists with respect to publicly-traded
partnerships of which 90% or more of the gross income for every taxable year
consists of "qualifying income." Qualifying income includes interest (from
other than a financial business), dividends and income and gains from the
processing, transportation and marketing of timber. Based upon the
representations of the Company and the General Partner and a review of the
applicable legal authorities, Counsel is of the opinion that at least 90% of
the Company's gross income will constitute qualifying income. The Company
estimates that less than one percent of its gross income for each taxable year
will not constitute qualifying income.
If the Company fails to meet the Qualifying Income Exception (other than a
failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery), the Company will be treated as if
it had transferred all of its assets (subject to liabilities) to a newly
formed corporation (on the first day of the year in which it fails to meet the
Qualifying Income Exception) in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their interests in
the Company. This contribution and liquidation should be tax-free to
Unitholders and the Company, so long as the Company, at that time, does not
have liabilities in excess of the tax basis of its assets. Thereafter, the
Company would be treated as a corporation for federal income tax purposes.
If the Company or the Operating Company were treated as an association
taxable as a corporation in any taxable year, either as a result of a failure
to meet the Qualifying Income Exception or otherwise, its items of income,
gain, loss and deduction would be reflected only on its tax return rather than
being passed through to the Unitholders, and its net income would be taxed to
the Company or the Operating Company at corporate rates.
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In addition, any distribution made to a Unitholder would be treated as either
taxable dividend income (to the extent of the Company's current or accumulated
earnings and profits) or (in the absence of earnings and profits) a nontaxable
return of capital (to the extent of the Unitholder's tax basis in his
Subordinated Units) or taxable capital gain (after the Unitholder's tax basis
in the Subordinated Units is reduced to zero). Accordingly, treatment of
either the Company or the Operating Company as an association taxable as a
corporation would result in a material reduction in a Unitholder's cash flow
and after-tax return and thus would likely result in a substantial reduction
of the value of the Units.
The discussion below is based on the assumption that the Company will be
classified as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of the Company will be treated
as partners of the Company for federal income tax purposes. Counsel is also of
the opinion that (a) assignees who have executed and delivered Transfer
Applications, and are awaiting admission as limited partners and (b)
Unitholders whose Subordinated Units are held in street name or by a nominee
and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their Subordinated Units will
be treated as partners of the Company for federal income tax purposes. As
there is no direct authority addressing assignees of Subordinated Units who
are entitled to execute and deliver Transfer Applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute
and deliver Transfer Applications, Counsel's opinion does not extend to these
persons. Income, gain, deductions or losses would not appear to be reportable
by a Unitholder who is not a partner for federal income tax purposes, and any
cash distributions received by such a Unitholder would therefore be fully
taxable as ordinary income. These holders should consult their own tax
advisors with respect to their status as partners in the Company for federal
income tax purposes. Furthermore, a purchaser or other transferee of
Subordinated Units who does not execute and deliver a Transfer Application may
not receive certain federal income tax information or reports furnished to
record holders of Subordinated Units unless the Subordinated Units are held in
a nominee or street name account and the nominee or broker has executed and
delivered a Transfer Application with respect to such Subordinated Units.
A beneficial owner of Subordinated Units whose Subordinated Units have been
transferred to a short seller to complete a short sale would appear to lose
his status as a partner with respect to such Subordinated Units for federal
income tax purposes. See "--Tax Treatment of Operations--Treatment of Short
Sales."
TAX CONSEQUENCES OF UNIT OWNERSHIP
Flow-through of Taxable Income
No federal income tax will be paid by the Company. Instead, each Unitholder
will be required to report on his income tax return his allocable share of the
income, gains, losses and deductions of the Company without regard to whether
corresponding cash distributions are received by such Unitholder.
Consequently, a Unitholder may be allocated income from the Company even if he
has not received a cash distribution. Each Unitholder will be required to
include in income his allocable share of Company income, gain, loss and
deduction for the taxable year of the Company ending with or within the
taxable year of the Unitholder.
Treatment of Company Distributions
Distributions by the Company to a Unitholder generally will not be taxable
to the Unitholder for federal income tax purposes to the extent of his tax
basis in his Subordinated Units immediately before the distribution. Cash
distributions in excess of a Unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the Subordinated Units,
taxable in accordance with the rules described under "--Disposition of
Subordinated Units" below. Any reduction in a Unitholder's share of the
Company's liabilities for which no partner, including the General Partner,
bears the economic risk of loss ("nonrecourse liabilities") will be treated as
a distribution of cash to that Unitholder. To the extent that Company
distributions cause a Unitholder's "at risk" amount to be less than zero at
the end of any taxable year, he must recapture any losses deducted in previous
years. See "--Limitations on Deductibility of Company Losses."
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A decrease in a Unitholder's percentage interest in the Company because of
the issuance by the Company of additional Subordinated Units will decrease
such Unitholder's share of nonrecourse liabilities of the Company, and thus
will result in a corresponding deemed distribution of cash. A non-pro rata
distribution of money or property may result in ordinary income to a
Unitholder, regardless of his tax basis in his Subordinated Units, if such
distribution reduces the Unitholder's share of the Company's "unrealized
receivables" (including depreciation recapture) and/or substantially
appreciated "inventory items" (both as defined in Section 751 of the Code)
(collectively, "Section 751 Assets"). To that extent, the Unitholder will be
treated as having been distributed his proportionate share of the Section 751
Assets and having exchanged such assets with the Company in return for the
non-pro rata portion of the actual distribution made to him. This latter
deemed exchange will generally result in the Unitholder's realization of
ordinary income under Section 751(b) of the Code. Such income will equal the
excess of (1) the non-pro rata portion of such distribution over (2) the
Unitholder's tax basis for the share of such Section 751 Assets deemed
relinquished in the exchange.
Basis of Subordinated Units
A Unitholder's initial tax basis for his Subordinated Units will be the
amount he paid for the Subordinated Units plus his share of the Company's
nonrecourse liabilities. That basis will be increased by his share of Company
income and by any increases in his share of Company nonrecourse liabilities.
That basis will be decreased (but not below zero) by distributions from the
Company, by the Unitholder's share of Company losses, by any decrease in his
share of Company nonrecourse liabilities and by his share of expenditures of
the Company that are not deductible in computing its taxable income and are
not required to be capitalized. A limited partner will have no share of
Company debt which is recourse to the General Partner, but will have a share,
generally based on his share of profits, of Company debt which is not recourse
to any partner. See "--Disposition of Subordinated Units--Recognition of Gain
or Loss."
Limitations on Deductibility of Company Losses
The deduction by a Unitholder of his share of Company losses will be limited
to the tax basis in his Units and, in the case of an individual Unitholder or
a corporate Unitholder (if more than 50% of the value of its stock is owned
directly or indirectly by five or fewer individuals or certain tax-exempt
organizations), to the amount for which the Unitholder is considered to be "at
risk" with respect to the Company's activities, if that is less than the
Unitholder's tax basis. A Unitholder must recapture losses deducted in
previous years to the extent that Company distributions cause the Unitholder's
at risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a Unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that the Unitholder's tax
basis or at risk amount (whichever is the limiting factor) is subsequently
increased. Upon the taxable disposition of a Unit, any gain recognized by a
Unitholder can be offset by losses that were previously suspended by the at
risk limitation but may not be offset by losses suspended by the basis
limitation. Any excess loss (above such gain) previously suspended by the at
risk or basis limitations is no longer utilizable.
In general, a Unitholder will be at risk to the extent of the tax basis of
his Units, excluding any portion of that basis attributable to his share of
Company nonrecourse liabilities, reduced by any amount of money the Unitholder
borrows to acquire or hold his Units if the lender of such borrowed funds owns
an interest in the Company, is related to such a person or can look only to
Units for repayment. A Unitholder's at risk amount will increase or decrease
as the tax basis of the Unitholder's Units increases or decreases (other than
tax basis increases or decreases attributable to increases or decreases in his
share of Company nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by the Company will only be available to offset
future income
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generated by the Company and will not be available to offset income from other
passive activities or investments (including other publicly-traded
partnerships) or salary or active business income. Passive losses which are
not deductible because they exceed a Unitholder's income generated by the
Company may be deducted in full when he disposes of his entire investment in
the Company in a fully taxable transaction to an unrelated party. The passive
activity loss rules are applied after other applicable limitations on
deductions such as the at risk rules and the basis limitation.
A Unitholder's share of net income from the Company may be offset by any
suspended passive losses from the Company, but it may not be offset by any
other current or carryover losses from other passive activities, including
those attributable to other publicly-traded partnerships. The IRS has
announced that Treasury Regulations will be issued which characterize net
passive income from a publicly-traded partnership as investment income for
purposes of the limitations on the deductibility of investment interest.
Limitations on Interest Deductions
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a Unitholder's net passive income from the Company will be
treated as investment income for this purpose. In addition, the Unitholder's
share of the Company's portfolio income will be treated as investment income.
Investment interest expense includes (i) interest on indebtedness properly
allocable to property held for investment, (ii) the Company's interest expense
attributed to portfolio income, and (iii) the portion of interest expense
incurred to purchase or carry an interest in a passive activity to the extent
attributable to portfolio income. The computation of a Unitholder's investment
interest expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or carry a Unit. Net investment
income includes gross income from property held for investment and amounts
treated as portfolio income pursuant to the passive loss rules less deductible
expenses (other than interest) directly connected with the production of
investment income, but generally does not include gains attributable to the
disposition of property held for investment.
ALLOCATION OF COMPANY INCOME, GAIN, LOSS AND DEDUCTION
In general, if the Company has a net profit, items of income, gain, loss and
deduction will be allocated among the General Partner and the Unitholders in
accordance with their respective percentage interests in the Company. At any
time that distributions are made to the Common Units and not to the
Subordinated Units, or that Incentive Distributions are made to the General
Partner, gross income will be allocated to the recipients to the extent of
such distribution. If the Company has a net loss, items of income, gain, loss
and deduction will generally be allocated first, to the General Partner and
the Unitholders in accordance with their respective Percentage Interests to
the extent of their positive capital accounts (as maintained under the
Partnership Agreement) and, second, to the General Partner.
As required by Section 704(c) of the Code and as permitted by Regulations
thereunder, certain items of Company income, deduction, gain and loss will be
allocated to account for the difference between the tax basis and fair market
value of property contributed to the Company by the General Partner and
Holdings ("Contributed Property"). The effect of these allocations to a
Unitholder will be essentially the same as if the tax basis of the Contributed
Property were equal to their fair market value at the time of contribution. In
addition, certain items of recapture income will be allocated to the extent
possible to the partner allocated the deduction or curative allocation giving
rise to the treatment of such gain as recapture income in order to minimize
the recognition of ordinary income by some Unitholders. Finally, although the
Company does not expect that its operations will result in the creation of
negative capital accounts, if negative capital accounts nevertheless result,
items of Company income and gain will be allocated in an amount and manner
sufficient to eliminate the negative balance as quickly as possible.
Regulations provide that an allocation of items of partnership income, gain,
loss or deduction, other than an allocation required by Section 704(c) of the
Code to eliminate the difference between a partner's "book" capital account
(credited with the fair market value of Contributed Property) and "tax"
capital account (credited with
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the tax basis of Contributed Property) (the "Book-Tax Disparity"), will
generally be given effect for federal income tax purposes in determining a
partner's distributive share of an item of income, gain, loss or deduction
only if the allocation has substantial economic effect. In any other case, a
partner's distributive share of an item will be determined on the basis of the
partner's interest in the partnership, which will be determined by taking into
account all the facts and circumstances, including the partner's relative
contributions to the partnership, the interests of the partners in economic
profits and losses, the interest of the partners in cash flow and other
nonliquidating distributions and rights of the partners to distributions of
capital upon liquidation.
Counsel is of the opinion that allocations under the Partnership Agreement
will be given effect for federal income tax purposes in determining a
partner's distributive share of an item of income, gain, loss or deduction.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year
The Company has adopted the year ending December 31 as its taxable year and
has adopted the accrual method of accounting for federal income tax purposes.
Each Unitholder will be required to include in income his allocable share of
Company income, gain, loss and deduction for the taxable year of the Company
ending within or with the taxable year of the Unitholder. In addition, a
Unitholder who has a taxable year ending on a date other than December 31 and
who disposes of all of his Units following the close of the Company's taxable
year but before the close of his taxable year must include his allocable share
of Company income, gain, loss and deduction in income for his taxable year
with the result that he will be required to report in income for his taxable
year his distributive share of more than one year of Partnership income, gain,
loss and deduction. See "--Disposition of Common Units--Allocations Between
Transferors and Transferees."
Initial Tax Basis, Depreciation and Amortization
The tax basis of the various assets of the Company will be used for purposes
of computing depletion with respect to timber properties, depreciation and
cost recovery deductions and, ultimately, gain or loss on the disposition of
such assets. The Company assets initially had an aggregate tax basis equal to
the tax basis of the assets in the possession of USTK and Old Services
immediately prior to the formation of the Company. The federal income tax
burden associated with the difference between the fair market value of
property held by the Company and its tax basis immediately prior to this
offering will be borne by partners holding interests in the Company prior to
this offering. See "--Allocation of Company Income, Gain, Loss and Deduction."
To the extent allowable, the Company may elect to use the depletion,
depreciation and cost recovery methods that will result in the largest
depreciation deductions in the early years of the Company. The Company will
not be entitled to any amortization deductions with respect to any goodwill
conveyed to the Company on formation. Property subsequently acquired or
constructed by the Company may be depreciated using accelerated methods
permitted by the Code.
If the Company disposes of depreciable property by sale, foreclosure, or
otherwise, all or a portion of any gain (determined by reference to the amount
of depreciation previously deducted and the nature of the property) may be
subject to the recapture rules and taxed as ordinary income rather than
capital gain. Similarly, a partner who has taken cost recovery or depreciation
deductions with respect to property owned by the Company may be required to
recapture such deductions as ordinary income upon a sale of his interest in
the Company. See "--Allocation of Company Income, Gain, Loss and Deduction"
and "--Disposition of Common Units--Recognition of Gain or Loss."
Costs incurred in organizing the Company are being amortized over a period
of 60 months. The costs incurred in promoting the issuance of Units (i.e.
syndication expenses) must be capitalized and cannot be deducted currently,
ratably or upon termination of the Company. There are uncertainties regarding
the classification of costs as organization expenses, which may be amortized,
and as syndication expenses, which may not be amortized. Under recently
adopted regulations, the underwriting discounts and commissions would be
treated as a syndication cost.
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Timber Income
Under Section 631 of the Code, a substantial part of the gain or loss
realized by the Company from the sale of timber will qualify as Section 1231
gain or loss. A Unitholder's distributive share of the Company Section 1231
gain or loss aggregated each year with any of his other Section 1231 gains and
losses (generally gains and losses from the sale of property used in a trade
or business held for at least one year and from involuntary conversions). If a
net gain results, all such gains and losses are capital gains and losses; if a
net loss results, all such gains and losses are ordinary income and losses.
Moreover, a Unitholder's net Section 1231 gain is treated as ordinary income
to the extent of his prior net Section 1231 losses for the five most recent
prior taxable years to the extent such losses have not previously been offset
against Section 1231 gains. Losses are deemed recaptured in the chronological
order in which they arose.
The special treatment provided by Section 631 for Unitholders applies only
to timber that the Company has either owned or had a contract right to cut for
a period 12 months or more before being cut. If the timber is cut by the
Company, Section 631(a) permits the Company to elect, and it has elected, to
treat the cutting of the timber as a sale of a Section 1231 asset for an
amount equal to the fair market value of the timber as of the beginning of the
taxable year in which it is cut. In such event, the cut timber has a basis
equal to that value in determining ordinary income or loss on a subsequent
sale of the cut timber. If the timber is cut by another person pursuant to a
contract in which the Company retains an economic interest in the timber, the
amount received by the Company under that contract is also treated under
Section 631(b) as the amount realized from the sale of a Section 1231 asset
(generally, the date the gain is deemed realized is the date when, in the
ordinary course of business, the quantity of the timber cut is first
definitely determined). In either case, the Section 1231 gain or loss is the
difference between the amount realized and the cost depletion allowed with
respect to the cut timber. See "--Timber Depletion."
Income from the sale of timber that does not qualify under Section 631 will
be taxable as ordinary income in the year of sale.
Timber Depletion
Timber is subject to cost depletion and is not subject to accelerated cost
recovery, depreciation or percentage depletion. Timber depletion is determined
with respect to each separate timber account (containing timber located in a
timber "block") and is equal to the product obtained by multiplying the units
of timber cut by a fraction, the numerator of which is the aggregate adjusted
basis of all timber included in such account and the denominator of which is
the total number of timber units in such timber account. The depletion
allowance so calculated represents the adjusted tax basis of such timber for
purposes or determining gain or loss on disposition. The tax basis of timber
in each timber account is reduced by the depletion allowance for such account.
If a Section 631(a) election is in effect, the taxpayer will be entitled to
a depletion allowance as discussed above under "Timber Income." Thereafter,
the taxpayer's adjusted basis with respect to such timber will be the fair
market value of the timber as of the first day of the taxable year in which
the timber is cut. As the cut timber is sold, the taxpayer's adjusted basis
will be taken into account for purposes of determining gain or loss on the
sale. In the case of an outright sale of timber or a disposition of timber
treated as a sale under Section 631(b) of the Code, the amount realized for
the timber is reduced by the adjusted basis in such timber. A taxpayer
disposing of timber with a retained economic interest in a transaction which
fails to qualify under Section 631(b) also reduces the amount realized from
such disposition by the adjusted basis in the timber.
Sales of Timberlands
If any tract of timberland is sold or otherwise disposed of in a taxable
transaction, the Company will recognize gain or loss measured by the
difference between the amount realized (including the amount of any
indebtedness assumed by the purchaser upon such disposition or to which such
property is subject) and the adjusted tax basis of such property. Generally,
the character of any gain or loss recognized upon that disposition
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will depend upon whether the tract of timberland (i) is held for sale to
customers in the ordinary course of business (i.e., the Company is a "dealer"
with respect to such property), (ii) is held for "use in a trade or business"
within the meaning of Section 1231 of the Code or (iii) is held by the Company
as a "capital asset" within the meaning of Section 1221 of the Code. In
determining dealer status with respect to Forestlands and other types of real
estate, the courts have identified a number of factors for distinguishing
between a particular property held for sale in the ordinary course of business
and one held for investment. Any determination must be based on all the facts
and circumstances surrounding the particular property and sale in question.
The Company holds its Timberlands for the purposes of generating cash flow
from the periodic harvesting and sale of timber and achieving long-term
capital appreciation. Although the General Partner may consider strategic
sales of Timberlands consistent with achieving long-term capital appreciation,
the General Partner does not anticipate frequent sales, nor significant
marketing, improvement or subdivision activity in connection with any
strategic sale of timberland. Thus, the General Partner does not believe the
Company will be viewed as a dealer. However, in light of the factual nature of
this question, there is no assurance that the Company will not be viewed by
the IRS as a "dealer" in Timberlands.
In addition, were the IRS successfully to contend that any of the Company's
predecessors was a dealer with respect to any tracts of timberland distributed
to the Company, gains from sales of these tracts within a five-year period
from the date the Initial Offering was consummated (not later than November
13, 1997) would be taxable as ordinary income. The General Partner, however,
believes that none of the Company's predecessors was a dealer with respect to
any of its timberland holdings.
If the Company is not a dealer with respect to a particular tract of
timberland and the Company and its predecessor has held the timberland for a
one-year period primarily for use in its trade or business, the character of
any gain or loss realized from the disposition of such timberland will be
determined under Section 1231 of the Code. See "--Timber Income." If the
Company and its predecessor has not held a timberland tract for more than one
year at the time of sale, gain or loss from the sale thereof will be ordinary.
If the Company is not a dealer with respect to a particular tract of
timberland, and the timberland is not used in a trade or business, that tract
will be a "capital asset" within the meaning of Section 1221 of the Code. Gain
or loss recognized from the disposition of that timberland will be taxable as
capital gain or loss, and the character of such capital gain or loss as long-
term or short-term will be based upon the Company's holding period in such
property at the time of its sale.
Since amounts realized upon the sale, exchange or other disposition of a
tract of timberland by the Company may be used to reduce any liability to
which the tract of timberland is subject, it is possible (although not
anticipated), that the Company's gain on the sale of such a tract would exceed
the distributive proceeds of the sale, and the income taxes payable on the
sale of the Unitholders could exceed their distributive share of any such
proceeds.
Section 754 Election
The Company has made the election permitted by Section 754 of the Code. That
election is irrevocable without the consent of the IRS. The election generally
permits the Company to adjust a Common Unit purchaser's (other than a
Subordinated Unit purchaser that purchases Subordinated Units from the
Company) tax basis in the Company's assets ("inside basis") pursuant to
Section 743(b) of the Code to reflect his purchase price. The Section 743(b)
adjustment belongs to the purchaser and not to other partners. (For purposes
of this discussion, a partner's inside basis in the Company's assets will be
considered to have two components: (1) his share of the Company's tax basis in
such assets ("common basis") and (2) his Section 743(b) adjustment to that
basis.)
Proposed Treasury regulations under Section 743 of the Code require, if the
remedial allocation method is adopted (which the Company has done), the
Section 743(b) adjustment attributable recovery property to be depreciated
over the remaining cost recovery period for the Section 704(c) built-in gain.
Nevertheless, the
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proposed regulations under Section 197 indicate that the Section 743(b)
adjustment attributable to an amortizable Section 197 intangible should be
treated as a newly-acquired asset placed in service in the month when the
purchaser acquires the Unit. Under Treasury Regulation Section 1.167(c)-
1(a)(6), a Section 743(b) adjustment attributable to property subject to
depreciation under Section 167 of the Code rather than cost recovery
deductions under Section 168 is generally required to be depreciated using
either the straight-line method or the 150% declining balance method. Although
the proposed regulations under Section 743 will likely eliminate many of the
problems if finalized in their current form. The depreciation and amortization
methods and useful lives associated with the Section 743(b) adjustment,
therefore, may differ from the methods and useful lives generally used to
depreciate the common basis in such properties. Pursuant to the Partnership
Agreement, the Company is authorized to adopt a convention to preserve the
uniformity of Units even if such convention is not consistent with Treasury
Regulation Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation 1.197-
2(g)(3). See "--Uniformity of Units."
Although Counsel is unable to opine as to the validity of such an approach,
the Company intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property
(to the extent of any unamortized Book-Tax Disparity) using a rate of
depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the common basis of such property, or treat
that portion as non-amortizable to the extent attributable to property the
common basis of which is not amortizable. This method is consistent with the
proposed regulations under Section 743 but is arguably inconsistent with
Treasury Regulation Section 1.167(c)-1(a)(6) (which is not expected to
directly apply to a material portion of the Company's assets) and Proposed
Treasury Regulation 1.197-2(g)(3). To the extent such Section 743(b)
adjustment is attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, the Company will apply the rules described in
the Regulations and legislative history. If the Company determines that such
position cannot reasonably be taken, the Company may adopt a depreciation or
amortization convention under which all purchasers acquiring Units in the same
month would receive depreciation or amortization, whether attributable to
common basis or Section 743(b) adjustment, based upon the same applicable rate
as if they had purchased a direct interest in the Company's assets. Such an
aggregate approach may result in lower annual depreciation or amortization
deductions than would otherwise be allowable to certain Unitholders.
See "--Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS may seek to reallocate some or all of any Section
743(b) adjustment not so allocated by the Company to goodwill which, as an
intangible asset, would be amortizable over a longer period of time than the
Company's tangible assets.
A Section 754 election is advantageous if the transferee's tax basis in his
Units is higher than such Units' share of the aggregate tax basis to the
Company of the Company's assets immediately prior to the transfer. In such a
case, as a result of the election, the transferee would have a higher tax
basis in his share of the Company's assets for purposes of calculating, among
other items, his depreciation and depletion deductions and his share of any
gain or loss on a sale of the Company's assets. Conversely, a Section 754
election is disadvantageous if the transferee's tax basis in such Units is
lower than such Unit's share of the aggregate tax basis of the Company's
assets immediately prior to the transfer. Thus, the fair market value of the
Units may be affected either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and will
be made by the Company on the basis of certain assumptions as to the value of
Company assets and other matters. There is no assurance that the
determinations made by the Company will not be successfully challenged by the
IRS and that the deductions resulting from them will not be reduced or
disallowed altogether. Should the IRS require a different basis adjustment to
be made, and should, in the Company's opinion, the expense of compliance
exceed the benefit of the election, the Company may seek permission from the
IRS to revoke the Section 754 election for the Company. If such permission is
granted, a subsequent purchaser of Units may be allocated more income than he
would have been allocated had the election not been revoked.
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Alternative Minimum Tax
Although it is not expected that the Company will generate significant tax
preference items or adjustments, each Unitholder will be required to take into
account his distributive share of any items of Company income, gain, deduction
or loss for purposes of the alternative minimum tax. The minimum tax rate for
noncorporate taxpayers is 26% on the first $175,000 of alternative minimum
taxable income in excess of the exemption amount and 28% on any additional
alternative minimum taxable income. Prospective Unitholders should consult
with their tax advisors as to the impact of an investment in Units on their
liability for the alternative minimum tax.
Valuation of Company Property and Basis of Properties
The federal income tax consequences of the ownership and disposition of
Units will depend in part on estimates by the Company of the relative fair
market values, and determinations of the initial tax bases, of the assets of
the Company. Although the Company may from time to time consult with
professional appraisers with respect to valuation matters, many of the
relative fair market value estimates will be made by the Company. These
estimates and determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis are subsequently found to be incorrect, the character
and amount of items of income, gain, loss or deductions previously reported by
Unitholders might change, and Unitholders might be required to adjust their
tax liability for prior years.
Treatment of Short Sales
A Unitholder whose Units are loaned to a "short seller" to cover a short
sale of Units may be considered as having disposed of ownership of those
Units. If so, he would no longer be a partner with respect to those Units
during the period of the loan and may recognize gain or loss from the
disposition. As a result, during this period, any Company income, gain,
deduction or loss with respect to those Units would not be reportable by the
Unitholder, any cash distributions received by the Unitholder with respect to
those Units would be fully taxable and all of such distributions would appear
to be treated as ordinary income. Unitholders desiring to assure their status
as partners and avoid the risk of gain recognition should modify any
applicable brokerage account agreements to prohibit their brokers from
borrowing their Units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of Company interests.
Also, the Taxpayer Relief Act of 1997 (the "TRA of 1997") contains provisions
which adversely affect certain short sales. See "--Disposition of Subordinated
Units--Recognition of Gain or Loss."
DISPOSITION OF SUBORDINATED UNITS
Recognition of Gain or Loss
Gain or loss will be recognized on a sale of Units equal to the difference
between the amount realized and the Unitholder's tax basis for the Units sold.
A Unitholder's amount realized will be measured by the sum of the cash or the
fair market value of other property received plus his share of Company
nonrecourse liabilities. Because the amount realized includes a Unitholder's
share of Company nonrecourse liabilities, the gain recognized on the sale of
Units could result in a tax liability in excess of any cash received from such
sale.
Prior Company distributions in excess of cumulative net taxable income in
respect of a Subordinated Unit which decreased a Unitholder's tax basis in
such Subordinated Unit will, in effect, become taxable income if the
Subordinated Unit is sold at a price greater than the Unitholder's tax basis
in such Subordinated Unit, even if the price is less than his original cost.
Should the IRS successfully contest the convention used by the Company to
amortize only a portion of the Section 743(b) adjustment (described under "--
Tax Treatment of Operations--Section 754 Election") attributable to an
amortizable Section 197 intangible after a sale by the General Partner of
Units, a Unitholder could realize additional gain from the sale of Units than
had such convention been respected. In that case, the Unitholder may have been
entitled to additional deductions against income in prior years but may be
unable to
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claim them, with the result to him of greater overall taxable income than
appropriate. Counsel is unable to opine as to the validity of the convention
but believes such a contest by the IRS to be unlikely because a successful
contest could result in substantial additional deductions to other
Unitholders.
Gain or loss recognized by a Unitholder (other than a "dealer" in Units) on
the sale or exchange of a Unit will generally be taxable as capital gain or
loss. Capital gain recognized on the sale of Units held for more than 18
months will generally be taxed at a maximum rate of 20%. A portion of this
gain or loss (which could be substantial), however, will be separately
computed and taxed as ordinary income or loss under Section 751 of the Code to
the extent attributable to assets giving rise to depreciation recapture or
other "unrealized receivables" or to "inventory items" owned by the Company.
The term "unrealized receivables" includes potential recapture items,
including depreciation recapture. Ordinary income attributable to unrealized
receivables, inventory items and depreciation recapture may exceed net taxable
gain realized upon the sale of the Unit and may be recognized even if there is
a net taxable loss realized on the sale of the Unit. Thus, a Unitholder may
recognize both ordinary income and a capital loss upon a disposition of Units.
Net capital loss may offset no more than $3,000 of ordinary income in the case
of individuals and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a Company in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If
this ruling is applicable to the holders of Subordinated Units, a Subordinated
Unitholder will be unable to select high or low basis Subordinated Units to
sell as would be the case with corporate stock. It is not clear whether the
ruling applies to the Company because, similar to corporate stock, interests
in the Company are evidenced by separate certificates. Accordingly, Counsel is
unable to opine as to the effect such ruling will have on the Unitholders. A
Unitholder considering the purchase of additional Subordinated Units or a sale
of Subordinated Units purchased in separate transactions should consult his
tax advisor as to the possible consequences of such ruling.
The TRA of 1997 affects the taxation of certain financial products and
securities, including partnership interests by treating a taxpayer as having
sold an "appreciated" partnership interest (one in which gain would be
recognized if it were sold, assigned or otherwise terminated at its fair
market value) if the taxpayer or related persons enter into a short sale of,
enter into an offsetting notional principal contract with respect to, enter
into a futures or forward contract to deliver, or in the case of an
appreciated financial position that is a short sale or offsetting notional
principal or futures or forward contract, acquire, the same or substantially
identical property. The Secretary of Treasury is also authorized to issue
regulations that treat a taxpayer that enters in transactions or positions
that have substantially the same effect as the preceding transactions as
having constructively sold the financial position.
Allocations Between Transferors and Transferees
In general, the Company's taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be subsequently
apportioned among the Unitholders in proportion to the number of Units owned
by each of them as of the opening of the principal national securities
exchange on which the Common Units are then traded on the first business day
of the month (the "Allocation Date"). However, gain or loss realized on a sale
or other disposition of Company assets other than in the ordinary course of
business will be allocated among the Unitholders on the Allocation Date in the
month in which that gain or loss is recognized. As a result, a Unitholder
transferring Common Units in the open market may be allocated income, gain,
loss and deduction accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and
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the transferees of Units. If this method is not allowed under the Treasury
Regulations (or only applies to transfers of less than all of the Unitholder's
interest), taxable income or losses of the Company might be reallocated among
the Unitholders. The Company is authorized to revise its method of allocation
between transferors and transferees (as well as among partners whose interests
otherwise vary during a taxable period) to conform to a method permitted under
future Treasury Regulations.
A Unitholder who owns Units at any time during a quarter and who disposes of
such Units prior to the record date set for a cash distribution with respect
to such quarter will be allocated items of Company income, gain, loss and
deductions attributable to such quarter but will not be entitled to receive
that cash distribution.
Notification Requirements
A Unitholder who sells or exchanges Units is required to notify the Company
in writing of that sale or exchange within 30 days after the sale or exchange
and in any event by no later than January 15 of the year following the
calendar year in which the sale or exchange occurred. The Company is required
to notify the IRS of that transaction and to furnish certain information to
the transferor and transferee. However, these reporting requirements do not
apply with respect to a sale by an individual who is a citizen of the United
States and who effects the sale or exchange through a broker. Additionally, a
transferee of a Unit will be required to furnish a statement to the IRS, filed
with its income tax return for the taxable year in which the sale or exchange
occurred, that sets forth the amount of the consideration paid for the Unit.
Failure to satisfy these reporting obligations may lead to the imposition of
substantial penalties.
Constructive Termination
The Company and the Operating Company will be considered to have been
terminated if there is a sale or exchange of 50% or more of the total
interests in Company capital and profits within a 12-month period. Under the
TRA of 1997, electing large partnerships do not terminate by reason of the
sale or exchange of interests in the partnership. A termination of the Company
will cause a termination of the Operating Company. A termination of the
Company will result in the closing of the Company's taxable year for all
Unitholders. In the case of a Unitholder reporting on a taxable year other
than a fiscal year ending December 31, the closing of the Company's taxable
year may result in more than 12 months' taxable income or loss of the Company
being includable in his taxable income for the year of termination. New tax
elections required to be made by the Company, including a new election under
Section 754 of the Code, must be made subsequent to a termination, and a
termination could result in a deferral of Company deductions for depreciation.
A termination could also result in penalties if the Company were unable to
determine that the termination had occurred. Moreover, a termination might
either accelerate the application of, or subject the Company to, any tax
legislation enacted prior to the termination. A termination of the Company
would result in a deemed transfer by the Company of its assets to a new
partnership in exchange for an interest in the new partnership followed by a
deemed distribution of interests in the new partnership to the Unitholders in
liquidation of the Company.
Entity-Level Collections
If the Company is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any Unitholder or any General
Partner or any former Unitholder, the Company is authorized to pay those taxes
from Company funds. Such payment, if made, will be treated as a distribution
of cash to the partner on whose behalf the payment was made. If the payment is
made on behalf of a person whose identity cannot be determined, the Company is
authorized to treat the payment as a distribution to current Unitholders. The
Company is authorized to amend the Partnership Agreement in the manner
necessary to maintain uniformity of intrinsic tax characteristics of Units and
to adjust subsequent distributions, so that after giving effect to such
distributions, the priority and characterization of distributions otherwise
applicable under the Partnership Agreement is maintained as nearly as is
practicable. Payments by the Company as described above could give rise to an
overpayment of tax on behalf of an individual partner in which event the
partner could file a claim for credit or refund.
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UNIFORMITY OF UNITS
Because the Company cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of such Units must be maintained. In the absence of uniformity, compliance
with a number of federal income tax requirements, both statutory and
regulatory, could be substantially diminished. A lack of uniformity can result
from a literal application of Proposed Treasury Regulation Section 1.168-2(n),
Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation
1.197-2(g)(3). Any non-uniformity could have a negative impact on the value of
the Units. See "--Tax Treatment of Operations--Section 754 Election."
The Company intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of contributed property
or adjusted property (to the extent of any unamortized Book-Tax Disparity)
using a rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the Common Basis of such
property, or treat that portion as nonamortizable, to the extent attributable
to property the Common Basis of which is not amortizable, consistent with the
proposed regulations under Section 743, despite its inconsistency with
Treasury Regulation Section 1.167(c)-1(a)(6) (which is not expected to
directly apply to a material portion of the Company's assets) and Proposed
Treasury Regulation 1.197-2(g)(3). See "--Tax Treatment of Operations--Section
754 Election." To the extent such Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized Book-Tax Disparity, the
Company will apply the rules described in the Regulations. If the Company
determines that such a position cannot reasonably be taken, the Company may
adopt a depreciation and amortization convention under which all purchasers
acquiring Units in the same month would receive depreciation and amortization
deductions, whether attributable to Common Basis or Section 743(b) basis,
based upon the same applicable rate as if they had purchased a direct interest
in the Company's property. If such an aggregate approach is adopted, it may
result in lower annual depreciation and amortization deductions than would
otherwise be allowable to certain Unitholders and risk the loss of
depreciation and amortization deductions not taken in the year that such
deductions are otherwise allowable. This convention will not be adopted if the
Company determines that the loss of depreciation and amortization deductions
will have a material adverse effect on the Unitholders. If the Company chooses
not to utilize this aggregate method, the Company may use any other reasonable
depreciation and amortization convention to preserve the uniformity of the
intrinsic tax characteristics of any Units that would not have a material
adverse effect on the Unitholders. The IRS may challenge any method of
depreciating the Section 743(b) adjustment described in this paragraph. If
such a challenge were sustained, the uniformity of Units might be affected,
and the gain from the sale of Units might be increased without the benefit of
additional deductions. See "--Disposition of Common Units--Recognition of Gain
or Loss."
Tax-Exempt Organizations and Certain Other Investors
Ownership of Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and,
as described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax
(including individual retirement accounts ("IRAs") and other retirement plans)
are subject to federal income tax on unrelated business taxable income. Much
of the taxable income derived by such an organization from the ownership of a
Unit will be unrelated business taxable income and thus will be taxable to
such a Unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of the Company's gross income will
include that type of income.
Non-resident aliens and foreign corporations, trusts or estates which hold
Units will be considered to be engaged in business in the United States on
account of ownership of Units. As a consequence they will be required to file
federal tax returns in respect of their share of Company income, gain, loss or
deduction and pay federal income tax at regular rates on any net income or
gain. Generally, a partnership is required to pay a
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withholding tax on the portion of the partnership's income which is
effectively connected with the conduct of a United States trade or business
and which is allocable to the foreign partners, regardless of whether any
actual distributions have been made to such partners. However, under rules
applicable to publicly-traded partnerships, the Company will withhold
(currently at the rate of 39.6%) on actual cash distributions made quarterly
to foreign Unitholders. Each foreign Unitholder must obtain a taxpayer
identification number from the IRS and submit that number to the Transfer
Agent of the Company on a Form W-8 in order to obtain credit for the taxes
withheld. A change in applicable law may require the Company to change these
procedures.
Because a foreign corporation which owns Units will be treated as engaged in
a United States trade or business, such a corporation may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Company's income and gain (as
adjusted for changes in the foreign corporation's "U.S. net equity") which are
effectively connected with the conduct of a United States trade or business.
That tax may be reduced or eliminated by an income tax treaty between the
United States and the country with respect to which the foreign corporate
Unitholder is a "qualified resident." In addition, such a Unitholder is
subject to special information reporting requirements under Section 6038C of
the Code.
Under a ruling of the IRS a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on
the disposition of such Unit to the extent that such gain is effectively
connected with a United States trade or business of the foreign Unitholder.
Apart from the ruling, a foreign Unitholder will not be taxed upon the
disposition of a Unit if that foreign Unitholder has held less than 5% in
value of the Units during the five-year period ending on the date of the
disposition and if the Units are regularly traded on an established securities
market at the time of the disposition.
ADMINISTRATIVE MATTERS
Company Information Returns and Audit Procedures
The Company intends to furnish to each Unitholder, within 90 days after the
close of each calendar year, certain tax information, including a Schedule K-
1, which sets forth each Unitholder's share of the Company's income, gain,
loss and deduction for the preceding Company taxable year. In preparing this
information, which will generally not be reviewed by counsel, the Company will
use various accounting and reporting conventions, some of which have been
mentioned in the previous discussion, to determine the Unitholder's share of
income, gain, loss and deduction. There is no assurance that any of those
conventions will yield a result which conforms to the requirements of the
Code, regulations or administrative interpretations of the IRS. The Company
cannot assure prospective Unitholders that the IRS will not successfully
contend in court that such accounting and reporting conventions are
impermissible. Any such challenge by the IRS could negatively affect the value
of the Units.
The federal income tax information returns filed by the Company may be
audited by the IRS. Adjustments resulting from any such audit may require each
Unitholder to adjust a prior year's tax liability, and possibly may result in
an audit of the Unitholder's own return. Any audit of a Unitholder's return
could result in adjustments of non-Company as well as Company items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined in a partnership proceeding
rather than in separate proceedings with the partners. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
The Partnership Agreement appoints the General Partner as the Tax Matters
Partner of the Company.
The Tax Matters Partner will make certain elections on behalf of the Company
and Unitholders and can extend the statute of limitations for assessment of
tax deficiencies against Unitholders with respect to Company items. The Tax
Matters Partner may bind a Unitholder with less than a 1% profits interest in
the Company to a settlement with the IRS unless that Unitholder elects, by
filing a statement with the IRS, not to give such authority to the Tax Matters
Partner. The Tax Matters Partner may seek judicial review (by which all the
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Unitholders are bound) of a final partnership administrative adjustment and,
if the Tax Matters Partner fails to seek judicial review, such review may be
sought by any Unitholder having at least a 1% interest in the profits of the
Company and by the Unitholders having in the aggregate at least a 5% profits
interest. However, only one action for judicial review will go forward, and
each Unitholder with an interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on the Company's return. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to
substantial penalties. Under the 1997 Proposed Legislation, partners in
electing large partnerships would be required to treat all Company items in a
manner consistent with the Company return.
Under the reporting provisions of the TRA of 1997, each partner of an
electing large partnership takes into account separately his share of the
following items, determined at the partnership level: (1) taxable income or
loss from passive loss limitation activities; (2) taxable income or loss from
other activities (such as portfolio income or loss); (3) net capital gains to
the extent allocable to passive loss limitation activities and other
activities; (4) tax exempt interest; (5) a net alternative minimum tax
adjustment separately computed for passive loss limitation activities and
other activities; (6) general credits; (7) low-income housing credit; (8)
rehabilitation credit; (9) foreign income taxes; (10) credit for producing
fuel from a nonconventional source; and (11) any other items the Secretary of
Treasury deems appropriate.
The TRA of 1997 also made a number of changes to the tax compliance and
administrative rules relating to electing partnerships. One provision would
require that each partner in a large partnership, such as the Company, take
into account his share of any adjustments to partnership items in the year
such adjustments are made. Under prior law, adjustments relating to
partnership items for a previous taxable year are taken into account by those
persons who were partners in the previous taxable year. Alternatively, under
the TRA of 1997, a partnership could elect to or, in some circumstances, could
be required to directly pay the tax resulting from any such adjustments. In
either case, therefore, Unitholders could bear significant economic burdens
associated with tax adjustments relating to periods predating their
acquisition of Units. It is not expected that the Company will elect to have
these provisions apply because of the cost of their application.
Nominee Reporting
Persons who hold an interest in the Company as a nominee for another person
are required to furnish to the Company (a) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (b) whether the
beneficial owner is (i) a person that is not a United States person, (ii) a
foreign government, an international organization or any wholly-owned agency
or instrumentality of either of the foregoing, or (iii) a tax-exempt entity;
(c) the amount and description of Units held, acquired or transferred for the
beneficial owner; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and
acquisition cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and certain
information on Units they acquire, hold or transfer for their own account. A
penalty of $50 per failure (up to a maximum of $100,000 per calendar year) is
imposed by the Code for failure to report such information to the Company. The
nominee is required to supply the beneficial owner of the Units with the
information furnished to the Company.
Registration as a Tax Shelter
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that
the Company is not subject to the registration requirement on the basis that
it will not constitute a tax shelter. However, the General Partner, as a
principal organizer of the Company, has filed an application to register the
Company as a tax shelter with the Secretary of the Treasury in the absence of
assurance that the Company will not be subject to tax shelter registration and
in light of the substantial penalties which might be
106
<PAGE>
imposed if registration is required and not undertaken. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE PARTNERSHIP OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS.
The Company must furnish the registration number to the Unitholders, and a
Unitholder who sells or otherwise transfers a Unit in a subsequent transaction
must furnish the registration number to the transferee. The penalty for
failure of the transferor of a Unit to furnish the registration number to the
transferee is $100 for each such failure. The Unitholders must disclose the
tax shelter registration number of the Company on Form 8271 to be attached to
the tax return on which any deduction, loss or other benefit generated by the
Company is claimed or income of the Company is included. A Unitholder who
fails to disclose the tax shelter registration number on his return, without
reasonable cause for that failure, will be subject to a $250 penalty for each
failure. Any penalties discussed herein are not deductible for federal income
tax purposes. Registration as a tax shelter may increase the risk of an audit.
Accuracy-Related Penalties
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more of certain listed
causes, including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, with respect to any
portion of an underpayment if it is shown that there was a reasonable cause
for that portion and that the taxpayer acted in good faith with respect to
that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally
is reduced if any portion is attributable to a position adopted on the return
(i) with respect to which there is, or was, "substantial authority" or (ii) as
to which there is a reasonable basis and the pertinent facts of such position
are disclosed on the return. Certain more stringent rules apply to "tax
shelters," a term that in this context does not appear to include the Company.
If any Company item of income, gain, loss or deduction included in the
distributive shares of Unitholders might result in such an "understatement" of
income for which no "substantial authority" exists, the Company must disclose
the pertinent facts on its return. In addition, the Company will make a
reasonable effort to furnish sufficient information for Unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes,
and estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the Company does business or owns property. Although an
analysis of those various taxes is not presented here, each prospective
Unitholder should consider their potential impact on his investment in the
Company. The Company currently owns property and/or conducts business in
Oregon and Washington. Oregon currently imposes a personal income tax. A
Unitholder will be required to file state income tax returns and to pay state
income taxes in some or all of the states in which the Company does business
or owns property and may be subject to penalties for failure to comply with
those requirements. In certain states, tax losses may not produce a tax
benefit in the year incurred (if, for example, the Company has no income from
sources within that state) and also may not be available to offset income in
subsequent taxable years. Some of the states may require the Company, or the
Company may elect, to withhold a percentage of income from amounts to be
distributed to a Unitholder who is not a resident of the state. Withholding,
the amount of which may be greater or less than a particular Unitholder's
income tax liability to the state, generally does not relieve
107
<PAGE>
the non-resident Unitholder from the obligation to file an income tax return.
Amounts withheld may be treated as if distributed to Unitholders for purposes
of determining the amounts distributed by the Company. See "--Disposition of
Common Units--Entity-Level Collections." Based on current law and its estimate
of future Company operations, the General Partner anticipates that any amounts
required to be withheld will not be material.
It is the responsibility of each Unitholder to investigate the legal and tax
consequences, under the laws of pertinent states and localities of his
investment in the Company. Accordingly, each prospective Unitholder should
consult, and must depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each Unitholder
to file all state and local, as well as U.S. federal, tax returns that may be
required of such Unitholder. Counsel has not rendered an opinion on the state
or local tax consequences of an investment in the Company.
INVESTMENT IN THE COMPANY BY EMPLOYEE BENEFIT PLANS
An investment in the Company by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and restrictions imposed by Section 4975 of the Code. As used herein, the term
"employee benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or IRAs established or maintained by an
employer or employee organization. Among other things, consideration should be
given to (a) whether such investment is prudent under Section 404(a)(1)(B) of
ERISA; (b) whether in making such investment, such plan will satisfy the
diversification requirement of Section 404(a)(1)(C) of ERISA; and (c) whether
such investment will result in recognition of unrelated business taxable
income by such plan and, if so, the potential after-tax investment return. See
"Tax Considerations--Uniformity of Units--Tax-Exempt Organizations and Certain
Other Investors." The person with investment discretion with respect to the
assets of an employee benefit plan (a "fiduciary") should determine whether an
investment in the Company is authorized by the appropriate governing
instrument and is a proper investment for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
IRAs that are not considered part of an employee benefit plan) prohibit an
employee benefit plan from engaging in certain transactions involving "plan
assets" with parties that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the plan.
In addition to considering whether the purchase of Subordinated Units is a
prohibited transaction, a fiduciary of an employee benefit plan should
consider whether such plan will, by investing in the Company, be deemed to own
an undivided interest in the assets of the Company, with the result that the
General Partner also would be a fiduciary of such plan and the operations of
the Company would be subject to the regulatory restrictions of ERISA,
including its prohibited transaction rules, as well as the prohibited
transaction rules of the Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under certain circumstances. Pursuant
to these regulations, an entity's assets would not be considered to be "plan
assets" if, among other things, (a) the equity interest acquired by employee
benefit plans are publicly offered securities--i.e., the equity interests are
widely held by 100 or more investors independent of the issuer and each other,
freely transferable and registered pursuant to certain provisions of the
federal securities laws, (b) the entity is an "operating company"--i.e., it is
primarily engaged in the production or sale of a product or service other than
the investment of capital either directly or through a majority owned
subsidiary or subsidiaries, or (c) there is no significant investment by
benefit plan investors, which is defined to mean that less than 25% of the
value of each class of equity interest (disregarding certain interests held by
the General Partner, its affiliates, and certain other
108
<PAGE>
persons) is held by the employee benefit plans referred to above, IRAs and
other employee benefit plans not subject to ERISA (such as governmental
plans). The Company's assets should not be considered "plan assets" under
these regulations because it is expected that the investment will satisfy the
requirements in (a) and (b) above and may also satisfy the requirements in
(c).
Plan fiduciaries contemplating a purchase of Subordinated Units should
consult with their own counsel regarding the consequences under ERISA and the
Code in light of the serious penalties imposed on persons who engage in
prohibited transactions or other violations.
VALIDITY OF THE SUBORDINATED UNITS
The validity of the Subordinated Units will be passed upon for the Company
by Andrews & Kurth L.L.P., New York, New York.
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.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Securities covered by this Prospectus. 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
Securities covered by this Prospectus, 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.
109
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets--December 31, 1997 and 1996.................. F-3
Consolidated Statements of Operations.................................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Consolidated Statement of Changes in Partners' Capital and Members'
Deficit and Weyerhaueser Investment and Advances........................ F-8
Notes to Consolidated Financial Statements............................... F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
U.S. Timberlands Company, L.P.:
We have audited the accompanying consolidated balance sheets of U.S.
Timberlands, as described in Note 1, as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in partners' capital
and members' deficit, and cash flows for the year ended December 31, 1997 and
the period from inception (August 30, 1996) through December 31, 1996. We have
also audited the statements of operations, changes in Weyerhaeuser investment
and advances and cash flows of the Predecessor for the year 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, 1997 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1997 and the period from inception
(August 30, 1996) through December 31, 1996, and the results of the
Predecessor's operations and cash flows for the year 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,
January 23, 1998
F-2
<PAGE>
U.S. TIMBERLANDS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT UNIT INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 10,625 $ 16,613
Accounts receivable, net of allowance for doubtful
accounts of
$100 and $0, respectively............................ 2,526 1,563
Other receivables..................................... 1,247 131
Receivable from affiliate -- 10,121
Inventories........................................... -- 78
Prepaid expenses...................................... 534 680
Logging equipment held for resale..................... -- 400
-------- --------
Total current assets................................ 14,932 29,586
-------- --------
TIMBER, TIMBERLANDS AND LOGGING ROADS, net.............. 359,349 273,457
SEED ORCHARD AND NURSERY STOCK.......................... 1,828 1,901
PROPERTY, PLANT AND EQUIPMENT, at cost:
Equipment............................................. 605 801
Buildings and land improvements....................... 843 677
Less- Accumulated depreciation........................ (187) (58)
-------- --------
Total property, plant and equipment................. 1,261 1,420
LONG-TERM RECEIVABLE.................................... 1,171 --
DEFERRED FINANCING FEES................................. 6,673 3,827
-------- --------
Total assets........................................ $385,214 $310,191
======== ========
LIABILITIES AND PARTNERS' CAPITAL AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable...................................... $ 1,404 $ 889
Accrued liabilities................................... 4,949 7,238
Deferred revenue...................................... 5,744 --
Payable to affiliate.................................. 1,000 --
-------- --------
Total current liabilities........................... 13,097 8,127
BORROWINGS UNDER REVOLVING CREDIT FACILITY.............. -- 90,000
LONG-TERM DEBT.......................................... 225,000 215,000
MINORITY INTEREST....................................... 1,471 --
PARTNERS' CAPITAL AND MEMBERS' DEFICIT:
Members' deficit
Old Services.......................................... -- (1,127)
</TABLE>
F-3
<PAGE>
U.S. TIMBERLANDS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT UNIT INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
--------- ---------
<S> <C> <C>
USTK.................................................. -- $ (1,809)
Partners' capital
General partner interest............................. $ 1,471 --
Limited partner interest (12,859,607 units issued and
outstanding as of December 31, 1997)................ 144,175 --
--------- ---------
145,646 (2,936)
--------- ---------
Total liabilities and partners' capital and members'
deficit............................................... $ 385,214 $ 310,191
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
U.S. TIMBERLANDS
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
U.S. TIMBERLANDS PREDECESSOR
------------------------ -------------------
AUGUST 30 JANUARY 1
1996 1996
THROUGH THROUGH
DECEMBER 31, AUGUST 29,
1997 1996 1996 1995
---------- ------------ ---------- --------
(A) (A)
<S> <C> <C> <C> <C>
REVENUES:
Log and stumpage sales........ $ 60,445 $ 13,590 $14,077 $ 29,110
Timber and property sales..... 15,244 -- -- --
By-products and other......... 1,656 429 1,501 2,623
---------- --------- ------- --------
Total revenues.............. 77,345 14,019 15,578 31,733
OPERATING COSTS:
Cost of products sold......... 17,778 6,179 9,225 14,951
Cost of timber and property
sales........................ 8,746 -- -- --
Depreciation, depletion and
road amortization............ 17,303 3,323 927 1,486
Selling, general and
administrative expenses...... 6,250 9,284 2,730 4,235
---------- --------- ------- --------
Operating income (loss)..... 27,268 (4,767) 2,696 11,061
INTEREST EXPENSE................ 25,321 7,316 -- --
AMORTIZATION OF DEFERRED FINANC-
ING FEES AND DEBT GUARANTEE
FEES........................... 4,193 1,326 -- --
INTEREST INCOME................. (1,452) (409) -- --
OTHER (INCOME) EXPENSE, net..... 574 36 1 (555)
---------- --------- ------- --------
INCOME (LOSS) BEFORE EXTRAORDI-
NARY ITEMS..................... (1,368) (13,036) 2,695 11,616
EXTRAORDINARY ITEMS, losses on
extinguishment of debt......... 9,337 -- -- --
---------- --------- ------- --------
NET INCOME (LOSS)............... $ (10,705) $ (13,036) $ 2,695 $ 11,616
========== ========= ======= ========
BASIC INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS PER UNIT:
Common...................... $ 3.05 $ 0.00
Subordinated................ $ (1.01) $ (3.04)
DILUTED LOSS BEFORE
EXTRAORDINARY ITEMS PER UNIT... $ (.28) $ (3.04)
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the consolidated
statement of operations for 1997 and the combined statement of operations
for the period from August 30, 1996 through December 31, 1996 are 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 consolidated statements.
F-5
<PAGE>
U.S. TIMBERLANDS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. TIMBERLANDS PREDECESSOR
---------------------- --------------------
AUGUST 30, JANUARY 1,
1996 THROUGH 1996 THROUGH
DECEMBER 31, AUGUST 29,
1997 1996 1996 1995
-------- ------------ ------------ -------
(A) (A)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net income (loss)............... $(10,705) $(13,036) $2,695 $11,616
Adjustments to reconcile net
income (loss) to cash provided
by (used in) operating
activities--
Depreciation, depletion,
amortization and cost of
timber and property sold..... 26,775 3,549 927 1,486
Write-off of deferred
financing fees............... 9,148 -- -- --
Other noncash items........... 630 51 6 (200)
Changes in operating accounts--
Receivables.................. (3,250) (1,694) 699 1,057
Interest receivable from
affiliate.................... 121 (121) -- --
Inventories................... 78 921 1,348 (1,535)
Prepaid expenses.............. 146 (680) 371 (308)
Accounts payable.............. 515 889 (292) (272)
Accrued liabilities........... (2,919) 7,137 (242) (34)
Deferred revenue.............. 5,744 -- -- --
-------- -------- ------ -------
Net cash provided by (used
in) operating activities... 26,283 (2,984) 5,512 11,810
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Weyerhaeuser Acquisition........ -- (283,464) -- --
Receivable from affiliate....... 10,000 (10,000) -- --
Purchase of property, plant and
equipment...................... (319) (212) (6) (1,124)
Proceeds from sales of property,
plant and equipment............ 400 2,374 -- 223
Ochoco Acquisition.............. (110,873) -- -- --
Timber and road additions....... (534) (12) (26) (224)
Capitalized seed orchard and
nursery costs.................. (240) (136) (427) (734)
-------- -------- ------ -------
Net cash used in investing
activities................. (101,566) (291,450) (459) (1,859)
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Weyerhaeuser investment and
advances, net.................. -- -- (5,054) (9,951)
Members' contributions.......... -- 10,100 -- --
Partner Contribution............ 1 -- -- --
Member's distribution........... (1,191) -- -- --
Deferred financing fees......... (12,720) (4,053) -- --
Long-term borrowings............ 510,000 305,000 -- --
Repayment of long-term
borrowings..................... (590,000) -- -- --
Common Units Offering costs..... (16,922) -- -- --
Common Units Offering proceeds.. 180,127 -- -- --
-------- -------- ------ -------
</TABLE>
F-6
<PAGE>
U.S. TIMBERLANDS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. TIMBERLANDS PREDECESSOR
------------------------- -----------------------
AUGUST 30, 1996 JANUARY 1, 1996
THROUGH THROUGH
DECEMBER 31, AUGUST 29,
1997 1996 1996 1995
-------- --------------- --------------- -------
<S> <C> <C> <C> <C>
(A) (A)
Net cash provided by (used
in) financing
activities............... $ 69,295 $311,047 $(5,054) $(9,951)
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS.. (5,988) 16,613 (1) --
CASH AND CASH EQUIVALENTS,
beginning of period........ 16,613 -- 1 1
-------- -------- ------- -------
CASH AND CASH EQUIVALENTS,
end of period.............. $ 10,625 $ 16,613 $ -- $ 1
======== ======== ======= =======
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest.... $ 28,083 $ 2,062 $ -- $ --
NONCASH ACTIVITIES:
Net asset transfers (to)
from Weyerhaeuser
Company, principally
property, plant and
equipment................ $ -- $ -- $ 1,043 $ (255)
Redemption of Member's
Interest in Old
Services................. $ 1,000 $ -- $ -- $ --
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the consolidated
statement of cash flows for 1997 and the combined statement of cash flows
for the period from August 30, 1996 through December 31, 1996 are 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 consolidated statements.
F-7
<PAGE>
U.S. TIMBERLANDS
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'
CAPITAL AND MEMBERS' DEFICIT AND WEYERHAEUSER
INVESTMENT AND ADVANCES
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. U.S.
TIMBERLANDS TIMBERLANDS
MANAGEMENT KLAMATH
COMPANY, FALLS, U.S. TIMBERLANDS U.S.
PREDECESSOR L.L.C. L.L.C. COMPANY, L.P. TIMBERLANDS
-------------- ----------- ----------- --------------------- -----------
(A) (A) (A) (A) (A)
TOTAL
MEMBERS'
PARTNERS' PARTNERS' EQUITY
CAPITAL -- CAPITAL -- (DEFICIT)
WEYERHAEUSER GENERAL LIMITED AND
INVESTMENT AND MEMBERS' MEMBER'S PARTNER PARTNER PARTNER'S
ADVANCES DEFICIT DEFICIT INTEREST INTEREST CAPITAL
-------------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
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' contribu-
tions................. 100 10,000 -- -- 10,100
Net loss............... (1,227) (11,809) -- -- (13,036)
------ ------- ------- --------- ---------
BALANCE, December 31,
1996................... (1,127) (1,809) -- -- (2,936)
Members' distribution.. (1,191) -- -- -- (1,191)
Initial partner contri-
bution................ -- -- -- 1 1
Net loss-- January 1,
1997 through November
18, 1997.............. (2,009) (7,424) -- -- (9,433)
Redemption of member's
interest.............. (1,000) -- -- -- (1,000)
Assumption of Old Serv-
ices and USTK's net
liabilities by the
MLP................... 5,327 9,233 (148) (14,521) (109)
Issuance of partner in-
terests............... -- -- 1,801 176,525 178,326
Equity issuance costs.. -- -- (169) (16,584) (16,753)
Net loss-- November 19,
1997 through December
31, 1997.............. -- -- (13) (1,246) (1,259)
------ ------- ------- --------- ---------
BALANCE, December 31,
1997................... $ -- $ -- $ 1,471 $ 144,175 $ 145,646
====== ======= ======= ========= =========
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the consolidated
statement of partners' capital for the year ended December 31, 1997 and
the combined statement of changes in members' deficit for the period from
August 30, 1996 through December 31, 1996 are not comparable to the
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 consolidated statements.
F-8
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS EXCEPT UNIT AND PER UNIT AMOUNTS)
1. ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION:
Organization
The accompanying consolidated financial statements include the accounts of
U.S. Timberlands Company, L.P. (the MLP), a Delaware master limited
partnership and its 99% owned subsidiary U.S. Timberlands Klamath Falls,
L.L.C. (USTK and the Operating Company), collectively referred to hereafter as
the Company. All intercompany transactions have been eliminated in
consolidation. The MLP was formed on June 27, 1997 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). U.S.
Timberlands Services Company, L.L.C. (the General Partner and New Services)
manages the businesses of the Company and owns a 1% general partner interest
in the MLP. The General Partner also owns a 1% member's interest in the
Operating Company.
Nature of Operations
The primary activity of the Company is the growing of trees and the sale of
logs and standing timber to third party wood processors. The Company's timber
is located 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.
Initial Public Offering and Related Transactions
On November 19, 1997, the MLP completed an initial public offering (the
Common Units Offering) of 8,577,487 common units (including the 1,118,803
common units issued upon exercise of the underwriters' overallotment option in
December 1997) representing limited partner interests (Common Units). In
addition, the Operating Company issued $225,000 of senior unsecured notes in a
public offering (the Notes). Concurrent with the Common Units Offering, Old
Services contributed all of its assets to the General Partner in exchange for
interests therein. Immediately thereafter, USTK assumed certain indebtedness
of U.S. Timberlands Holdings, L.L.C. (Holdings), an affiliate of USTK, and the
General Partner contributed its timber operations to USTK in exchange for a
member's interest in USTK. The General Partner then contributed all but a 1%
member interest in USTK to the MLP in exchange for a general partner interest,
1,387,963 subordinated units representing limited partner interests
(Subordinated Units) and the right to receive certain incentive distributions.
The General Partner distributed the 1,387,963 Subordinated Units to Old
Services and Old Services used a portion of such Subordinated Units to redeem
interests in Old Services. Holdings also contributed all of its member
interest in USTK to the Company in exchange for 2,894,157 Subordinated Units.
This series of transactions is hereafter referred to as the Transactions.
Since the controlling owner of Old Services and USTK prior to the Transactions
now controls the General Partner, the Transactions were recorded as a
reorganization under common control and therefore remain at their historical
cost.
Basis of Presentation--Prior to the Transactions
During 1996, USTK and Old 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. As legal
entities, USTK and Old Services were not consolidated. However, due to common
ownership and management, the financial statements of USTK and Old Services
prior to the Transactions have been presented on a combined basis. All
intercompany transactions between the above entities have been eliminated in
the accompanying financial statements.
F-9
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 the Company. 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>
JANUARY 1, 1996
THROUGH
SOURCE OF REVENUES AUGUST 29, 1996 1995
------------------ --------------- -------
<S> <C> <C>
Weyerhaeuser Company.............................. $10,157 $20,065
Unaffiliated wood processors...................... 5,421 11,668
------- -------
Total........................................... $15,578 $31,733
======= =======
</TABLE>
Concurrent with the Weyerhaeuser Acquisition, Collins Products Company
L.L.C. (Collins), an unaffiliated party, acquired Weyerhaeuser's Klamath Falls
wood conversion facilities. The Company has entered into a 10-year log supply
agreement with Collins providing for the delivery by the Company to Collins of
34 million board feet of merchantable timber each year at market prices as
discussed in Note 9.
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 $445 in the period from January 1, 1996 through August 29,
1996 and $622 in 1995, and is included in selling, general and administrative
expenses in the accompanying combined statements of operations. Management of
the Company believes the allocation methods used provide the Predecessor with
a reasonable share of such expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies summarized below include both those of
the Company and the Predecessor, unless otherwise noted.
F-10
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
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 on timber deeds and timberland and property sales are generally
recognized upon closing. Revenue from timber sold under stumpage contracts
(i.e., the customer arranges to harvest and deliver the logs) is recognized
when the timber is harvested. Deferred revenue as of December 31, 1997,
represents cash received in advance of logs harvested under stumpage
contracts.
Concentration of Credit Risk
As of December 31, 1997, the Company had accounts receivable from five
individual customers that represent 25%, 21%, 20%, 17% and 12% of total
accounts receivable, respectively.
The Company had sales to individual customers that were greater than 10% of
total sales for the respective periods as follows:
<TABLE>
<CAPTION>
U.S. TIMBERLANDS PREDECESSOR
---------------------- --------------------
AUGUST 30, 1996 JANUARY 1, 1996
THROUGH THROUGH
1997 DECEMBER 31, 1996 AUGUST 29, 1996 1995
---- ----------------- --------------- ----
<S> <C> <C> <C> <C>
Weyerhaeuser Company........... -- -- 65% 63%
Unaffiliated customer.......... 23% 54% 14% 14%
Unaffiliated customer.......... 21% 14% 10% --
Unaffiliated customer.......... 15% 11% -- --
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.
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 consolidated 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 merchantable
timber by its estimated net merchantable volume. Depletion in any given year
represents the net merchantable volume harvested multiplied by the depletion
rate. These estimates are subject to change based on periodic reevaluations of
merchantable volume. Logging road costs for main and spur roads are amortized
based on the net merchantable volume harvested.
F-11
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 statements of
operations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions and betterments
to buildings and equipment are capitalized. 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.
Minority Interest
The General Partner holds a 1% minority interest ownership in USTK (the
Minority Interest). A pro rata share of the Company's net equity at the
completion of the Transactions and the Company's net loss since the date of
the Transactions have been allocated to the Minority Interest in the
accompanying financial statements. The portion of the Company's net loss
attributable to the Minority Interest in 1997 was insignificant.
Income Taxes
The MLP is a master limited partnership. USTK and Old Services are both
limited liability companies (L.L.C.s). Accordingly, the MLP and respective
L.L.C.s are not liable for federal or state income taxes since the MLP's and
the respective L.L.C.s' income or loss is reported on the separate tax returns
of the individual unitholders or members. Accordingly, no provision for
current or deferred income taxes has been reflected in the accompanying
financial statements.
F-12
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Per Unit Information
The Company accounts for income (loss) per unit in accordance with Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Under
SFAS No. 128, the Company is required to present basic income (loss) per
Common and Subordinated Unit, and diluted loss per unit information. As the
Company recorded extraordinary items in 1997, the Company reflected basic
income (loss) before extraordinary items per Common and Subordinated Unit
information on the face of the statements of operations. See additional per
unit information discussion below:
<TABLE>
<CAPTION>
BASIC (A)
-----------------------
COMMON SUBORDINATED DILUTED (B)
--------- ------------ -----------
1997
<S> <C> <C> <C>
Extraordinary items, losses per unit...... $ (3.92) $ (1.29) $ (1.76)
Net loss per unit......................... $ (0.86) $ (2.30) $ (2.04)
Weighted average units outstanding........ 943,064 4,282,120 5,225,184
1996 (C)
Extraordinary items, losses per unit...... $ -- $ -- $ --
Net loss per unit......................... $ -- $ (3.04) $ (3.04)
Weighted average units outstanding........ -- 4,282,120 4,282,120
</TABLE>
- --------
(a) Basic income (loss) per Common and Subordinated Unit is calculated by
dividing the income (loss) allocable to Common and Subordinated Units by
the weighted average number of Common and Subordinated Units outstanding.
Income (loss) for the period from November 19, 1997 through December 31,
1997 is allocated to Common and Subordinated Units utilizing the book
liquidation method which allocates income (loss) in accordance with
liquidation preferences, as set forth in the Company's Partnership
Agreement, of the Common and Subordinated Unitholders' partners' capital
accounts. For the purpose of the basic income (loss) per unit
calculations, losses for the periods from January 1, 1997 through November
18, 1997 and from August 30, 1996 through December 31, 1996 are allocated
to the Subordinated Units.
(b) Diluted loss per unit is calculated by dividing loss, after adjusting for
the General Partner's effective 2% interest during the period from
November 19, 1997 through December 31, 1997, by the weighted average
number of Common and Subordinated Units outstanding.
(c) The per unit information presented below is for the period from August 30,
1996 through December 31, 1996.
No per unit information is presented for the periods ended August 29, 1996
and December 31, 1995 as the Predecessor had a different ownership structure
and any per unit information would not be relevant or meaningful to the user
of the financial statements.
Pro Forma Loss Per Unit:--Following is a summary of the pro forma loss per
unit for 1997 as if the Common and Subordinated Units were issued as of
January 1, 1997:
<TABLE>
<CAPTION>
PRO FORMA
---------
<S> <C>
1997
Loss before extraordinary items per
unit.............................. $(0.11)
Extraordinary items, losses per
unit.............................. $(0.71)
Net loss per unit.................. $(0.82)
</TABLE>
Financial Instruments
All of the Company's material financial instruments are recognized in its
balance sheets. Except as noted below, the carrying values generally
approximate fair market value for these financial assets and liabilities:
Notes--The estimated fair value of the Company's Notes, based upon
interest rates at December 31, 1997 for similar obligations with like
maturities, was $235,328 and was carried at $225,000.
Interest Rate Collar Agreement--The Company enters into interest rate
collar agreements to manage interest rate risk. The fair value of interest
rate collar agreements is the estimated amount that the Company
F-13
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
would receive or pay upon termination of the agreement, taking into
consideration the current credit worthiness of the counterpart. As of
December 31, 1997, the Company has an outstanding interest rate collar
agreement. The Company estimates that it would have to pay $630 to
terminate this agreement. Accordingly, the Company has recognized an
unrealized loss related to the interest rate collar agreement in other
(income) expense in the accompanying statement of operations.
Unit-Based Compensation Plans
The Company accounts for unit-based compensation plans under the provisions
of the Accounting Principles Board's Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees." The Company has adopted the disclosure-only
provision of the Financial Accounting Standards Board Statement No. 123 (SFAS
123), "Accounting For Stock Based Compensation."
3. ACQUISITIONS:
Weyerhaeuser
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 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>
Ochoco
On July 15, 1997, the Company acquired approximately 42,000 acres of timber
and timberlands and approximately 3,000 acres of timber cutting rights from
Ochoco Lumber Company L.P. for $110,873 (the Ochoco Timberlands).
Substantially all of the purchase price was allocated to timber, timberlands
and logging roads. The acquisition was principally financed through $110,000
of debt financing. Because the Company's acquisition of the Ochoco Timberlands
did not represent an acquisition of an existing business, the pro forma impact
on operations for 1997 of this acquisition has not been disclosed.
4. ACCRUED LIABILITIES:
The Company's accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Interest........................................... $2,492 $5,254
Debt guarantee fee................................. -- 1,100
Severance and harvest tax.......................... 269 230
Employee compensation.............................. 703 81
Equity issuance costs.............................. 617 --
Other.............................................. 868 573
-- --
------ ------
$4,949 $7,238
====== ======
</TABLE>
F-14
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
USTK--9 5/8% Notes due 2007...................... $225,000 $ --
Holdings--Term loan, paid November 1997.......... -- 130,000
USTK--Borrowings under revolving credit facility,
refinanced July 1997 and paid November 1997..... -- 90,000
USTK--Term loan payable quarterly, refinanced
July 1997 and paid
November 1997................................... -- 85,000
-------- --------
$225,000 $305,000
======== ========
</TABLE>
USTK Debt--Prior to the Transactions
As of December 31, 1996, USTK had $90,000 of outstanding borrowings under a
revolving credit facility and an outstanding $85,000 term loan related to the
Weyerhaeuser Acquisition.
On July 14, 1997, USTK entered into a long-term financing arrangement with
certain banks to finance the Ochoco Acquisition discussed in Note 3 and to
refinance borrowings under the USTK revolving credit facility and USTK term
loan (the Long-Term Financing Arrangement). The retirement of debt under
credit facilities existing as of July 14, 1997, resulted in an extraordinary
loss on extinguishment of debt of $3,571 due principally to the write-off of
unamortized deferred financing fees. This write-off is recorded as an
extraordinary item in the accompanying statement of operations.
In connection with the Long-Term Financing Arrangement, the Company incurred
$5,970 of fees which were deferred.
Holdings Debt--Prior to the Transactions
As of December 31, 1996, Holdings had $130,000 of outstanding term loan debt
related to the Weyerhaeuser Acquisition (the Holdings Debt). The Holdings Debt
was guaranteed by Weyerhaeuser. In connection with the Holdings Debt, Holdings
was required to pay Weyerhaeuser a debt guarantee fee. The Holdings Debt and
the related debt guarantee fee of $4,368 were paid with proceeds from the
Transactions. The debt guarantee fee is included in amortization of deferred
financing fees and debt guarantee fees in the accompanying statements of
operations.
Notes
Concurrent with the Transactions, the Operating Company issued $225,000 of
Notes. The Notes were issued jointly and severally by the Operating Company
and U.S. Timberlands Finance Corp. (Finance Corp.), a wholly owned subsidiary
of the Operating Company (collectively, the Issuers). The Issuers serve as co-
obligors of the Notes. The Notes represent unsecured general obligations of
the Company and bear interest at 9 5/8% payable semiannually in arrears on May
15 and November 15, and mature on November 15, 2007 unless previously
redeemed. The Notes are redeemable at the option of the Issuers in whole or in
part, on or after November 15, 2002 at predetermined redemption prices plus
accrued interest to the redemption date.
In addition, at any time on or prior to November 15, 2000, the Issuers, at
their option, may redeem the Notes with the net cash proceeds of a common
units offering or other equity interests of the Company, at 109.625% of the
principal amount hereof, plus accrued and unpaid interest thereon to the
redemption date,
F-15
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
provided that at least 65% of the principal amount of the Notes originally
issued remain outstanding immediately following such redemption. The Notes
contain certain restrictive covenants, including limiting the ability of the
Operating Company and its subsidiaries to make cash distributions, incur
additional indebtedness, sell assets or harvest timber in excess of certain
limitations.
In conjunction with the Notes issuance, the Company retired all existing
debt under the Long-Term Financing Arrangement. This resulted in an
extraordinary loss on extinguishment of debt of $5,766 due principally to the
write-off of existing unamortized deferred financing fees. This write-off is
recorded in the accompanying statement of operations.
Bank Credit Facility
Concurrent with the Transactions, the Operating Company entered into a
revolving credit facility (the Bank Credit Facility) with a commercial bank
(the Bank). The Bank Credit Facility consists of a $75,000 acquisition
facility (the Acquisition Facility) and a $25,000 working capital facility
(the Working Capital Facility). The Operating Company's obligations under the
Bank Credit Facility represent unsecured general obligations. Average
borrowings on the Bank Credit Facility were $14,512,000. As of December 31,
1997, there were no outstanding borrowings on the Bank Credit Facility.
The Bank Credit Facility bears interest at the lower of the Bank's prime
rate, plus a margin of 2.0% (10.5% at December 31, 1997) or LIBOR plus a
margin of 2.5% (8.41% at December 31, 1997). The Working Capital Facility
expires on November 19, 2000 and all amounts borrowed thereunder shall then be
due and payable. At November 19, 2000, the Company may elect to amortize any
outstanding loans under the Acquisition Facility in sixteen equal quarterly
installments beginning one quarter after the conversion to a term loan,
subject to certain provisions contained in the Bank Credit Facility agreement.
The Bank Credit Facility contains certain restrictive covenants, including
limiting the ability of the Operating Company to make cash distributions,
incur certain additional indebtedness, incur certain liens, or sell assets or
harvest timber in excess of certain limitations. In addition, the Bank Credit
Facility requires that the Operating Company maintain certain financial
ratios. As of December 31, 1997, the Operating Company was in compliance with
all covenants of the Bank Credit Facility.
6. PARTNERS' CAPITAL:
Common Units Offering
On November 19, 1997, the Company issued 7,458,684 Common Units. Proceeds
from such offering were $141,265, net of underwriter fees and other related
costs of $15,367. Concurrent with such offering, 4,282,120 Subordinated Units
were issued in exchange for all members' interests in USTK and Old Services.
On December 12, 1997, the underwriters exercised their overallotment option
and the Company issued an additional 1,118,803 Common Units. Proceeds from the
exercise of the overallotment option were $21,940, net of $1,555 of
underwriters' fees. As of December 31, 1997, the Company has 8,577,487 Common
Units and 4,282,120 Subordinated Units outstanding.
Partnership Income (Loss)
As provided in the MLP's Partnership Agreement and the Operating Company's
Operating Agreement, income and losses are allocated 98% to the holders of
outstanding Common Units (the Common Unitholders) and Subordinated Units (the
Subordinated Unitholders), 1% to the General Partner's general partner
interest in the MLP and 1% to the General Partner's minority interest in the
Operating Company.
F-16
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash Distributions
The Company is required to make quarterly cash distributions from Available
Cash, as defined in the MLP's Partnership Agreement. Generally, cash
distributions are paid in order of preferences: first the minimum quarterly
distribution of $.50 per unit (the MQD) to Common Unitholders and the General
Partner, and second, to the extent cash remains available, to Subordinated
Unitholders.
The MLP's Partnership Agreement sets forth certain cash distribution target
rates for the Company to meet in order for the General Partner's share of
Available Cash to increase. To the extent that the quarterly distributions
exceed $.550 per Common and Subordinated Unit, the General Partner receives
15% of the excess Available Cash rather than the base amount of 2%. To the
extent that the quarterly distributions exceed $.633 per Common and
Subordinated Unit, the General Partner receives 25% of the excess Available
Cash and to the extent that the quarterly distributions exceed $.822 per
Common and Subordinated Unit, the General Partner receives 50% of the excess
Available Cash.
Subordinated Units
The Subordinated Units are subordinated in right of distributions to the
Common Unitholders. Provided that the MQD has been paid to Common and
Subordinated Unitholders for three consecutive four-quarter periods and earned
for two consecutive four-quarter periods, 25% of the Subordinated Units will
convert to Common Units as early as 2001, 25% as early as 2002 and the
remaining 50% may convert to Common Units as early as 2003.
Liquidation Preference
During the subordination period, Common Unitholders will generally be
entitled to receive more per unit in liquidating distributions than
Subordinated Unitholders. Following conversion of the Subordinated Units into
Common Units, all units will receive the same liquidation treatment.
7. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS:
Relationship with the General Partner
The General Partner has the ability to control management of the Company and
has all voting rights of the Company except for certain matters set forth in
the MLP's Partnership Agreement. 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 does not receive any management fee or other
compensation in connection with its management of the Company. The General
Partner and its affiliates perform services for the Company and are reimbursed
for all expenses incurred on behalf of the Company, including the costs of
employee, officer and director compensation 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 MLP's 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. Related noninterest bearing receivables and payables between the
General Partner and the Company are settled in the ordinary course of
business. As of December 31, 1997, the Company had a payable to the General
Partner of $253. During 1997, expenses allocated to and reimbursed by the
Company totaled $310.
Certain conflicts of interest could arise as a result of the relationships
described above. The Board of Directors and management of the General Partner
have a duty to manage the Company in the best interests of
F-17
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Unitholders and, consequently, must exercise good faith and integrity in
handling the assets and affairs of the Company.
Consulting Agreements
As of December 31, 1997, the General Partner has consulting agreements with
certain affiliated parties pursuant to which each such person or firm will
provide consulting services to the General Partner. Each agreement provides
for an annual retainer of $25, plus an hourly rate for services rendered at
the request of the General Partner. Payments by the General Partner related to
consulting agreements in 1997 were not significant.
Payable to Affiliate
In connection with the Transactions, the member interest of John J. Stephens
in Old Services was redeemed for $1,000 and certain subordinated units. The
$1,000 is payable to Old Services by the Company in January 1998. The above
transaction has been reflected as a direct reduction of equity in the
accompanying financial statements.
Management and Advisory Fees
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 John M. Rudey, Chairman. 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 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.
8. MANAGEMENT INCENTIVE PLANS:
Unit Option Plan
The Company has a Unit Option Plan which permits the grant of options (Unit
Options) covering 857,749 Common Units. Concurrent with the consummation of
the Transactions, 604,153 Unit Options were granted to key employees and
directors of the General Partner. An additional 90,622 Unit Options were
granted to key employees and directors on December 12, 1997, in connection
with the closing of the sale of 1,118,803 Common Units pursuant to the
exercise by the underwriters of their overallotment option. The Unit Options
granted in 1997 expire ten years from the date of grant and become exercisable
automatically upon and in the same proportion as the conversion of
Subordinated Units to Common Units. Once the performance criteria are
achieved, the Company will record compensation expense for the difference
between the exercise price and fair value of the Common Units, with a
corresponding increase to partners' capital. As of December 31, 1997, none of
the performance criteria had been achieved. Unit Options under the Company's
Unit Option Plan are determined by the Long-Term Incentive Plan Committee of
the Board of Directors (the LTIP Committee) and are granted at fair market
value at the date of the grant. All options granted as of December 31, 1997
have an exercise price of $21 per Common Unit.
F-18
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has computed, for pro forma disclosure purposes as required by
SFAS 123, the value of Unit Options granted under the Unit Option Plan. These
computations were made using the Black-Scholes option-pricing model, as
prescribed by SFAS 123, with the following weighted average assumptions:
<TABLE>
<S> <C>
Risk-free interest rate........................................... 6.00%
Expected dividend yield........................................... 9.52%
Expected life of the Unit Option Plan............................. 5 years
Expected volatility............................................... 20.32%
</TABLE>
If the Company had accounted for these plans in accordance with SFAS 123,
the impact on the Company's 1997 net loss and net loss per unit would have
been insignificant.
Restricted Unit Plan
Effective with the closing of the Transactions, the Company authorized the
establishment of a restricted unit plan (the Restricted Unit Plan) which
allows the Company to grant units (Restricted Units) to employees at the
discretion of the LTIP Committee. No consideration will be payable by the plan
participants upon vesting and issuance of the Restricted Units. Restricted
Units granted during the subordination period will vest automatically upon and
in the same proportion as the conversion of Subordinated Units to Common
Units. Restricted Units granted subsequent to the subordination period are the
equivalent of Common Units. No Restricted Units have been granted as of
December 31, 1997.
Income Interests in the General Partner
In connection with the Common Units Offering and the related formation of
the General Partner, the General Partner issued income interests to certain
officers and directors of the General Partner at no cost. Such income
interests participate pro rata in cash distributions from USTK and the
Company. No such cash distributions from USTK or the Company were made in
1997. Under certain circumstances, the General Partner is required to
repurchase the income interests from officers and directors upon termination
of their employment at fair market value as determined by independent
appraisal. The fair value of these income interests will then be recorded as
compensation expense in the Company's financial statements with a
corresponding increase to contributed capital.
9. 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 Collins 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.
F-19
<PAGE>
U.S. TIMBERLANDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. QUARTERLY RESULTS FOR 1997 AND 1996 (UNAUDITED):
(thousands of dollars, except per Unit amounts)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
TOTAL
DECEMBER 31(A) SEPTEMBER 30 JUNE 30 MARCH 31(A) YEAR
-------------- ------------ ------- ----------- -------
1997
<S> <C> <C> <C> <C> <C>
Revenues................ $36,288 $17,261 $11,462 $12,334 $77,345
Gross profit(b)......... 16,511 7,608 4,141 5,258 33,518
Income (loss) before ex-
traordinary item....... 5,457 (1,051) (3,827) (1,947) (1,368)
Basic income (loss)
before
extraordinary item per
Unit:(d)
Common................. .77 -- -- -- 3.05
Subordinated........... .58 (.25) (.89) (.45) (1.01)
Diluted income (loss)
before extraordinary
item per Unit(d)....... .67 (.25) (.89) (.45) (.28)
1996(c)
Revenues................ 12,103
Gross profit(b)......... 4,245
Net loss................ (3,023)
Basic net loss per
Unit(d)
Common................. --
Subordinated........... (.71)
Diluted net loss per
Unit(d)................ (.71)
</TABLE>
- --------
(a) The quarter ended December 31, 1997 includes revenues of $11,750 and
related costs of $7,555 from a property sale. The quarter ended March 31,
1997 includes revenues of $3,494 and related costs of $1,191 from a timber
deed sale.
(b) Gross profit is calculated as revenues less cost of products sold, cost of
timber and property sales and depreciation, depletion and road
amortization.
(c) Due to a separate basis of presentation prior to the Weyerhaeuser
Acquisition on August 30, 1996 and a different ownership structure by the
Predecessor, no information for the quarters ended September 30, 1996 and
prior is presented. See discussion of the Company and the Predecessor=s
basis of presentation in Note 1 of the Notes to the Consolidated Financial
Statements.
(d) See discussion of per unit information in Note 2 of the Notes to the
Consolidated Financial Statements.
F-20
<PAGE>
APPENDIX A
GLOSSARY OF CERTAIN TERMS
Acquisition: The acquisition by the Company of substantially all of the
equity interests in USTK and the business and assets of U.S. Timberlands
Management Company, L.L.C., on November 19, 1997.
Acquisition Facility: A $75.0 million revolving credit facility entered into
by the Operating Company used for acquisitions and improvements.
Adjusted Operating Surplus: With respect to any period, Operating Surplus
generated during such period (a) less (i) any net increase in working capital
borrowings during such period and (ii) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and (b) plus (i) any net decrease in
working capital borrowings during such period and (ii) any net increase in
cash reserves for Operating Expenditures during such period required by any
debt instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included
in clause (a)(i) of the definition of Operating Surplus.
Audit Committee: A committee of the board of directors of the General
Partner which initially consists of three directors, including the two
independent directors, which reviews the external financial reporting of the
Company, recommends engagement of the Company's independent public
accountants, and reviews the Company's procedures for internal auditing and
the adequacy of the Company's internal accounting controls.
Available Cash: With respect to any quarter prior to liquidation:
(a) the sum of (i) all cash and cash equivalents of the Partnership Group
on hand at the end of such quarter and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination
of Available Cash with respect to such quarter resulting from borrowings
for working capital purposes made subsequent to the end of such quarter,
less
(b) the amount of any cash reserves that is necessary or appropriate in
the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any member of the
Partnership Group is a party or by which it is bound or its assets are
subject, or (iii) provide funds for distributions under Section 6.4 or 6.5
of the Partnership Agreement in respect of any one or more of the next four
quarters; provided, however, that the General Partner may not establish
cash reserves pursuant to (iii) above if the effect of such reserves would
be that the Company is unable to distribute the Minimum Quarterly
Distribution on all Common Units with respect to such quarter; and,
provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such quarter
but on or before the date of determination of Available Cash with respect
to such quarter shall be deemed to have been made, established, increased
or reduced for purposes of determining Available Cash within such quarter
if the General Partner so determines. Notwithstanding the foregoing,
"Available Cash" with respect to the quarter in which the liquidation of
the Company occurs and any subsequent quarter shall equal zero.
Bank Credit Facility: The $75.0 million Acquisition Facility and the $25.0
million Working Capital Facility both entered into by the Operating Company.
BBF: One billion board feet.
BDT: Bone Dry Ton; a ton of residuals of lumber manufacturing that is free
of moisture.
A-1
<PAGE>
BLM: The U.S. Department of Interior Bureau of Land Management.
Board Foot (BF): A unit of lumber measurement 1 foot square and 1 inch
thick.
Capital Account: The capital account maintained for a Partner pursuant to
the Partnership Agreement. The Capital Account of a Partner in respect of a
general partner interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such general partner interest, Common Unit,
Subordinated Unit, Incentive Distribution Right, or other Partnership Interest
were the only interest in the Company held by a Partner from and after the
date on which such general partner interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
Capital Surplus: All Available Cash distributed by the Company from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since the commencement of the Company equals
the Operating Surplus as of the end of the quarter prior to such distribution.
Any excess Available Cash will be deemed to be Capital Surplus.
Cause: Means a court of competent jurisdiction has entered a final, non-
appealable judgment finding the General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as a general
partner of the Company.
CERCLA and Superfund: Refer generally to the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended.
Chips: Wood generated either in a whole log chip mill or as a by-product of
the manufacture of lumber and plywood and used in the manufacture of pulp and
paper and various composite panel products such as medium density fiberboard,
particle board and oriented strand board.
Closing Date: November 19, 1997.
Code: Internal Revenue Code of 1986, as amended.
Collins: Collins Products LLC.
Collins Supply Agreement: The 10-year log supply agreement that the Company
has entered into with Collins, extendable by Collins for two additional five-
year terms.
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 initially consists of five directors, including two independent
directors, which determines the compensation of the officers of the General
Partner and administer its employee benefit plans.
A-2
<PAGE>
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 dated November 19, 1997 (the Closing Date) among the General
Partner, the Company, the Operating Company and certain other parties
governing the Transactions pursuant to which, among other things, the business
and operations of USTK and Old Services was transferred and the liabilities of
USTK, Old Services and Holdings were assumed.
Counsel: Andrews & Kurth L.L.P., special counsel to the General Partner and
the Company.
Current Market Price: With respect to any class of Units listed or admitted
to trading on any national securities exchange as of any date, the average of
the daily Closing Prices (as hereinafter defined) for the 20 consecutive
Trading Days (as hereinafter defined) immediately prior to such date. "Closing
Price" for any day means the last sale price on such day, regular way, or in
case no such sale takes place on such day, the average of the closing bid and
asked prices on such day, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the principal national securities exchange
(other than the Nasdaq Stock Market) on which the Units of such class are
listed or admitted to trading or, if the Units of such class are not listed or
admitted to trading on any national securities exchange (other than the Nasdaq
Stock Market), the last quoted price on such day, or, if not so quoted, the
average of the high bid and low asked prices on such day in the over-the-
counter market, as reported by the Nasdaq Stock Market or such other system
then in use, or if on any such day the Units of such class are not quoted by
any such organization, the average of the closing bid and asked prices on such
day as furnished by a professional market maker making a market in the Units
of such class selected by the General Partner, or if on any such day no market
maker is making a market in the Units of such class, the fair value of such
Units on such day as determined reasonably and in good faith by the General
Partner. "Trading Day" means a day on which the principal national securities
exchange on which Units of any class are listed or admitted to trading is open
for the transaction of business or, if the Units of a class are not listed or
admitted to trading on any national securities exchange, a day on which
banking institutions in New York City generally are open.
Cutting Contract or Stumpage Contract: An agreement whereby a third party
purchases the right to harvest trees from a given tract of land within a given
time period, and title to the standing trees passes at the time of such
harvest. Total payment under such an agreement is tied to volume removed.
DBH: "Diameter at breast height," a term frequently used to describe a tree
measurement taken 4 1/2 feet above ground level.
DD&A: Depreciation, depletion and road amortization.
Delaware Act: The Delaware Revised Uniform Limited Partnership Act, 6 Del C.
(S)17-101, et seq., as amended, supplemented or restated from time to time,
and any successor to such statute.
Departing Partner: A former General Partner from and after the effective
date of any withdrawal or removal of such former General Partner pursuant to
the Partnership Agreement.
EBITDDA: Operating income plus depreciation, depletion and amortization and
cost of timber and property sales. EBITDDA should not be considered as an
alternative to net income, operating income, cash flows from operating
activities or any other measure of financial performance presented in
accordance with generally accepted accounting principles. EBITDDA is not
intended to represent cash flow and does not represent the measure of cash
available for distribution, but provides additional information for evaluating
the Company's ability to make the Minimum Quarterly Distribution.
Exchange Act: Securities Exchange Act of 1934, as amended.
A-3
<PAGE>
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.
Founding Directors: John J. Stephens and George R. Hornig, individuals who
received approximately 143,398 Subordinated Units upon redemption of their
interests in Old Services, and the other initial directors of the General
Partner.
General Partner or New Services: U.S. Timberlands Services Company, L.L.C.
(formerly known as New Services, L.L.C.), a Delaware limited liability
company, and its successors and permitted assigns as general partner of the
Company.
GIS: The Company's computerized geographic information system.
Holdings: U.S. Timberlands Holdings, L.L.C., a Delaware limited liability
company.
Holdings Debt: The $130.0 million of bank indebtedness incurred by Holdings
in connection with USTK's acquisition of the Klamath Falls Timberlands in
August 1996.
Incentive Distribution Right: A non-voting limited partner Partnership
Interest issued to the General Partner in connection with the transfer of
substantially all of its member interest in the Operating Company to the
Company pursuant to the Partnership Agreement, which Partnership Interest will
confer upon the holder thereof only the rights and obligations specifically
provided in the Partnership Agreement with respect to Incentive Distribution
Rights (and no other rights otherwise available to or other obligations of
holders of a Partnership Interest).
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 were issued, which is
filed as an exhibit to the Registration Statement of which this Prospectus is
a part.
Initial Common Units: The Common Units sold in this Initial Offering.
Initial Offering: The Company's initial public offering of Common Units
completed on November 19, 1997.
Initial Unit Price: $21.00, the amount per Unit equal to the initial public
offering price of the Common Units in the Initial Offering .
Interim Capital Transactions: The following transactions if they occur prior
to liquidation: (a) borrowings, refinancings and refundings of indebtedness
and sales of debt securities (other than for working capital purposes and
other than for items purchased on open account in the ordinary course of
business) by any Group Member; (b) sales of equity interests by any Group
Member (other than the Common Units that were sold to the Underwriters
pursuant to the full exercise of their over-allotment option in connection
with the Initial Offering); and (c) sales or other voluntary or involuntary
dispositions of any assets of any Group Member (other than (i) sales or other
dispositions of inventory, accounts receivable and other assets in the
ordinary course of business, including the exchange of timber or real property
for other timber or real property to the extent that the timber or real
property received in exchange is of equal or greater value, or the sale of
timber or real property, to the extent the proceeds are invested within 270
days in other timber or real property, and (ii) sales or other dispositions of
assets as a part of normal retirements or replacements), in each case prior to
the Liquidation Date. Notwithstanding anything herein to the contrary, Interim
Capital Transactions shall not include (A) the first $50.0 million in real
property (and related timber) sales made by the Partnership Group subsequent
to the Closing Date and (B) stumpage, timber deed and other bulk timber sales
(which, in the case of (A) and (B) would otherwise
A-4
<PAGE>
be deemed Interim Capital Transactions) generally of the type described in the
Partnership's strategic plan approved by the Board of Directors of the General
Partner prior to the Closing Date.
IRS: Internal Revenue Service.
Klamath Falls Timberlands: The approximately 604,000 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. Amended and
Restated 1997 Long-Term Incentive Plan.
LTIP Committee: A committee of the board of directors of the General
Partner, which initially consists of three directors, including the two
independent directors, which acts with respect to the Company's Long-Term
Incentive Plan.
Management Incentive Plan: The U.S. Timberlands Company, L.P. Management
Incentive Plan.
MBF: One thousand board feet. A common unit of measure for pricing standing
timber as well as lumber.
MMBF: One million board feet.
Merchantable Timber: A tree that will produce a sound log 16 feet in length
and at least 5p in diameter, inside bark, at the small end. Timber may be
merchantable even if it has not reached its optimum sale value.
Minimum Quarterly Distribution: $0.50 per Unit with respect to each quarter
or $2.00 per Unit on an annualized basis, subject to adjustment as described
in "Cash Distribution Policy--Distributions from Capital Surplus" and "Cash
Distribution Policy--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
Non-citizen Assignee: A Limited Partner or assignee who (i) fails to furnish
information about nationality, citizenship, residency or other related status
within 30 days after a request by the General Partner for such information, or
(ii) the General Partner determines after receipt of such information is not
an eligible citizen.
Notes: The $225.0 million aggregate principal amount of unsecured senior
notes due 2007 offered publicly by the Company on November 13, 1997.
Ochoco: Ochoco Lumber Company.
Ochoco Acquisition: The acquisition of the Ochoco Timberlands by USTK from
Ochoco on July 15, 1997.
Ochoco Timberlands: The approximately 42,000 fee acres of timberland and
cutting rights on approximately 3,000 acres of timberland acquired by USTK on
July 15, 1997 from Ochoco.
Old Services: U.S. Timberlands Management Company, L.L.C., formerly known as
U.S. Timberlands Services Company, L.L.C.
Operating Company: U.S. Timberlands Klamath Falls, L.L.C., a Delaware
limited liability company, and any successors thereto.
Operating Company Agreement: The Second Amended and Restated Operating
Agreement of the Operating Company, as it may be amended, supplemented or
restated from time to time (which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part).
A-5
<PAGE>
Operating Expenditures: All Partnership Group expenditures, including, but
not limited to, taxes, reimbursements of the General Partner, debt service
payments and capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal and premium on
indebtedness shall not be an Operating Expenditure if the payment is (i)
required in connection with the sale or other disposition of assets or (ii)
made in connection with the refinancing or refunding of indebtedness with
the proceeds from new indebtedness or from the sale of equity interests.
For purposes of the foregoing, at the election and in the reasonable
discretion of the General Partner, any payment of principal or premium
shall be deemed to be refunded or refinanced by any indebtedness incurred
or to be incurred by the Partnership Group within 180 days before or after
such payment to the extent of the principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or (iii)
distributions to partners. Where capital expenditures are made in part for
Acquisitions or Capital Improvements and in part for other purposes, the
General Partner's good faith allocation between the amounts paid for each
shall be conclusive.
Operating Surplus: As to any period prior to liquidation, on a cumulative
basis and without duplication:
(a) the sum of (i) $15.0 million plus all cash and cash equivalents of
the Partnership Group on hand as of the close of business on the Closing
Date, (ii) all cash receipts of the Partnership Group for the period
beginning on the Closing Date and ending with the last day of such period,
other than cash receipts from Interim Capital Transactions and (iii) all
cash receipts of the Partnership Group after the end of such period but on
or before the date of determination of Operating Surplus with respect to
such period resulting from borrowings for working capital purposes, less
(b) the sum of (i) Operating Expenditures for the period beginning on the
Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures, provided however, that disbursements made (including
contributions to a member of the Partnership Group or disbursements on
behalf of a member of the Partnership Group) or cash reserves established,
increased or reduced after the end of such period but on or before the date
of determination of Available Cash with respect to such period shall be
deemed to have been made, established, increased or reduced for purposes of
determining Operating Surplus, within such period if the General Partner so
determines. Notwithstanding the foregoing, "Operating Surplus" with respect
to the quarter in which the liquidation occurs and any subsequent quarter
shall equal zero.
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 (which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part), as it may be amended, restated
or supplemented from time to time. Unless the context requires otherwise,
references to the Partnership Agreement constitute references to the
Partnership Agreement of the Company and to the Operating Company Agreement,
collectively.
Partnership Group: The Company, the Operating Company and any subsidiary of
either such entity, treated as a single consolidated entity.
Partnership Interest: An ownership interest in the Company, which shall
include the general partner interests and limited partner interests.
A-6
<PAGE>
Partnership Security: Means any class or series of equity interest in the
Company (but excluding any options, rights, warrants and appreciation rights
relating to any equity interest in the Company), including, without
limitation, Common Units, Subordinated Units and Incentive Distribution
Rights.
Plantations: The 184,000 acres of the Timberlands which are actively managed
tree farms.
Predecessor: The southern Oregon timberlands operations of Weyerhaeuser
acquired by the Company in the Weyerhaeuser Acquisition.
Public Note Offering: The public offering by the Company of the Notes.
Registration Statement: The Registration Statement on Form S-1 (No. 333- ),
filed by the Company with the Commission, relating to the Securities.
Restricted Activities: The (i) acquisition, exchange, operation or sale of
timber-producing real property or rights to harvest timber, a principal
purpose of which is producing logs or other forest products, (ii) harvesting
of timber other than harvesting which is incidental to the ownership or
operation of real property not owned or operated for a principal purpose of
producing logs or other forest products, (iii) sale, exchange or purchase of
logs other than sales, exchanges or purchases which are incidental to the
ownership or operation of real property not owned or operated for a principal
purpose of producing logs or other forest products, and (iv) any and all other
activities relating to the forest products industry to the extent such
activities compete with activities of the Company or the Operating Company.
RROW: Reciprocal right-of-way.
Seedling: A young tree generally less than three years of age used as
planting stock for reforestation.
Securities: The Subordinated Units covered by this Prospectus.
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).
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 the Initial 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
A-7
<PAGE>
date equaled or exceeded the sum of the Minimum Quarterly Distribution on all
of the Common Units and Subordinated Units that were outstanding during such
periods on a fully-diluted basis (i.e, taking into account for purposes of
such determination all Outstanding Common Units, all Outstanding Subordinated
Units, all Common Units and Subordinated Units issuable upon exercise of
employee options that have, as of the date of determination, already vested or
are scheduled to vest prior to the end of the quarter immediately following
the quarter with respect to which such determination is made, and all Common
Units and Subordinated Units that have as of the date of determination, been
earned by but not yet issued to management of the Partnership in respect of
incentive compensation), plus the related distribution on the general partner
interest in the Company and the managing member interest in the Operating
Company, and (iii) there are no outstanding Common Unit Arrearages; and (b)
the date on which the General Partner is removed as general partner of the
Company upon the requisite vote by holders of Outstanding Units under
circumstances where Cause does not exist and Units held by the General Partner
and its Affiliates are not voted in favor of such removal. Prior to the end of
the Subordination Period, a portion of the Subordinated Units will convert
into Common Units on a one-for-one basis on the first day after the record
date established by the General Partner for any quarter ending on or after (a)
December 31, 2000 with respect to one-quarter of the Subordinated Units
(1,070,530 Subordinated Units) and (b) December 31, 2001 with respect to an
additional one-quarter of the Subordinated Units (1,070,530 Subordinated
Units), on a cumulative basis, in respect of which (i) distributions of
Available Cash from Operating Surplus on the Common Units and the Subordinated
Units with respect to each of the three consecutive, non-overlapping four-
quarter periods immediately preceding such date equaled or exceeded the sum of
the Minimum Quarterly Distribution on all of the Common Units and Subordinated
Units during such periods, (ii) the Adjusted Operating Surplus generated
during each of the two consecutive, non-overlapping four-quarter periods
immediately preceding such date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the Common Units and Subordinated Units that
were outstanding during such periods on a fully diluted basis (i.e, taking
into account for purposes of such determination all Outstanding Common Units,
all Outstanding Subordinated Units, all Common Units and Subordinated Units
issuable upon exercise of employee options that have, as of the date of
determination, already vested or are scheduled to vest prior to the end of the
quarter immediately following the quarter with respect to which such
determination is made, and all Common Units and Subordinated Units that have
as of the date of determination, been earned by but not yet issued to
management of the Partnership in respect of incentive compensation), plus the
related distribution on the general partner interest in the Company and the
managing member interest in the Operating Company, and (iii) there are no
outstanding Common Unit Arrearages; provided, however, that the early
conversion of the second 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 its
combined 2% interest in the Company and the Operating Company (and all the
rights to the Incentive Distribution) into Common Units or to receive cash in
exchange for such interests.
Target Distribution Levels: See "Cash Distribution Policy--Incentive
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.
Transactions: The transactions related to the formation of the Company, the
issuance of the Notes, the entering into of the Bank Credit Facility and the
other transactions that occurred in connection with the Initial Offering.
A-8
<PAGE>
Transfer Agent: American Stock Transfer & Trust Company serves as registrar
and transfer agent for the Common Units.
Transfer Application: An application for transfer of Units in the form set
forth on the back of a certificate, substantially in the form included in this
Prospectus as Appendix B, or in a form substantially to the same effect in a
separate instrument.
Unitholders: Holders of the Common Units and the Subordinated Units,
collectively.
Unit Majority: During the Subordination Period, at least a majority of the
outstanding Common Units, voting as a class, and at least a majority of the
outstanding Subordinated Units, voting as a class and, thereafter, at least a
majority of the outstanding Units.
Units: The Common Units and the Subordinated Units, collectively, but not
including the right to receive Incentive Distributions.
Unrecovered Capital: At any time, the Initial Unit Price, less the sum of
all distributions theretofore made in respect of an Initial Common Unit
constituting Capital Surplus and any distributions of cash (or the net agreed
value of any distributions in kind) in connection with the dissolution and
liquidation of the Company theretofore made in respect of such Unit, adjusted
as the General Partner determines to be appropriate to give effect to any
distribution, subdivision or combination of such Units.
USFS: United States Department of Agriculture--Forest Service.
USFWS: United States Fish and Wildlife Service.
USTK: U.S. Timberlands Klamath Falls, L.L.C., a Delaware limited liability
Company which, upon consummation of the Transactions, became the Company's
Operating Company.
USTK Debt: The $285.0 million of bank indebtedness incurred by USTK in July
1997 to refinance indebtedness incurred in connection with the acquisition of
the Klamath Falls Timberlands and to finance the acquisition of the Ochoco
Timberlands.
Weyerhaeuser: Weyerhaeuser Company.
Weyerhaeuser Acquisition: The acquisition by USTK and Old Services in August
1996 of the Klamath Falls Timberlands from Weyerhaeuser.
Working Capital Facility: A $25.0 million revolving credit facility entered
into by the Operating Company to be used for working capital purposes.
A-9
<PAGE>
APPENDIX B
No transfer of the Subordinated Units evidenced hereby will be registered on
the books of the Company, unless the Certificate evidencing the Subordinated
Units to be transferred is surrendered for registration or transfer and an
Application for Transfer of Subordinated Units has been executed by a
transferee either (a) on the form set forth below or (b) on a separate
application that the Company will furnish on request without charge. A
transferor of the Subordinated Units shall have no duty to the transferee with
respect to execution of the transfer application in order for such transferee
to obtain registration of the transfer of the Subordinated Units.
APPLICATION FOR TRANSFER OF SUBORDINATED UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Subordinated Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of U.S. Timberlands Company, L.P.
(the "Company"), as amended, supplemented or restated to the date hereof (the
"Partnership Agreement"), (b) represents and warrants that the Assignee has
all right, power and authority and, if an individual, the capacity necessary
to enter into the Partnership Agreement, (c) appoints the General Partner and,
if a Liquidator shall be appointed, the Liquidator of the Company as the
Assignee's attorney-in-fact to execute, swear to, acknowledge and file any
document, including, without limitation, the Partnership Agreement and any
amendment thereto and the Certificate of Limited Partnership of the Company
and any amendment thereto, necessary or appropriate for the Assignee's
admission as a Substituted Limited Partner and as a party to the Partnership
Agreement, (d) gives the powers of attorney provided for in the Partnership
Agreement and (e) makes the waivers and gives the consents and approvals
contained in the Partnership Agreement. Capitalized terms not defined herein
have the meanings assigned to such terms in the Partnership Agreement.
Date: _______________________________
- ------------------------------------- -------------------------------------
Social Security or other identifying Signature of Assignee
number of Assignee
- ------------------------------------- -------------------------------------
Purchase Price including Name and Address of Assignee
commissions, if any
Type of Entry (check one):
[_] Individual[_] Partnership [_] Corporation
[_] Trust [_] Other (specify ____________________________________________
Nationality (check one):
[_] U.S. Citizen, Resident or
Domestic Entity [_] Non-resident Alien
[_] Foreign Corporation
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Company must withhold tax with respect to certain transfers of
property if a holder of an interest in the Company is a foreign person. To
inform the Company that no withholding is required with respect to the
undersigned interestsholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
B-1
<PAGE>
COMPLETE EITHER A OR B:
A.Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is _____ .
3. My home address is _____________________________________________________ .
B. Partnership, Corporation or Other Interestholder
1. _________________________________________________________is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as
those terms are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is ____________ .
3. The interestholder's office address and place of incorporation (if
applicable) is ___________________________________________________________ .
The interestholders agrees to notify the Company within sixty (60) days of
the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Company and that any false statement contained
herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct
and complete and, if applicable, I further declare that I have authority to
sign this document on behalf of
-------------------------------------
Name of Interestholder
-------------------------------------
Signature and Date
-------------------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing,
and is holding for the account of any other person, this application
should be completed by an officer thereof or, in the case of a broker or
dealer, by a registered representative who is a member of a registered
national securities exchange or a member of the National Association of
Securities Dealers, Inc., or, in the case of any other nominee holder, a
person performing a similar function. If the Assignee is a broker,
dealer, bank, trust company, clearing corporation, other nominee owner
or an agent of any of the foregoing, the above certification as to any
person for whom the Assignee will hold the Subordinated Units shall be
made to the best of the Assignee's knowledge.
B-2
<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 amounts set forth
below are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 7,576
Printing and engraving expenses................................. 100,000
Legal fees and expenses......................................... 40,000
Accounting fees and expenses.................................... 8,000
Transfer agent and registrar fees............................... 2,000
--------
Total....................................................... $157,576
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Section of the Prospectus entitled "The Partnership Agreement--
Indemnification" is incorporated herein by this reference.
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
The Company issued to U.S. Timberlands Holdings, L.L.C. and U.S. Timberlands
Management Company, L.L.C, 2,894,157 and 1,387,963 subordinated units
representing limited partner interests in the Company, respectively, in
connection with the formation of the Company on November 19, 1997, in
offerings exempt from registration under Section 4(2) of the Securities Act of
1933, as amended. There have been no other sales of unregistered securities of
the Company within the past three years.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
a. Exhibits
<TABLE>
<C> <S>
+3.1 --Amended and Restated Agreement of Limited Partnership of U.S.
Timberlands Company, L.P.
+3.2 --Second Amended and Restated Operating Agreement of U.S. Timberlands
Klamath Falls, L.L.C.
5.1 --Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered
8.1 --Opinion of Andrews & Kurth L.L.P. relating to tax matters
+10.1 --Credit Agreement among U.S. Timberlands Klamath Falls, L.L.C. and
certain banks
+10.2 --Indenture among U.S. Timberlands Klamath Falls, L.L.C., U.S.
Timberlands Finance Corp. and State Street Bank and Trust Company,
as trustee
+10.3 --Contribution, Conveyance and Assumption Agreement among U.S.
Timberlands Company, L.P. and certain other parties
*10.4 --Form of U.S. Timberlands Company, L.P. 1997 Long-Term Incentive
Plan
*10.5 --Employment Agreement for Mr. Rudey
++10.6 --Employment Agreement for Mr. Symington
++10.7 --Employment Agreement for Mr. Michie
++10.8 --Employment Agreement for Mr. McDowell
*10.9 --Supply Agreement between U.S. Timberlands Klamath Falls, L.L.C. and
Collins Products LLC
*21.1 --List of Subsidiaries
23.1 --Consent of Arthur Andersen LLP
23.2 --Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1 and 8.1)
24.1 --Powers of Attorney (included on signature page)
27.1 --Financial Data Schedule
</TABLE>
- --------
* Incorporated by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-1 (File No. 333-32811) filed November 13,
1997.
+ Incorporated by reference to the same numbered Exhibit to the Registrant's
Current Report on Form 8-K filed January 15, 1998.
++ Incorporated by reference to the same numbered Exhibit to the Registrant's
Annual Report on Form 10-K filed March 31, 1998.
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
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.
II-2
<PAGE>
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of Prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and 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.
(5) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on May 6, 1998.
U.S. Timberlands Company, L.P.
By: U.S. Timberlands Services Company, L.L.C.
-----------------------------------------
As General Partner
By: /s/ John M. Rudey
------------------------------------
Name: John M. Rudey
Title: Chairman
II-4
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below appoints John M. Rudey, Allen E.
Symington 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 May 6, 1998
- ------------------------------------- Director (Principal
JOHN M. RUDEY Executive Officer)
/s/ Allen E. Symington President, Chief May 6, 1998
- ------------------------------------- Financial Officer
ALLEN E. SYMINGTON and Director
(Principal
Financial Officer)
/s/ John C. McDowell Vice President-- May 6, 1998
- ------------------------------------- Finance and
JOHN C. MCDOWELL Controller
(Principal
Accounting Officer)
/s/ Spencer R. Stuart Director May 6, 1998
- -------------------------------------
SPENCER R. STUART
/s/ Thomas C. Theobald Director May 6, 1998
- -------------------------------------
THOMAS C. THEOBALD
/s/ Aubrey L. Cole Director May 6, 1998
- -------------------------------------
AUBREY L. COLE
/s/ George R. Hornig Director May 6, 1998
- -------------------------------------
GEORGE R. HORNIG
/s/ Robert F. Wright Director May 6, 1998
- -------------------------------------
ROBERT F. WRIGHT
II-5
<PAGE>
INDEX TO EXHIBITS
EXHIBITS
<TABLE>
<S> <C>
+3.1 --Amended and Restated Agreement of Limited Partnership of U.S. Timberlands Company, L.P.
+3.2 --Second Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, L.L.C.
5.1 --Opinion of Andrews & Kurth L.L.P. as to the legality of the securities being registered
8.1 --Opinion of Andrews & Kurth L.L.P. relating to tax matters
+10.1 --Credit Agreement among U.S. Timberlands Klamath Falls, L.L.C. and certain banks
+10.2 --Indenture among U.S. Timberlands Klamath Falls, L.L.C., U.S. Timberlands Finance Corp. and
State Street Bank and Trust Company, as trustee
+10.3 --Contribution, Conveyance and Assumption Agreement among U.S. Timberlands Company, L.P.
and certain other parties
*10.4 --Form of U.S. Timberlands Company, L.P. 1997 Long-Term Incentive Plan
*10.5 --Employment Agreement for Mr. Rudey
++10.6 --Employment Agreement for Mr. Symington
++10.7 --Employment Agreement for Mr. Michie
++10.8 --Employment Agreement for Mr. McDowell
*10.9 --Supply Agreement between U.S. Timberlands Klamath Falls, L.L.C. and Collins Products LLC
*21.1 --List of Subsidiaries
23.1 --Consent of Arthur Andersen LLP
23.2 --Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1 and 8.1)
24.1 --Powers of Attorney (included on signature page)
27.1 --Financial Data Schedule
</TABLE>
- --------
* Incorporated by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-1 (File No. 333-32811) filed November 13,
1997.
+ Incorporated by reference to the same numbered Exhibit to the Registrant's
Current Report on Form 8-K filed January 15, 1998.
++ Incorporated by reference to the same numbered Exhibit to the Registrant's
Annual Report on Form 10-K filed March 31, 1998.
<PAGE>
[LETTERHEAD OF ANDREWS & KURTH L.L.P.]
EXHIBIT 5.1
May 6, 1998
U.S. Timberlands Company, L.P.
1301 Fifth Avenue
Suite 3725
Seattle, Washington 9810l
Gentlemen:
We have acted as counsel to U. S. Timberlands Company, L.P., a Delaware
limited partnership (the "Company"), in connection with the registration under
the Securities Act of 1933, as amended (the "Act"), of up to $25,000,000 of
subordinated units representing limited partner interests in the Company (the
"Subordinated Units") which may be offered and sold from time to time pursuant
to the Company's registration statement on Form S-1, filed with the Securities
and Exchange Commission on the date hereof (the "Registration Statement"). The
Subordinated Units may be sold or delivered from time to time by certain selling
unitholders in amounts, at prices and on terms to be determined as described in
prospectus supplements to the prospectus contained in the Registration Statement
(the "Prospectus"). This opinion also relates to any registration statement
(including any amendment thereto) for the offering that is to be effective upon
filing pursuant to Rule 462(b) under the Act.
As the basis for the opinion hereinafter expressed, we have examined such
statutes, regulations, corporate records and documents, certificates of
corporate and public officials, and other instruments as we have deemed
necessary or advisable for the purposes of this opinion. In such examination we
have assumed the authenticity of all documents submitted to us as originals and
the conformity with the original documents of all documents submitted to us as
copies.
With respect to the opinion set forth below, we have assumed that at each
time of the sale and delivery of the Subordinated Units, such Subordinated Units
will be sold and delivered consistent with the Delaware Revised Uniform Limited
Partnership Act (the "Delaware Act") and the partnership agreement of the
Company as in effect at such time.
<PAGE>
U.S. Timberlands Company, L.P.
May , 1998
Page 2
Based on the foregoing, and on such legal considerations as we
deem relevant, we are of the opinion that:
1. The Company has been duly formed and is validly existing as a
limited partnership under the Delaware Act.
2. The Subordinated Units, as described in the Registration Statement, are
duly authorized, validly issued, fully paid and nonassessable, except as such
nonassessability may be affected by the matters described in the Prospectus
under the caption "The Partnership Agreement--Limited Liability."
This opinion is delivered as of the date hereof and we disclaim any
responsibility to update this opinion at any time following the date hereof.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement (and to any registration statement filed pursuant to Rule
462) and to the reference to our firm under the caption "Validity of the
Subordinated Units" in the Prospectus.
Very truly yours,
/s/ Andrews & Kurth L.L.P.
<PAGE>
[LETTERHEAD OF ANDREWS & KURTH L.L.P.]
EXHIBIT 8.1
May 6, 1998
U.S. Timberlands Company, L.P.
1301 Fifth Avenue
Suite 3725
Seattle, Washington 98101
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel in connection with the Registration Statement on
Form S-1, Registration No. 333- (the "Registration Statement") of U.S.
Timberlands Company, L.P. (the "Company"), relating to the registration of the
offering and sale (the "Offering") of up to $25,000,000 of Subordinated Units
representing limited partner interests in the Company (the "Subordinated
Units"). In connection therewith, we have participated in the preparation of the
discussion set forth under the caption "Tax Considerations" (the "Discussion")
in the Registration Statement. Capitalized terms used and not otherwise defined
herein are used as defined in the Registration Statement.
All statements of legal conclusions contained in the Discussion,
unless otherwise noted, reflect our opinion with respect to the matters set
forth therein.
In addition, based on the foregoing, we are of the opinion that the
federal income tax discussion in the prospectus included in the Registration
Statement with respect to those matters as to which no legal conclusions are
provided is an accurate discussion of such federal income tax matters (except
for the representations and statements of fact of the Company and its general
partner, included in such discussion, as to which we express no opinion).
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the use of our name in the Discussion. The
issuance of such consent does not concede that we are an "expert" for the
purposes of the Securities Act of 1933.
Very truly yours,
/s/ Andrews & Kurth L.L.P.
<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
May 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM U.S.
TIMBERLANDS COMPANY, L.P.'S DECEMBER 31, 1997 AND DECEMBER 31, 1996 COMBINED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR OTHER
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 AUG-30-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 10,625 16,613<F1>
<SECURITIES> 0 0
<RECEIVABLES> 3,873 1,694
<ALLOWANCES> 100 0
<INVENTORY> 0 78
<CURRENT-ASSETS> 14,932 29,586
<PP&E> 1,448 1,478
<DEPRECIATION> 187 58
<TOTAL-ASSETS> 385,214 310,191
<CURRENT-LIABILITIES> 13,097 8,127
<BONDS> 225,000 215,000
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 145,646 (2,936)
<TOTAL-LIABILITY-AND-EQUITY> 385,214 310,191
<SALES> 77,345 14,019
<TOTAL-REVENUES> 77,345 14,019
<CGS> 17,778 6,179
<TOTAL-COSTS> 50,077 18,786
<OTHER-EXPENSES> 4,767 1,362
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 25,321 7,316
<INCOME-PRETAX> (1,368) (13,036)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,368) (13,036)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (9,337) 0
<CHANGES> 0 0
<NET-INCOME> (10,705) (13,036)
<EPS-PRIMARY> (3.16) (3.04)
<EPS-DILUTED> (2.04) (3.04)
<FN>
<F1>THE INCOME STATEMENT DATA FOR THE PERIOD ENDED DECEMBER 31, 1996 REPRESENTS
ONLY FOUR MONTHS OF OPERATIONS AS THE COMPANY WAS FORMED ON AUGUST 30, 1996.
</FN>
</TABLE>
