<PAGE>
PROSPECTUS
$225,000,000
[LOGO OF
U.S. TIMBERLANDS
KLAMATH FALLS, L.L.C. U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
U.S. TIMBERLANDS U.S. TIMBERLANDS FINANCE CORP.
FINANCE CORP.] 9 5/8% SENIOR NOTES DUE 2007
----------
The 9 5/8% Senior Notes due 2007 (the "Notes") offered hereby are being
issued, jointly and severally, by U.S. Timberlands Klamath Falls, L.L.C., a
Delaware limited liability company (the "Company"), and U.S. Timberlands
Finance Corp. ("Finance Corp."), a wholly owned subsidiary of the Company. The
Company and Finance Corp. are collectively referred to as the "Issuers." U.S.
Timberlands Company, L.P., a recently formed Delaware limited partnership (the
"Master Partnership"), is a 98.9899% member of the Company.
The Notes will bear interest from the date of issuance at the rate of 9 5/8%
per annum, payable semi-annually in arrears, on May 15 and November 15 of each
year, commencing May 15, 1998, and will 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 the redemption prices set
forth herein, plus accrued and unpaid interest to the redemption date. In
addition, at any time on or prior to November 15, 2000, the Issuers may redeem
Notes with the net cash proceeds of a public offering of common units or other
equity interests in the Master Partnership or equity interests in the Company,
at 109.625% of the principal amount thereof, plus accrued interest to the
redemption date, provided that at least 65% of the principal amount of Notes
originally issued remain outstanding immediately following such redemption. In
the event of a Change of Control (as defined herein), holders of the Notes
will have the right to require the Issuers to purchase each such holder's
Notes at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of purchase. There can be no assurance
that the Company will have access to sufficient funds to repurchase the Notes
in the event of a Change of Control. Further, the indenture governing the
Notes will not provide protection in the event of a highly leveraged
transaction, including certain takeovers, recapitalizations or restructurings.
The Notes will be general unsecured obligations of the Issuers, and will
rank pari passu in right of payment with all existing and future senior
indebtedness of the Issuers and senior to all existing and future subordinated
indebtedness of the Issuers and will effectively be subordinated to any
secured indebtedness of the Issuers. At the closing of this offering the
Issuers will not have any secured indebtedness.
This offering is subject to, among other things, the completion by the
Master Partnership of a public offering of common units representing limited
partner interests in the Master Partnership (the "Common Units"), and the
closing by the Company of a $25.0 million revolving credit facility to be used
for working capital purposes (the "Working Capital Facility") and a
$75.0 million revolving credit facility to be used for acquisitions and
capital improvements (the "Acquisition Facility" and, together with the
Working Capital Facility, the "Bank Credit Facility"). See "The Transactions."
Upon issuance all Notes will be represented by one or more Global Notes
registered in the name of the Depositary (as defined herein). Payment of the
principal, premium, if any, and interest on the Global Note will be made to
the Depositary and not to the beneficial owners thereof. See "Description of
Notes--Depositary."
The Notes have been approved for listing on the New York Stock Exchange,
subject to official notice of issuance, under the symbol "TIMBZ 07".
SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN
THE NOTES.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO THE
PUBLIC (1) COMMISSIONS (2) ISSUERS (3)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note 100.00% 3.00% 97.00%
- --------------------------------------------------------------------------------------------------------
Total $225,000,000 $6,750,000 $218,250,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1)Plus accrued interest, if any, from the date of issuance.
(2) For information regarding indemnification of the Underwriters, see
"Underwriting."
(3)Before deducting estimated expenses of $800,000, payable by the Issuers.
----------
The Notes are being offered by the several Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that delivery of the Notes will be made in book-
entry form through the facilities of The Depository Trust Company on or about
November 19, 1997.
----------
SMITH BARNEY INC.
BANCAMERICA ROBERTSON STEPHENS
DEUTSCHE MORGAN GRENFELL
November 13, 1997
<PAGE>
[MAP OF THE COMPANY'S TIMBERLANDS AND THREE
PHOTOGRAPHS OF THE COMPANY'S PROPERTIES,
ONE PHOTOGRAPH OF LOG HAULING OPERATIONS
AND ONE PHOTOGRAPH OF A HOUSE UNDER CONSTRUCTION]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and historical and pro forma
financial data appearing elsewhere in this Prospectus. The transactions related
to the formation of the Master Partnership, the public offering of Common Units
by the Master Partnership, the entering into by the Company of the Bank Credit
Facility and the other transactions to occur in connection with this offering
are referred to in this Prospectus as the "Transactions." See "The
Transactions." Except as the context otherwise requires, references to, or
descriptions of, assets and operations of the Company in this Prospectus
include the assets and operations of the Master Partnership and any 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 Manager (as defined below) in the Master Partnership and the 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 KLAMATH FALLS, L.L.C.
THE COMPANY
The Company's business consists of the growing of trees and the sale of logs
and standing timber. The Company owns approximately 630,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 1997 to
be approximately 2.2 billion board feet ("BBF") in Oregon east of the Cascade
Range (the "Timberlands"). Logs harvested from the Timberlands are sold to
unaffiliated domestic conversion facilities. These logs are processed for sale
as lumber, plywood and other wood products, primarily for use in new
residential home construction, home remodeling and repair and general
industrial applications. The Company also owns and operates its own seed
orchard and produces approximately five million conifer seedlings annually from
its nursery, approximately half of which are used for its own internal
reforestation programs, with the balance sold to other forest products
companies.
The Timberlands include substantial holdings of merchantable, good quality
timber. The Timberlands' merchantable timber consists of Ponderosa Pine
(approximately 42%) and Douglas Fir (approximately 14%), species which have
historically commanded premium prices over other softwood species, with the
balance consisting of Lodgepole Pine, White Fir and other softwood species. The
Timberlands have stands of varying ages and are unique in the forests east of
the Cascade Range in Oregon in that approximately 184,000 acres are actively
managed tree farms (the "Plantations"). The Plantations were first established
by Weyerhaeuser Company ("Weyerhaeuser") in the early 1960s and acreage has
been planted each year since then. Currently, the Plantations contain age
classes ranging generally from two to 35 years old. Initial thinning of the
Plantation stands, including the thinning of commercial quantities of
merchantable timber, is expected to begin within the next five years. Because
the timber on the Plantations is generally not yet considered merchantable,
volumes of timber on the Plantations are not included in the Company's
estimated merchantable timber volume. The balance of the Timberlands are
composed of natural stands.
The Company was formed in 1996. In August 1996, the Company and U.S.
Timberlands Management Company, L.L.C., formerly known as U.S. Timberlands
Services Company, L.L.C. ("Old Services"), acquired approximately 600,000 fee
acres of timberland (the "Klamath Falls Timberlands"), containing an estimated
merchantable timber volume of approximately 1.9 BBF and related assets from
Weyerhaeuser (the "Weyerhaeuser Acquisition"). 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, the Company 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
1
<PAGE>
Timberlands is at least 80 years old. The Company believes that the age classes
and species mix of the Ochoco Timberlands fit well with the Klamath Falls
Timberlands and provide the Company flexibility in developing its harvest
plans. Most of the land comprising the Ochoco Timberlands had been owned by
Ochoco since the 1920s. The Company expects that during 1997, including the
five and one-half months of its operations on the Ochoco Timberlands, it will
harvest approximately 153 MMBF of timber (including the sale of harvest rights)
from the Timberlands.
During the period from January 1, 1994 through the acquisition of the Klamath
Falls Timberlands by the Company, 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 the Company's acquisition of the Klamath Falls Timberlands, the
Company 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 2.2 BBF of merchantable, good
quality timber, approximately 184,000 acres of plantation timberland and a
full-scale seed orchard and nursery operation located in a region where
conversion facilities have been experiencing shortages in the supply of wood
fiber; (ii) the Company focuses on owning timberlands rather than operating
conversion facilities, which minimizes the Company's cost structure and capital
expenditures, allows the Company to seek the most favorable markets for its
timber rather than being committed to supply its own facilities, and ensures
that the Company will not compete with its customers; (iii) the Company's
senior operating management team has an average of more than 20 years of
experience in the forest products industry, including experience in
identifying, evaluating, completing and integrating acquisitions of timber
properties; (iv) the Company's lean operating structure allows it to
efficiently manage its Timberlands, and should enable it to acquire additional
timberlands without commensurate increases in overhead; and (v) the Company's
computerized geographic information system ("GIS") enables the Company to
evaluate the optimal timing and patterns of the harvest of its Timberlands and
evaluate and integrate acquisitions of additional timberlands.
BUSINESS STRATEGY
The Company's business strategy is to manage its Timberlands in a manner that
will enable the Master Partnership to pay the Minimum Quarterly Distribution
(as defined in the Glossary) on all the Units (as defined below) and to
increase the per Unit value of the Master Partnership's assets and its cash
flow. Management intends to pursue this strategy in a number of ways:
Continue to Increase Productivity of the Timberlands
The Company intends to continue to utilize and increase the use of various
modern forestry practices on its Timberlands in order to increase their
productivity. Examples of these practices include the use of the Company's GIS,
which enables it to develop optimal harvest plans; the application of selective
harvesting and thinning practices, which improve the productivity of the
remaining stand while providing merchantable timber for sale;
2
<PAGE>
and the development of genetically improved seedlings to grow trees with
desirable traits such as superior size and disease resistance. Certain members
of senior management were involved in the development of these practices while
at Weyerhaeuser, and the Company expects to benefit from their experience.
Maximize Investment in Ochoco Timberlands
In order to maximize its investment in the Ochoco Timberlands, the Company
intends to harvest the mature timber thereon over the next five to six years.
As a result, the Company will convert Ochoco's older, slower growing forests to
younger, more productive forests. In addition, by increasing the harvest on the
Ochoco Timberlands, the Company will be able to reduce the amount of timber
harvested on the Klamath Falls Timberlands, allowing these faster growing
Timberlands to continue to mature, thereby increasing their commercial value.
Pursue Accretive Acquisition Opportunities
The Company intends to identify, evaluate and acquire undervalued timberlands
in North America with the objective of increasing both the value of the Master
Partnership's Units and its cash flow. The Company believes that management's
relationships within the timber industry, as well as its focus on operating
timberlands, rather than conversion facilities, give it a competitive advantage
in developing acquisition opportunities. The Company believes that its use of
independent contractors to conduct its silviculture and harvesting activities
should enable it to operate significantly increased acreage without a
commensurate increase in fixed overhead costs. The Company intends to evaluate
and pursue those opportunities that are located within markets distinguished by
strong demand, that include ages and species that complement the Company's
existing inventory, and that fit the Company's current and long-term value
objectives. In addition, the Company may in the future acquire timberlands
located in areas, and containing timber, suitable for export. By early January
1998, it is expected that Edward J. Kobacker, the current Executive Vice
President and Chief Operating Officer of the Manager, will become the President
and Chief Executive Officer of the Manager and that John J. Stephens, the
current President and Chief Executive Officer, will become Vice Chairman of the
Board of Directors of the Manager in order to devote more time to the Company's
acquisition program.
Implement Flexible Marketing Strategies
The Company's marketing strategy emphasizes flexibility in structuring the
sales of its timber assets. Depending upon the needs of its customers and
current market conditions, the Company can either sell harvested logs or sell
harvest rights to standing timber ("stumpage") and can sell forest by-products,
such as wood chips. The Company believes that its strategy of owning
timberlands rather than conversion facilities that compete with its customers
is an important factor in developing and maintaining strong customer
relationships. Since the Weyerhaeuser Acquisition, the Company has sold logs to
22 different customers and expects to sell to a greater number in the future.
In addition to log and stumpage sales, the Company may also sell or exchange
parcels of land with other timberland owners. For example, the Company may seek
to realize the value of portions of the Plantations by exchanging them for more
mature timber owned by other timberland owners or by selling them for immediate
cash proceeds.
Sell Land for Higher and Better Uses
The Company seeks to realize the value of land that may have a higher and
better use than for timberland management or that is otherwise a candidate for
sale or exchange. For example, some of the Timberlands may have greater value
if used for ranching, farming or recreational purposes. The Company intends to
sell approximately 30,000 acres of small tracts for higher and better uses over
the next ten years. The Company recently sold approximately 13,000 acres from
the Klamath Falls Timberlands. In addition, the Company has identified a tract
of approximately 23,000 acres that it intends to sell within the next five
years. The Company
3
<PAGE>
will also seek to exchange lands with significant environmental sensitivity or
recreational values for lands that are more suitable for commercial timberland
management.
INDUSTRY CONDITIONS
The Company's ability to implement its business strategy over the long term
and its results of operations will depend upon a number of factors, many of
which are beyond its control. These factors include general industry
conditions, domestic and international prices and supply and demand for logs,
lumber and other wood products, seasonality and competition from other domestic
and international supplying regions and substitute products.
Supply
The supply of logs available for purchase has been most affected in recent
years by significant reductions in timber harvested from public timberlands,
principally as a result of efforts to preserve the habitat of certain
endangered species, as well as a change in the emphasis of government policy
toward habitat preservation, conservation and recreation and away from timber
management. Since the early 1970s, environmental and other similar concerns and
governmental policies have substantially reduced the volume of timber under
contract to be harvested from public lands. The pace of regulatory activity
accelerated in the late 1980s. Federal timber under contract in Washington and
Oregon decreased approximately 88% from approximately 8.4 BBF in January 1988
to approximately 1.0 BBF in January 1997. The resulting supply decrease caused
prices for logs to increase significantly, reaching peak levels during late
1993 and early 1994. Although prices have declined from these record levels,
current prices still exceed pre-1993 levels. The low supply of timber from
public lands, which is expected to continue for the foreseeable future, has
benefited private timber holders, such as the Company, through higher stumpage
and log prices.
Industry participants do not expect environmental restrictions to ease
materially within any reasonable planning horizon. Consequently, many producers
of lumber and wood products are attempting to adapt to the new supply
environment by increasing their emphasis on raw material yields, entering into
long term timber supply arrangements and value-added manufacturing, and
accessing previously untapped supplies (such as private wood lot owners, timber
with difficult access, alternative species and imports). These factors have
tended to restrict prices from even greater increases. While raw material
supply is expected to be an ongoing challenge for the lumber and wood products
industry, such conditions are likely to cause the favorable operating
environment for timber owners, such as the Company, to continue for the
foreseeable future.
In response to an increase in timber prices in the early 1990s, imports of
logs and lumber from abroad (from countries such as Canada and New Zealand)
increased. These imports, however, only partially offset the lost volume of
timber from public timberlands and did not replace the mature, high-quality
timber found in greater quantities on public timberlands. Since 1993, imports
have decreased and their impact on timber prices currently is minimal.
Demand
Changes in general economic and demographic factors, including the strength
of the economy and interest rates for home mortgages and construction loans,
have historically caused fluctuations in housing starts and, in turn, in the
demand and prices for lumber and commodity wood products. With the growth of
the home center distribution business, the repair and remodeling markets have
become a significant factor in terms of the demand for lumber and commodity
wood products and have dampened the wide fluctuations that occurred when new
housing starts were the primary factor. A large portion of the Company's
property consists of Pine species, which are used in the finishing market, for
molding trim, doors and windows. This market is more affected by repair
4
<PAGE>
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.
U.S. TIMBERLANDS FINANCE CORP.
Finance Corp., a wholly-owned corporate subsidiary of the Company which has
nominal assets and will not conduct any operations, is acting as co-obligor for
the Notes. Certain institutional investors that might otherwise be limited in
their ability to invest in securities issued by limited liability companies, by
reason of the legal investment laws of their states of organization or their
charter documents, may be able to invest in the Notes because Finance Corp. is
a co-obligor.
TRANSACTIONS AT CLOSING
Concurrent with the closing of this offering, Old Services will contribute
all of its assets, including its timber operations, to U.S. Timberlands
Services Company, L.L.C., a newly formed Delaware limited liability company and
the managing member of the Company (the "Manager" or "New Services"), in
exchange for interests therein. Immediately thereafter, the Company will assume
certain indebtedness of U.S. Timberlands Holdings, L.L.C., an affiliate of the
Company ("Holdings"), and the Manager will contribute its timber operations to
the Company in exchange for the managing member interest in the Company. Then
the Manager will contribute all but a 1% member interest in the Company to the
Master Partnership in exchange for a general partner interest in the Master
Partnership, the right to receive Incentive Distributions (as defined in the
Glossary) and 1,387,963 subordinated limited partner interests in the Master
Partnership ("Subordinated Units" and, collectively with the Common Units, the
"Units") and Holdings will contribute all of its interest in the Company to the
Master Partnership in exchange for 2,894,157 Subordinated Units. The Manager
will then distribute the Subordinated Units to Old Services. Approximately
143,398 Subordinated Units will be used by Old Services to redeem interests in
Old Services held by John J. Stephens and George R. Hornig, founding directors
of the Manager. As a result of such transactions, the Company will become the
operating subsidiary of the Master Partnership and the Manager will own an
aggregate 2% interest in the Master Partnership and the Company on a combined
basis and the right to receive Incentive Distributions; Old Services will own
1,244,565 Subordinated Units; Holdings will own 2,894,157 Subordinated Units;
and Messrs. Stephens and Hornig will own an aggregate of 143,398 Subordinated
Units. The 4,282,120 Subordinated Units owned by Old Services, Holdings and
Messrs. Stephens and Hornig will represent an aggregate 35.8% interest in the
Company.
Use of Proceeds
Concurrent with the closing of this offering, (i) the Master Partnership will
issue and sell 7,458,684 Common Units through a public offering (the "MLP
Offering"), (ii) the Company will enter into the Bank Credit Facility, which
will include a $25.0 million Working Capital Facility and a $75.0 million
Acquisition Facility, and (iii) the Master Partnership will contribute to the
Company the net proceeds from the sale of the Common Units (estimated to be
approximately $143.8 million after deducting underwriting discounts and
commissions and expenses associated with the MLP Offering and assuming that the
underwriters' over-allotment
5
<PAGE>
option with respect to the MLP Offering is not exercised). The net proceeds
from the sale of the Notes offered hereby (estimated to be approximately $217.4
million after deducting underwriting discounts and commissions and expenses
associated with this offering), together with the net proceeds from the sale of
Common Units, approximately $24.1 million to be borrowed by the Company under
the Acquisition Facility and cash on hand (estimated to be approximately $30.2
million), will be used by the Company to repay approximately $415.5 million of
indebtedness of the Company (including accrued interest).
For additional information regarding the terms of the Bank Credit Facility,
see "Description of Bank Credit Facility."
The following table sets forth an estimated breakdown of the sources and uses
of funds contemplated by the Transactions.
<TABLE>
<CAPTION>
AMOUNTS
(IN MILLIONS)
-------------
<S> <C>
SOURCES OF FUNDS
Net Proceeds from Notes offering (a)........................... $217.4
Net Proceeds from MLP Offering (b)............................. 143.8
Drawdown on Acquisition Facility............................... 24.1
Cash on hand................................................... 30.2
------
Total........................................................ $415.5
======
USES OF FUNDS
Repayment of outstanding bank indebtedness (c)................. $415.5
======
</TABLE>
- --------
(a) After approximately $7.6 million in underwriting discounts and commissions
and expenses relating to this offering.
(b) After approximately $12.9 million in underwriting discounts and commissions
and expenses relating to the MLP Offering.
(c) Represents (i) $130.0 million of bank debt incurred by Holdings in
connection with the Company's acquisition of the Klamath Falls Timberlands,
$3.6 million in loan guarantee fees payable to Weyerhaeuser (the "Guarantee
Fees") and approximately $10.2 million of accrued interest and (ii) $270.0
million of bank debt incurred by the Company to refinance indebtedness
incurred in connection with its acquisition of the Klamath Falls
Timberlands and to finance the acquisition of the Ochoco Timberlands and
approximately $1.7 million of accrued interest.
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables set forth for the periods and at the dates indicated,
summary historical financial and operating data for the Company, and pro forma
financial and operating data after giving effect to the Weyerhaeuser
Acquisition and the Transactions. The summary historical operating statement
data for the two years ended December 31, 1995, the eight months ended August
29, 1996 and the balance sheet data as of December 31, 1995 are derived from
the historical audited financial statements of the southern Oregon timberlands
operations of Weyerhaeuser (the "Predecessor") which were prepared by the
Company and should be read in conjunction with such financial statements
included elsewhere in this Prospectus. The summary historical combined
financial data for the four months ended December 31, 1996 are derived from the
historical combined audited financial statements of the Company, and the
summary historical financial data for the one month ended September 30, 1996
and for the nine months ended September 30, 1997 are derived from the
historical unaudited combined financial statements of the Company included
elsewhere in this Prospectus. In the opinion of management, each of the
unaudited financial statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair statement of the results for the
unaudited periods. The summary pro forma financial and operating data of the
Company are derived from the unaudited pro forma consolidated financial
statements and notes thereto included elsewhere in this Prospectus and should
be read in conjunction therewith. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The dollar amounts
in the table below are in thousands.
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(A) FORMA(B)
--------------------------------------------------- ------------ ------------
JANUARY 1, AUGUST 30,
1996 1996
YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED
--------------------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1996 1996 1996
----------- ----------- ------- ------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT
DATA:
Revenues:
Logs................... $27,225 $28,609 $29,102 $29,110 $14,077 $ 13,590 $ 27,667
Timberland and property
sales................. -- 4,180 -- -- -- -- --
By-products and other.. 4,354 3,537 3,240 2,623 1,501 429 1,930
------- ------- ------- ------- ------- -------- --------
Total revenues......... 31,579 36,326 32,342 31,733 15,578 14,019 29,597
Operating costs:
Cost of products sold.. 12,830 15,697 16,351 14,951 9,225 6,179 15,404
Cost of timber and
property sales........ -- 58 -- -- -- -- --
Depreciation, depletion
and road
amortization.......... 1,531 1,443 1,455 1,486 927 3,323 8,376
Selling, general and
administrative
expenses.............. 4,069 4,034 4,454 4,235 2,730 9,284 7,079 (c)
------- ------- ------- ------- ------- -------- --------
Operating income
(loss)................ 13,149 15,094 10,082 11,061 2,696 (4,767) (1,262)
Interest expense....... -- -- -- -- -- 7,316 24,943
Amortization of
deferred financing
fees and debt
guarantee fees........ -- -- -- -- -- 1,326 755
Interest income........ -- -- -- -- -- (409) (409)
Other (income) expense,
net................... (322) 297 140 (555) 1 36 37
------- ------- ------- ------- ------- -------- --------
Net income (loss)...... $13,471 $14,797 $ 9,942 $11,616 $ 2,695 $(13,036) $(26,588)
======= ======= ======= ======= ======= ======== ========
Non-managing member's
interest in net loss.. $(26,322)
========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(A) FORMA(B)
---------------------------------------------------- ------------ ------------
JANUARY 1,
1996 AUGUST 30,
YEAR ENDED DECEMBER 31, THROUGH 1996 THROUGH YEAR ENDED
---------------------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1996 1996 1996
----------- ----------- ------- ------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS AND OTHER
DATA:
EBITDDA(d)............. $ 14,680 $16,595 $11,537 $12,547 $ 3,623 $ (1,444) $ 7,114
Capital expenditures--
Maintenance(e)........ 1,553 1,157 2,098 2,082 459 360
Ratio of earnings
(losses) to fixed
charges(f)............
Cash flow from (used
in) operations........ 16,784 15,124 13,173 11,810 5,512 (2,984)
Cash flow used in
investing............. (1,553) (1,157) (2,013) (1,859) (459) (291,450)
Cash flow from (used
in) financing......... (15,231) (13,967) (11,160) (9,951) (5,054) 311,047
BALANCE SHEET DATA (AT
PERIOD END):
Working capital........ $ 793 $ 2,068 $ 211 $ 1,304 $ 524 $ 21,459
Timber, timberlands and
logging roads, net ... 22,050 21,495 20,885 20,822 21,275 273,457
Total assets........... 30,787 32,292 29,844 30,947 27,839 310,191
Long-term debt......... -- -- -- -- -- 305,000
Excess of assets over
liabilities........... 29,220 29,643 27,745 29,155 27,839
Members' deficit....... (2,936)
OPERATING DATA
(UNAUDITED):
Harvest volumes (MBF):
Used in log and
stumpage sales(g)..... 70,982 69,291 68,208 63,614 32,760 27,389 60,149
Used in chip sales..... 33,012 18,996 10,224 18,315 5,196 -- 5,196
Total................. 103,994 88,287 78,432 81,929 37,956 27,389 65,345
Sales volumes:
Log and stumpage sales
(MBF)(g).............. 70,903 66,250 68,302 63,822 32,760 30,210 62,970
Timber and property
sales (MBF)........... -- 9,449 -- -- -- -- --
Chip sales (BDT)....... 98,802 52,278 38,380 25,702 20,568 7,174 27,742
</TABLE>
<TABLE>
<CAPTION>
COMPANY
PRO
PREDECESSOR COMPANY(A) FORMA(B)
----------- ----------------------------- -------------
JANUARY 1,
1996 AUGUST 30, 1996 NINE MONTHS NINE MONTHS
THROUGH THROUGH ENDED ENDED
AUGUST 29, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997 1997
----------- --------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING STATEMENT
DATA:
Revenues:
Logs................... $14,077 $ 1,916 $ 36,819 $ 36,819
Timberland and property
sales................. -- -- 3,494 3,494
By-products and other.. 1,501 -- 744 744
------- -------- -------- --------
Total revenues......... 15,578 1,916 41,057 41,057
Operating costs:
Cost of products sold.. 9,225 1,404 12,101 12,101
Cost of timber and
property sales........ -- -- 1,191 1,191
Depreciation, depletion
and road
amortization.......... 927 240 10,758 10,758
Selling, general and
administrative
expenses.............. 2,730 8,040 4,300 4,300
------- -------- -------- --------
Operating income....... 2,696 (7,768) 12,707 12,707
Interest expense....... -- 1,927 17,818 18,707
Amortization of
deferred financing
fees and debt
guarantee fees........ -- 330 2,954 566
Interest income........ -- -- (1,192) (1,192)
Other (income) expense,
net................... 1 (12) (48) (48)
------- -------- -------- --------
Income (loss) before
extraordinary item.... $ 2,695 $(10,013) $ (6,825) $ (5,326)
Extraordinary item-loss
on extinguishment of
debt.................. -- -- 3,571 3,571
------- -------- -------- --------
Net income (loss)...... $ 2,695 $(10,013) $(10,396) $ (8,897)
======= ======== ======== ========
Non-managing member's
interest in net loss.. $ (8,808)
========
CASH FLOWS AND OTHER
DATA:
EBITDDA(d)............. $ 3,623 $ (7,529) $ 24,656 $ 24,656
Capital expenditures--
Maintenance(e)........ 459 140 798
Ratio of earnings to
fixed charges(f)......
Cash flow from (used
in) operations........ 5,512 (2,714) 9,691
Cash flow used in
investing............. (459) (292,396) (101,271)
Cash flow from (used
in) financing......... (5,054) 311,172 98,999
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
COMPANY
PRO
PREDECESSOR COMPANY(A) FORMA(B)
--------------- ----------------------------- -------------
JANUARY 1, 1996 AUGUST 30, 1996 NINE MONTHS NINE MONTHS
THROUGH THROUGH ENDED ENDED
AUGUST 29, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997 1997
--------------- --------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
PERIOD END):
Working capital........ $ 524 $ 21,573 $ 15 $ 2,248
Timber, timberlands and
logging roads, net.... 21,275 276,504 373,230 373,230
Total assets........... 27,839 314,898 415,227 392,614
Long-term debt......... -- 305,000 413,000 265,294
Excess of assets over
liabilities........... 27,839
Members' equity (defi-
cit).................. 86 (14,523) 122,175
OPERATING DATA
(UNAUDITED):
Harvest volumes (MBF):
Used in log and
stumpage sales(g)..... 32,760 2,065 82,693 82,693
Used in chip sales..... 5,196 -- 3,011 3,011
Total................. 37,956 2,065 85,704 85,704
Sales volumes:
Log and stumpage sales
(MBF)(g).............. 32,760 4,476 82,693 82,693
Timber and property
sales (MBF)........... -- -- 11,045 11,045
Chip sales (BDT)....... 20,568 -- 8,981 8,981
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial and
operating data after August 30, 1996 are not comparable to financial and
operating data of the Predecessor. See the financial statements of the
Company and accompanying notes included elsewhere in this Prospectus for
additional information.
(b) The Company's pro forma consolidated financial and operating data are
derived from the unaudited pro forma consolidated financial statements of
the Company included elsewhere in this Prospectus.
(c) Includes $2,800 paid to an affiliate for management services. The Company
does not intend to pay such management fees subsequent to completion of the
Transactions.
(d) EBITDDA is defined as operating income 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 but provides additional
information for evaluating the Company's ability to service its
indebtedness. In addition, EBITDDA does not necessarily represent funds
available for management's discretionary use as it is calculated prior to
debt service obligations and capital expenditures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Description of Bank Credit Facility", and "Description of Notes."
(e) 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.
(f) For purposes of calculating the ratio of earnings (losses) to fixed charges
"earnings (losses)" are net income (loss) plus fixed charges and "fixed
charges" are composed of interest on indebtedness, amortization of deferred
financing costs and debt guarantee fees. Earnings were insufficient to
cover fixed charges by $13,036, $10,396, $26,588 and $8,897, for the
historical period from August 30, 1996 through December 31, 1996, the
historical nine-month period ended September 30, 1997 and for the pro forma
year ended December 31, 1996 and nine months ended September 30, 1997,
respectively. The Predecessor participated in Weyerhaeuser's centralized
cash management system and therefore had no indebtedness or fixed charges.
(g) The Company had no stumpage sales prior to April 1997.
9
<PAGE>
COMPANY STRUCTURE AND MANAGEMENT
The Company will be the operating subsidiary of the Master Partnership. Upon
consummation of the Transactions, the Master Partnership will own a 98.9899%
member interest in the Company and the Manager will own a 1.0101% managing
member interest in the Company and a 1.0% general partner interest in the
Master Partnership. The Manager therefore will own an aggregate 2% interest in
the Company and the Master Partnership on a combined basis.
Following this offering and the MLP Offering, the senior executives who
currently manage the Company and Old Services will manage and operate the
Company's business as the senior executives of the Manager. The Manager will
not receive any management fee or other compensation in connection with its
management of the Company, but will be reimbursed for all direct and indirect
expenses incurred on behalf of the Company (including wages and salaries of
employees, officers and directors of the Manager) and all other necessary or
appropriate expenses allocable to the Company or otherwise reasonably incurred
by the Manager in connection with the operation of the Company's business.
The principal executive offices of the Company and the Master Partnership are
located at 6400 Highway 66, Klamath Falls, Oregon 97601. The telephone number
at such offices is (541) 884-2240. The principal executive offices of the
Manager are located at 625 Madison Avenue, Suite 10-B, New York, New York
10022. The telephone number at such offices is (212) 755-1100.
The following charts depict the organization and ownership of (i) the Company
and Old Services prior to the consummation of the Transactions and (ii) the
Company and the Master Partnership immediately after giving effect to the
consummation of the Transactions, including the sale of the Common Units, and
assumes that the underwriters' over-allotment option in connection therewith is
not exercised. The percentages reflected in the second chart represent the
approximate ownership interest in each of the Company and the Master
Partnership individually and not on an aggregate basis. Except in the second
chart, the ownership percentages referred to in this Prospectus reflect the
approximate effective ownership interest of the Unitholders in the Master
Partnership and the Company on a combined basis. The 2% ownership percentage of
the Manager referred to in this Prospectus reflects the approximate effective
ownership interest of the Manager in the Company and the Master Partnership on
a combined basis.
10
<PAGE>
[FLOWCHART DEPICTING CURRENT OWNERSHIP STRUCTURE]
11
<PAGE>
[FLOWCHART DEPICTING EFFECTIVE AGGREGATE OWNERSHIP OF THE COMPANY
AND THE MASTER PARTNERSHIP UPON CONSUMMATION OF THE TRANSACTION]
12
<PAGE>
THE OFFERING
Issuers..................... U.S. Timberlands Klamath Falls, L.L.C. and U.S.
Timberlands Finance Corp. (the "Issuers").
Securities Offered.......... $225.0 million aggregate principal amount of 9
5/8% Senior Notes due 2007 (the "Notes").
Maturity Date............... November 15, 2007.
Payment Dates............... The Notes will bear interest from the date of
issuance at the rate of 9 5/8% per annum, payable
semi-annually in arrears on May 15 and November
15, of each year, commencing on May 15, 1998.
Ranking..................... The Notes will be senior unsecured joint and
several obligations of the Issuers. The Notes
will rank senior to all existing and future
subordinated indebtedness of the Issuers. The
Notes will rank pari passu in right of payment
with all future senior indebtedness of the
Issuers. At September 30, 1997, after giving pro
forma effect to this offering and the other
transactions described herein, the Company would
have had outstanding long-term indebtedness,
other than the Notes, of approximately $40.3
million, consisting solely of borrowings under
the Acquisition Facility. The Notes will be non-
recourse to the Manager and the Master
Partnership.
Mandatory Redemption........ The Issuers are not required to make mandatory
redemption or sinking fund payments with respect
to the Notes.
Optional Redemption......... The Notes will be redeemable, in whole or in
part, at the option of the Issuers on or after
November 15, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest
thereon to the redemption date. In addition, at
any time on or prior to November 15, 2000, the
Issuers may redeem Notes with the net cash
proceeds of a public offering of Common Units or
other equity interests of the Master Partnership
or of equity interests of the Company, at
109.625% of the principal amount hereof, plus
accrued and unpaid interest thereon to the
redemption date, provided that at least 65% of
the principal amount of Notes originally issued
remain outstanding immediately following such
redemption. See "Description of the Notes--
Optional Redemption."
Change of Control........... Upon a Change of Control, each holder of the
Notes will have the right to require the Issuers
to repurchase all or any part of such holder's
Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued
and unpaid
interest thereon to the date of purchase. There
can be no assurance that the Issuers will have
adequate funds available to repurchase the Notes.
See "Risk Factors--Risks Inherent in an
Investment in the Company--Inability to Fund a
Change of Control Offer."
Certain Covenants........... The Indenture contains covenants restricting or
limiting the ability of the Company and its
Restricted Subsidiaries (as defined herein) to,
among other things, (i) pay distributions or make
other restricted
13
<PAGE>
payments, (ii) incur additional indebtedness and
issue preferred stock, (iii) enter into sale and
leaseback transactions, (iv) create liens, (v)
incur dividend and other payment restrictions
affecting Subsidiaries, (vi) sell assets or
harvest timber in excess of certain limitations,
(vii) enter into mergers, consolidations or sales
of all or substantially all assets, (viii) enter
into transactions with affiliates or (ix) engage
in other lines of business. However, these
covenants are subject to certain exceptions.
Use of Proceeds............. The net proceeds to the Company from the sale of
the Notes offered hereby will be approximately
$217.4 million, after deducting underwriting
discounts and commissions and other expenses
associated with this offering. The net proceeds
of this offering, the net proceeds from the MLP
Offering, borrowings under the Acquisition
Facility and cash on hand will be applied to
repay indebtedness of the Company (including
accrued interest and the Guarantee Fees) upon
consummation of the Transactions. See "Use of
Proceeds."
Listing..................... The Notes have been approved for listing on the
New York Stock Exchange (the "NYSE"), subject to
official notice of issuance.
NYSE Symbol................. "TIMBZ 07."
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the information
set forth in "Risk Factors" and elsewhere in this Prospectus in evaluating an
investment in the Notes.
14
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements and information that are
based on the beliefs of the Company and the Manager, as well as assumptions
made by, and information currently available to, the Company and the Manager.
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 Manager 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 of 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
Prospective purchasers of the Notes should consider the following risk
factors in evaluating an investment in the Notes.
RISKS INHERENT IN AN INVESTMENT IN THE COMPANY
The Company's Indebtedness May Affect its Operations
On a pro forma basis at September 30, 1997, the Company's total long-term
indebtedness would have been approximately $265.3 million, representing
approximately 68% of the Company's total capitalization. As a result, the
Company will be significantly leveraged and will have indebtedness that is
substantial in relation to its equity capital. Upon consummation of the
Transactions, the Company will have outstanding $225.0 million in Notes, and
approximately $24.1 million in borrowings under the Acquisition Facility and
approximately $75.9 million of unused borrowing capacity under the Bank Credit
Facility. Future borrowings could result in a significant increase in the
Company's leverage. The ability of the Company to make principal and interest
payments depends on future performance, which performance is subject to many
factors, a number of which will be outside the 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
"Description of Bank Credit Facility" and "Description of Notes."
Possible Insufficiency of Assets in the Event of a Fraudulent Conveyance
The incurrence by the Issuers of indebtedness such as the Notes for the
purposes described herein may be subject to review under relevant federal and
state fraudulent conveyance laws if a bankruptcy case or a lawsuit (including
in circumstances where bankruptcy is not involved) is commenced by or on
behalf of unpaid creditors of the Issuers. Under these laws, if a court were
to find that, at the time the Notes were issued, (a) the Issuers either
incurred indebtedness represented by the Notes with the intent of hindering,
delaying or defrauding creditors or received less than reasonably equivalent
value or fair consideration for incurring such indebtedness and (b) the
Issuers (i) were insolvent or were rendered insolvent by reason of such
transaction, (ii) were engaged in a business or transaction for which the
assets remaining with them constituted unreasonably small capital or (iii)
intended to incur, or believed that they would incur, debts beyond their
ability to pay such debts as they matured, such court may subordinate the
Notes to presently existing and future indebtedness of the Issuers, void the
issuance of the Notes and direct the repayment of any amounts paid thereunder
to the Issuers or to a fund for the benefit of the Issuers' creditors, or take
other action detrimental to the holders of the Notes.
15
<PAGE>
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the relevant jurisdiction. Generally, however, an entity would
be considered insolvent for purposes of the foregoing if the sum of its debts,
including contingent liabilities, were greater than the fair saleable value of
all of its assets at fair valuation, or if the present fair saleable value of
its assets were less than the amount that would be required to pay its probable
liability on its existing debts, including contingent liabilities, as they
become absolute and matured.
Fraudulent Conveyance Considerations Relating to Subsidiary Guarantees
The indenture pursuant to which the Notes will be issued (the "Indenture")
does not require any subsidiary to guarantee the Notes unless such subsidiary
guarantees other indebtedness of the Company. On the date of the Indenture,
there are expected to be no Subsidiary Guarantors (as defined herein). The
incurrence of any Subsidiary Guarantees (as defined herein) in the future may
be subject to review under relevant federal and state fraudulent conveyance
laws if a bankruptcy case or a lawsuit (including in circumstances where
bankruptcy is not involved) is commenced by or on behalf of unpaid creditors of
the Subsidiary Guarantor. Under these laws, if a court were to find that, at
the time the Subsidiary Guarantee was incurred (a) the Subsidiary Guarantor
either incurred the Subsidiary Guarantee with the intent of hindering, delaying
or defrauding creditors or received less than reasonably equivalent value or
fair consideration for incurring such Subsidiary Guarantee and (b) the
Subsidiary Guarantor (i) was insolvent or was rendered insolvent by reason of
such transaction, (ii) was engaged in a business or transaction for which the
assets remaining with it constituted unreasonably small capital or
(iii) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court may subordinate the
Subsidiary Guarantee to presently existing and future indebtedness of the
Subsidiary Guarantor, void the issuance of the Subsidiary Guarantee and direct
the repayment of any amounts paid thereunder to the Subsidiary Guarantor, or to
a fund for the benefit of the Subsidiary Guarantor's creditors, or take other
action detrimental to the holders of the Notes. Among other things, a legal
challenge of the Subsidiary Guarantee issued by such Subsidiary Guarantor on
fraudulent conveyance grounds may focus on the benefits, if any, realized by
such Subsidiary Guarantor as a result of the issuance by the Issuers of the
Notes. To the extent the Subsidiary Guarantee was avoided as a fraudulent
conveyance or held unenforceable for any other reason, the holders of the Notes
would cease to have any claim against such Subsidiary Guarantor and would be
creditors solely of the Company and any Subsidiary Guarantors whose Subsidiary
Guarantees were not avoided or held unenforceable. In such event, the claims of
the holders of the Notes against the issuer of an invalid Subsidiary Guarantee
would be subject to the prior payment of all liabilities of such Subsidiary
Guarantor. See "Description of Notes--Subsidiary Guarantees of Notes."
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the relevant jurisdiction. Generally, however, a Subsidiary
Guarantor would be considered insolvent for purposes of the foregoing if the
sum of its debts, including contingent liabilities, were greater than the fair
saleable value of all of its assets at fair valuation, or if the present fair
saleable value of its assets were less than the amount that would be required
to pay its probable liability on its existing debts, including contingent
liabilities, as they become absolute and matured.
The Company Has a Limited Operating History; Recent Losses
The Klamath Falls Timberlands and the Ochoco Timberlands, prior to their
acquisition by the Company, had been part of Weyerhaeuser and Ochoco,
respectively, and had not been operated as separate businesses or divisions. In
addition, prior to the Company's acquisition of the Timberlands, sales from the
Timberlands were generally made to affiliated conversion facilities and not to
unaffiliated customers. Although the Company has operated the Klamath Falls
Timberlands since September 1996, and sales during such period have been made
exclusively to unaffiliated customers, there can be no assurance that the
Company will be able to manage successfully the Timberlands as a separate
business on a profitable basis. For the years ended December 31, 1994 and 1995
and the eight-month period ended August 29, 1996, the Company had net income of
$9.9 million, $11.6 million and $2.7 million, respectively. Since the
Weyerhaeuser Acquisition, the Company has had net losses of $13.0 million and
$10.4 million for the four-month period ended December 31, 1996 and the nine
months ended
16
<PAGE>
September 30, 1997, respectively. On a pro forma basis, the Company would have
had net losses of $26.6 million and $8.9 million for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively.
Change of Management Provisions
Following this offering, the ownership of Subordinated Units by certain
affiliates of the Manager will effectively preclude the removal of the Manager
as managing member of the Company or as general partner of the Master
Partnership without its consent. In addition, the Amended and Restated
Agreement of Limited Partnership of the Master Partnership (the "MLP
Partnership Agreement") contains certain provisions that may have the effect
of discouraging a person or group from attempting to remove the Manager as
managing member of the Company or as general partner of the Master Partnership
or otherwise change the management of the Company.
Absence of Trading Markets
The Notes will be a new issue of securities for which there currently is no
public market. Although the Notes have been approved for listing on the NYSE,
subject to official notice of issuance, no assurance can be given as to the
liquidity of any market for the Notes. The Underwriters have informed the
Company that they currently intend to make a market in the Notes, although the
Underwriters are not obliged to do so and may discontinue such market-making
at any time. In addition, such market-making activity will be subject to
limits imposed by the Securities Act of 1933, as amended (the "Securities
Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
Inability to Fund a Change of Control Offer
The Company must offer to purchase the Notes upon the occurrence of certain
events. The Indenture will provide that in the event of a Change of Control,
the Issuers will be required, subject to certain conditions, to offer to
purchase all outstanding Notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest thereon to the date of
purchase. On a pro forma basis after giving effect to the Transactions, the
Issuers will not have sufficient funds available to purchase all of the
outstanding Notes were they to be tendered in response to an offer made as a
result of a change of control. See "Description of Notes--Repurchase at the
Option of Holders--Change of Control."
RISKS INHERENT IN THE COMPANY'S BUSINESS
Cyclicality of Forest Products Industry Will Affect the Company's Results of
Operations
The Company's results of operations are, and will continue to be, affected
by the cyclical nature of the forest products industry. Prices and demand for
logs have been, and in the future can be expected to be, subject to cyclical
fluctuations. The demand for logs is primarily affected by the level of new
residential construction activity, and, to a lesser extent, repair and
remodeling activity and other industrial uses, which are subject to
fluctuations due to changes in economic conditions, interest rates, population
growth, weather conditions and other factors. Decreases in the level of
residential construction activity will be reflected in reduced demand for
logs, which may result in lower revenues, profits and cash flows.
Timber Supply May Increase in the Future
Various factors, including environmental and endangered species concerns,
have limited, and are likely to continue to limit, the amount of timber
offered for sale by certain United States government agencies, which
historically have been major suppliers of timber to the United States forest
products industry. Federal timber under contract in Washington and Oregon
decreased approximately 88% from approximately 8.4 BBF in January 1988 to
approximately 1.0 BBF in January 1997.
17
<PAGE>
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 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.
18
<PAGE>
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 Master Partnership'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. Covenants in the Indenture and the Bank Credit Facility might
restrict the ability of the Company to incur indebtedness to finance
acquisitions. The Company currently has no commitments to acquire any material
assets.
The Company's acquisition strategy involves numerous risks, including
difficulties inherent in the integration of operations and systems, the
diversion of management's attention from other business concerns and the
potential loss of key employees of acquired businesses. In addition, future
acquisitions also may involve the expenditure of significant funds. Depending
upon the nature, size and timing of future acquisitions, the Company may be
required to secure additional financing. There is no assurance that such
additional financing will be available to the Company on acceptable terms.
The Company Will Be Dependent Upon Key Personnel
The Company believes that its success will depend to a significant extent
upon the efforts and abilities of its senior operating management team. The
failure by the Manager to retain the key members of its senior operating
management team could adversely affect the financial condition or results of
operations of the Company.
Dependence on Certain Key Customers
The Company currently derives a significant portion of its revenues from
sales of timber to certain key customers. For the nine months ended September
30, 1997, three of these customers, Collins, Boise Cascade Corporation and
Crown Pacific Partners, purchased timber representing approximately 25%, 20%
and 17%, 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.
19
<PAGE>
THE TRANSACTIONS
Concurrent with the closing of this offering, Old Services will contribute
all of its assets, including its timber operations, to the Manager in exchange
for interests therein. Immediately thereafter, the Company will assume certain
indebtedness of Holdings and the Manager will contribute its timber operations
to the Company in exchange for a managing member interest in the Company.
Then, the Manager will contribute all but a 1% member interest in the Company
to the Master Partnership in exchange for a general partner interest in the
Master Partnership, the right to receive Incentive Distributions and 1,387,963
Subordinated Units and Holdings will contribute all of its interest in the
Company to the Master Partnership in exchange for 2,894,157 Subordinated
Units. The Manager will then distribute the Subordinated Units to Old
Services. Approximately 143,398 Subordinated Units will be used by Old
Services to redeem interests in Old Services held by Messrs. Stephens and
Hornig, founding directors of the Manager. As a result of such transactions,
the Company will become the operating subsidiary of the Master Partnership and
the Manager will own an aggregate 2% interest in the Company and the Master
Partnership on a combined basis, and the right to receive Incentive
Distributions; Old Services will own 1,244,565 Subordinated Units; Holdings
will own 2,894,157 Subordinated Units; and Messrs. Stephens and Hornig will
own an aggregate of 143,398 Subordinated Units. The 4,282,120 Subordinated
Units owned by Old Services, Holdings and Messrs. Stephens and Hornig will
represent an aggregate 35.8% interest in the Company.
Concurrently with the closing of this offering, (i) the Master Partnership
will issue and sell approximately 7,458,684 Common Units through the MLP
Offering, (ii) the Company will enter into the Bank Credit Facility, which
will include a $25.0 million Working Capital Facility and a $75.0 million
Acquisition Facility, and (iii) the Master Partnership will contribute to the
Company the net proceeds from the sale of the Common Units (estimated to be
approximately $143.8 million after deducting underwriting discounts and
commissions and expenses associated with the MLP Offering and assuming that
the underwriters' over-allotment option with respect to the MLP Offering is
not exercised). The net proceeds from the sale of the Notes offered hereby
(estimated to be approximately $217.4 million after deducting underwriting
discounts and commissions and expenses associated with this offering),
together with the net proceeds from the sale of Common Units, approximately
$24.1 million to be borrowed by the Company under the Acquisition Facility and
cash on hand (estimated to be approximately $30.2 million), will be used by
the Company to repay approximately $415.5 million of indebtedness of the
Company (including accrued interest).
For additional information regarding the terms of the Bank Credit Facility,
see "Description of Bank Credit Facility."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
are expected to be approximately $217.4 million, after deducting estimated
underwriting discounts and commissions and expenses associated with this
offering. The Company will apply the net proceeds from the sale of the Notes
offered hereby, together with the net proceeds from the sale of Common Units
contributed to the Company by the Master Partnership (estimated to be
approximately $143.8 million, assuming that the underwriters' over-allotment
option with respect to the MLP Offering is not exercised, and after deducting
underwriting discounts and commissions and expenses associated with the MLP
Offering), approximately $24.1 million borrowed under the Acquisition
Facility, and cash on hand (estimated to be approximately $30.2 million), to
repay the indebtedness assumed by the Company in connection with the
Transactions and other indebtedness of the Company. The indebtedness to be
repaid consists of: (i) $130.0 million of bank indebtedness incurred by
Holdings (the "Holdings Debt") in connection with the Company's acquisition of
the Klamath Falls Timberlands in August 1996, $3.6 million in Guarantee Fees
and approximately $10.2 million in accrued interest; and (ii) $270.0 million
of bank indebtedness incurred by the Company in July 1997 to refinance
indebtedness incurred in connection with the acquisition of the Klamath Falls
Timberlands and to finance the acquisition of the Ochoco Timberlands (the
"USTK Debt") and approximately $1.7 million in accrued interest. The Holdings
Debt matures in September 1999 and bears interest at a floating rate, adjusted
monthly (6.19% per annum at September 30, 1997). The USTK Debt consists of
$70.0 million outstanding under a revolving credit facility and $200.0 million
outstanding under a term credit facility, each of which matures in June 2004
and bears interest at a variable rate (7.94% per annum at September 30, 1997).
If the underwriters' over-allotment option in connection with the MLP Offering
is exercised in full, the Master Partnership will issue 1,118,803 additional
Common Units at $21.00 per Common Unit. The Company will use the net proceeds
from any exercise of the underwriters' over-allotment option to repay
indebtedness incurred by the Company under the Acquisition Facility. No
portion of the net proceeds of the Notes will be received by, or used for the
benefit of, Finance Corp.
21
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the combined capitalization of the
Company and Old Services (including the Holdings Debt) as of September 30,
1997, (ii) the pro forma adjustments required to reflect the Transactions,
including the sale of the Notes offered hereby and the MLP Offering (assuming
that the underwriters' over-allotment option with respect thereto is not
exercised) and the application of the net proceeds therefrom as described in
"Use of Proceeds," and (iii) the pro forma capitalization of the Company as of
September 30, 1997 after giving effect thereto. The table should be read in
conjunction with the historical and pro forma financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
--------------------------------------
COMPANY
AND OLD
SERVICES
COMBINED PRO FORMA CONSOLIDATED
HISTORICAL ADJUSTMENTS(A) PRO FORMA
---------- -------------- ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Long-term debt (including current
portion):
Acquisition Facility.................. $ -- $ 40,294 $ 40,294
Prior revolving credit facility(b).... 83,000 (83,000) --
Prior term loans(b)................... 330,000 (330,000) --
9 5/8% Senior Notes due 2007.......... -- 225,000 225,000
-------- --------- --------
Total indebtedness.................. 413,000 (147,706) 265,294
Members' equity (deficit):
Members' deficit prior to the
Transactions......................... (14,523) 14,523 --
Non-managing member's interest........ -- 120,953 120,953
Managing member's interest............ -- 1,222 1,222
-------- --------- --------
Total members' equity (deficit)..... (14,523) 136,698 122,175
-------- --------- --------
Total capitalization................ $398,477 $ (11,008) $387,469
======== ========= ========
</TABLE>
- --------
(a) See Notes to Pro Forma Consolidated Financial Statements of U.S.
Timberlands Klamath Falls, L.L.C.
(b) This table reflects indebtedness of the Company as of September 30, 1997.
On August 29, 1996, Holdings entered into a $130.0 million loan agreement
with several banks to finance a portion of the Weyerhaeuser Acquisition.
On July 14, 1997, the Company entered into a loan agreement with a
commercial bank to refinance a portion of the debt it incurred in
connection with the Weyerhaeuser Acquisition and to finance the Ochoco
Acquisition. This debt consists of a $200.0 million seven-year amortizing
secured facility and an $85.0 million revolving credit facility (of which
$83.0 million was outstanding as of September 30, 1997). This indebtedness
will be paid in full at the closing of this offering.
22
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables set forth for the periods and at the dates indicated,
selected historical financial and operating data for the Company, and pro
forma financial and operating data after giving effect to the Weyerhaeuser
Acquisition and the Transactions. The selected historical operating statement
data for the two years ended December 31, 1995, the eight months ended August
29, 1996 and the balance sheet data as of December 31, 1995 are derived from
the historical audited financial statements of the Predecessor which were
prepared by the Company and should be read in conjunction with such financial
statements included elsewhere in this Prospectus. The selected historical
combined financial data for the four months ended December 31, 1996 are
derived from the historical combined audited financial statements of the
Company, and the summary historical financial data for the one month ended
September 30, 1996 and for the nine months ended September 30, 1997 are
derived from the historical unaudited combined financial statements of the
Company included elsewhere in this Prospectus. In the opinion of management,
each of the unaudited financial statements include all adjustments, consisting
of normal recurring adjustments, necessary for a fair statement of the results
for the unaudited periods. The selected pro forma financial and operating data
of the Company are derived from the unaudited pro forma consolidated financial
statements and notes thereto included elsewhere in this Prospectus and should
be read in conjunction therewith. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The dollar amounts
in the table below are in thousands.
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(A) FORMA(B)
--------------------------------------------------- ------------ ------------
JANUARY 1, AUGUST 30,
1996 1996
YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED
--------------------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1996 1996 1996
----------- ----------- ------- ------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT
DATA:
Revenues:
Logs................... $27,225 $28,609 $29,102 $29,110 $14,077 $ 13,590 $ 27,667
Timberland and property
sales................. -- 4,180 -- -- -- -- --
By-products and other.. 4,354 3,537 3,240 2,623 1,501 429 1,930
------- ------- ------- ------- ------- -------- --------
Total revenues......... 31,579 36,326 32,342 31,733 15,578 14,019 29,597
Operating costs:
Cost of products sold.. 12,830 15,697 16,351 14,951 9,225 6,179 15,404
Cost of timber and
property sales........ -- 58 -- -- -- -- --
Depreciation, depletion
and road
amortization.......... 1,531 1,443 1,455 1,486 927 3,323 8,376
Selling, general and
administrative
expenses.............. 4,069 4,034 4,454 4,235 2,730 9,284 7,079 (c)
------- ------- ------- ------- ------- -------- --------
Operating income
(loss)................ 13,149 15,094 10,082 11,061 2,696 (4,767) (1,262)
Interest expense....... -- -- -- -- -- 7,316 24,943
Amortization of
deferred financing
fees and debt
guarantee fees........ -- -- -- -- -- 1,326 755
Interest income........ -- -- -- -- -- (409) (409)
Other (income) expense,
net................... (322) 297 140 (555) 1 36 37
------- ------- ------- ------- ------- -------- --------
Net income (loss)...... $13,471 $14,797 $ 9,942 $11,616 $ 2,695 $(13,036) $(26,588)
======= ======= ======= ======= ======= ======== ========
Non-managing member's
interest in net loss.. $(26,322)
========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRO
PREDECESSOR COMPANY(A) FORMA(B)
----------------------------------------------------- ------------ ------------
JANUARY 1,
1996 AUGUST 30,
YEAR ENDED DECEMBER 31, THROUGH 1996 THROUGH YEAR ENDED
----------------------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1996 1996 1996
----------- ----------- -------- ------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS AND OTHER
DATA:
EBITDDA(d)............. $ 14,680 $ 16,595 $ 11,537 $12,547 $ 3,623 $ (1,444) $ 7,114
Capital expenditures--
Maintenance(e)........ 1,553 1,157 2,098 2,082 459 360
Ratio of earnings
(losses) to fixed
charges(f)............
Cash flow from (used
in) operations........ 16,784 15,124 13,173 11,810 5,512 (2,984)
Cash flow used in
investing............. (1,553) (1,157) (2,013) (1,859) (459) (291,450)
Cash flow from (used
in) financing......... (15,231) (13,967) (11,160) (9,951) (5,054) 311,047
BALANCE SHEET DATA (AT
PERIOD END):
Working capital........ $ 793 $ 2,068 $ 211 $ 1,304 $ 524 $ 21,459
Timber, timberlands and
logging roads, net.... 22,050 21,495 20,885 20,822 21,275 273,457
Total assets........... 30,787 32,292 29,844 30,947 27,839 310,191
Long-term debt......... -- -- -- -- -- 305,000
Excess of assets over
liabilities........... 29,220 29,643 27,745 29,155 27,839
Members' deficit....... (2,936)
OPERATING DATA
(UNAUDITED):
Harvest volumes (MBF):
Used in log and
stumpage sales(g)..... 70,982 69,291 68,208 63,614 32,760 27,389 60,149
Used in chip sales..... 33,012 18,996 10,224 18,315 5,196 -- 5,196
Total................. 103,994 88,287 78,432 81,929 37,956 27,389 65,345
Sales volumes:
Log and stumpage sales
(MBF)(g).............. 70,903 66,250 68,302 63,822 32,760 30,210 62,970
Timber and property
sales (MBF)........... -- 9,449 -- -- -- -- --
Chip sales (BDT)....... 98,802 52,278 38,380 25,702 20,568 7,174 27,742
</TABLE>
<TABLE>
<CAPTION>
COMPANY
PRO
PREDECESSOR COMPANY(A) FORMA(B)
--------------- ----------------------------- -------------
JANUARY 1, 1996 AUGUST 30, 1996 NINE MONTHS NINE MONTHS
THROUGH THROUGH ENDED ENDED
AUGUST 29, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997 1997
--------------- --------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING STATEMENT
DATA:
Revenues:
Logs................... $14,077 $ 1,916 $ 36,819 $36,819
Timberland and property
sales................. -- -- 3,494 3,494
By-products and other.. 1,501 -- 744 744
------- -------- -------- -------
Total revenues......... 15,578 1,916 41,057 41,057
Operating costs:
Cost of products sold.. 9,225 1,404 12,101 12,101
Cost of timber and
property sales........ -- -- 1,191 1,191
Depreciation, depletion
and road
amortization.......... 927 240 10,758 10,758
Selling, general and
administrative
expenses.............. 2,730 8,040 4,300 4,300
------- -------- -------- -------
Operating income....... 2,696 (7,768) 12,707 12,707
Interest expense....... -- 1,927 17,818 18,707
Amortization of
deferred financing
fees and debt
guarantee fees........ -- 330 2,954 566
Interest income........ -- -- (1,192) (1,192)
Other (income) expense,
net................... 1 (12) (48) (48)
------- -------- -------- -------
Income (loss) before
extraordinary item.... $ 2,695 $(10,013) $ (6,825) $(5,326)
Extraordinary item-loss
on extinguishment of
debt.................. -- -- 3,571 3,571
------- -------- -------- -------
Net income (loss)...... $ 2,695 $(10,013) $(10,396) $(8,897)
======= ======== ======== =======
Non-managing member's
interest in net loss.. $(8,808)
=======
CASH FLOWS AND OTHER
DATA:
EBITDDA(d)............. $ 3,623 $ (7,529) $ 24,656 $24,656
Capital expenditures--
Maintenance(e)........ 459 140 798
Ratio of earnings to
fixed charges(f)......
Cash flow from (used
in) operations........ 5,512 (2,714) 9,691
Cash flow used in
investing............. (459) (292,396) (101,271)
Cash flow from (used
in) financing......... (5,054) 311,172 98,999
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR COMPANY(A) PRO FORMA(B)
--------------- ----------------------------- -------------
AUGUST 30, 1996 NINE MONTHS NINE MONTHS
JANUARY 1, 1996 THROUGH ENDED ENDED
THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
AUGUST 29, 1996 1996 1997 1997
--------------- --------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
PERIOD END):
Working capital ....... $ 524 $ 21,573 $ 15 $ 2,248
Timber, timberlands and
logging roads......... 21,275 276,504 373,230 373,230
Total assets........... 27,839 314,898 415,227 392,614
Long-term debt......... -- 305,000 413,000 265,294
Excess of assets over
liabilities........... 27,839
Members' equity (defi-
cit).................. 86 (14,523) 122,175
OPERATING DATA
(UNAUDITED):
Harvest volumes (MBF):
Used in log and
stumpage sales(g) .... 32,760 2,065 82,693 82,693
Used in chip sales..... 5,196 -- 3,011 3,011
Total................. 37,956 2,065 85,704 85,704
Sales volumes:
Log and stumpage sales
(MBF)(g) ............. 32,760 4,476 82,693 82,693
Timber and property
sales (MBF)........... -- -- 11,045 11,045
Chip sales (BDT)....... 20,568 -- 8,981 8,981
</TABLE>
- -------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial and
operating data for the period after August 30, 1996 are not comparable to
financial and operating data of the Predecessor. See the financial
statements of the Company and accompanying notes included elsewhere in
this Prospectus for additional information.
(b) The Company's pro forma consolidated financial and operating data are
derived from the unaudited pro forma consolidated financial statements of
the Company included elsewhere in this Prospectus.
(c) Includes $2,800 paid to an affiliate for management services. The Company
does not intend to pay such management fees subsequent to completion of
the Transactions.
(d) EBITDDA is defined as operating income 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 but provides
additional information for evaluating the Company's ability to service its
indebtedness. In addition, EBITDDA does not necessarily represent funds
available for management's discretionary use as it is calculated prior to
debt service obligations and capital expenditures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Description of Bank Credit Facilities", and "Description of Notes."
(e) 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.
(f) For purposes of calculating the ratio of earnings (losses) to fixed
charges, "earnings (losses)" are net income (loss) and fixed charges and
"fixed charges" are composed of interest on indebtedness, amortization of
deferred financing costs and debt guarantee fees. Earnings were
insufficient to cover fixed charges by $13,036, $10,396, $26,588 and
$8,887, for the historical period from August 30, 1996 through December
31, 1996, the historical nine-month period ended September 30, 1997 and
for the pro forma year ended December 31, 1996 and nine months ended
September 30, 1997, respectively. The Predecessor participated in
Weyerhaeuser's centralized cash management system and therefore had no
indebtedness or fixed charges.
(g) The Company had no stumpage sales prior to April 1997.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the historical financial condition and results
of operations of the Company and the Predecessor, should be read in
conjunction with the Summary Pro Forma Financial and Operating Data and notes
thereto, the Selected Historical Financial and Operating Data and notes
thereto and the historical and pro forma financial statements and notes
thereto included elsewhere in this Prospectus. The results of operations for
the nine-month period ended September 30, 1997 are not necessarily indicative
of the results to be expected for any other interim period or for the entire
year as a whole.
GENERAL
The combined financial statements for the Company represent the combined
financial position, results of operations, equity and cash flows of the
Company and Old Services. In addition, the long-term debt obligations, related
interest costs and debt guarantee fees of Holdings, the parent entity of the
Company, have been reflected in the combined financial statements as such debt
will be assumed by the Company as part of the Transactions. The comparability
of the financial results of the Company and the Predecessor is primarily
affected by (i) increased revenues resulting from increased harvest levels on
the Klamath Falls Timberlands, (ii) increased depletion charges resulting from
the step-up in asset values of the Timberlands, (iii) reduced per MBF logging
and hauling costs resulting from the use of independent contractors rather
than Company employees to conduct silvicultural activities and the harvesting
and delivery of logs due to lower hourly wage rates, the elimination of
compensation payments during seasonal down time and the reduction in
associated capital costs and (iv) a different customer base, as a majority of
the Predecessor's sales were to an affiliated customer at internally
established transfer prices whereas all of the Company's sales are to
unaffiliated conversion facilities at market based prices (although whether
the transfer prices or market-based prices were higher changed from time to
time). Following the consummation of the Transactions, the Company expects to
reduce the harvest levels on the Klamath Falls Timberlands; however, future
financial results will reflect the acquisition of the Ochoco Timberlands.
SUPPLY AND DEMAND FACTORS
The Company's results of operations are affected by various factors, many of
which are beyond its control, including general industry conditions, domestic
and international prices and supply and demand for logs, lumber and other wood
products, seasonality and competition from other domestic and international
supplying regions and substitute products.
Supply
The supply of logs available for purchase has been most affected in recent
years by significant reductions in timber harvested from public timberlands,
principally as a result of efforts to preserve the habitat of certain
endangered species, as well as a change in the emphasis of government policy
toward habitat preservation, conservation and recreation and away from timber
management. Since the early 1970s, environmental and other similar concerns
and governmental policies have substantially reduced the volume of timber
under contract to be harvested from public lands. The pace of regulatory
activity accelerated in the late 1980s. Federal timber under contract in
Washington and Oregon decreased approximately 88% from approximately 8.4 BBF
in January 1988 to approximately 1.0 BBF in January 1997. The resulting supply
decrease caused prices for logs to increase significantly, reaching peak
levels during 1993 and early 1994. Although prices have declined from these
record levels, current prices still exceed pre-1993 levels. The low supply of
timber from public lands, which is expected to continue for the foreseeable
future, has benefited private timber holders such as the Company through
higher stumpage and log prices.
Industry participants do not expect environmental restrictions to ease
materially within any reasonable planning horizon. Consequently, many
producers of lumber and wood products are attempting to adapt to the new
supply environment by increasing their emphasis on raw material yields,
entering into long term timber 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
26
<PAGE>
to restrict prices from even greater increases. While raw material supply is
expected to be an ongoing challenge for the lumber and wood products industry,
such conditions are likely to cause the favorable operating environment for
timber owners such as the Company to continue for the foreseeable future.
In response to an increase in timber prices in the early 1990s, imports of
logs and lumber from abroad (from countries such as Canada and New Zealand)
increased. These imports, however, only partially offset the lost volume of
timber from public timberlands and did not replace the mature, high-quality
timber found in greater quantities on public timberlands. Since 1993, imports
have decreased and their impact on timber prices currently is minimal.
Demand
Changes in general economic and demographic factors, including the strength
of the economy and interest rates for home mortgages and construction loans,
have historically caused fluctuations in housing starts and, in turn, demand
and prices for lumber and commodity wood products. With the growth of the home
center distribution business, the repair and remodeling markets have become a
significant factor in terms of the demand for lumber and commodity wood
products and have dampened the wide fluctuations that occurred when new
housing starts were the primary factor. A large portion of the Company's
property consists of Pine species, which are used in the finishing market, for
molding trim, doors and windows. This market is more affected by repair and
remodeling than new housing construction. Prices for these species, primarily
Ponderosa Pine, reached a peak in the spring of 1993 and as a result attracted
imports of Radiata Pine from New Zealand and Chile. The market absorbed these
relatively small quantities with little impact on prices. The demand for logs
in the United States is also affected by the level of lumber imports. In
response to increasing lumber imports from Canada, the United States and
Canada signed an agreement in 1996 which restricts the availability of
Canadian softwood lumber in the United States. The Company believes that this
agreement has not had a material impact on the price or demand for logs in the
United States although its long-term effect is uncertain.
Due to transportation costs, domestic conversion facilities in the Pacific
Northwest tend to purchase raw materials within relatively confined geographic
areas, generally within a 200-mile radius. The conversion facilities in the
vicinity of the Timberlands need more wood supply to run at capacity than can
be produced by nearby timberlands. As a result, the demand from this region is
relatively steady, although prices fluctuate with market conditions.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 (unaudited) Compared to Nine Months
Ended September 30, 1996 (unaudited)
The results of operations for the nine months ended September 30, 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
September 30, 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 for the first nine months of 1997 were $41.1 million, an
increase of 135% over revenues of $17.5 million for the first nine months of
1996. This increase was primarily attributable to a $20.8 million increase in
revenues from log and stumpage sales and a $3.5 million increase in timber and
property sales, partially offset by a decrease of $0.7 million in by-products
and other revenues.
Log and stumpage sales volumes for the first nine months of 1997 were 82,700
MBF, an increase of 122% over log and stumpage sales volumes of 37,200 MBF for
the first nine months of 1996. The significant increase in the volume
harvested was mainly due to the Company's aggressive harvest plan compared to
that of the Predecessor, as well as the commencement of log and stumpage sales
from the Ochoco Timberlands which were acquired on July 15, 1997. Average log
prices remained relatively constant, increasing from $430 per MBF for the
first nine months of 1996 to $431 per MBF for the first nine months of 1997.
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Revenues from a single Lodgepole Pine timber deed sale were $3.5 million
during the first nine months of 1997. There were no such timber or property
sales during the first nine months of 1996.
The reduction in revenues from by-products and other was primarily
attributable to a 56% 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.
Operating Costs. Operating costs were $28.4 million for the first nine
months of 1997, an increase of 26% over operating costs of $22.6 million for
the first nine months of 1996. This increase was the result of a $1.5 million
increase in cost of products sold, a $1.2 million increase in the cost of
timber and property sales and a $9.6 million increase in depreciation,
depletion and road amortization ("DD&A") expense. These increases were
partially offset by a $6.5 million decrease in selling, general and
administrative expenses.
The increase in cost of products sold was primarily the result of a $3.3
million increase in logging costs and a $0.2 million increase in severance
taxes. Partially offsetting these increases were a $1.5 million decrease in
wood fiber processing costs and a $0.7 million decrease in outside log
purchases. Logging costs and severance taxes increased primarily as a result
of a 128% increase in the level of merchantable grade logs harvested and sold,
partially offset by a 27% decrease in the Company's logging cost per MBF from
$198 per MBF during the first nine months of 1996 to $145 per MBF during the
1997 period. The decrease in the Company's logging cost per MBF was primarily
the result of the Company's changing from a mix of Company logging crews and
outside contractors during the first eight months of 1996 to the use of
outside contractors for all its logging operations during the 1997 period.
Wood fiber processing costs decreased by 77% as a result of a 56% decrease in
volume of chips processed and sold and a writedown to fiber log inventories
during the first nine months of 1996, resulting from a decline in chip prices
during the period. During the first nine months of 1997, the Company had a
timber deed sale with a cost basis of $1.2 million, whereas no sales of tracts
of timber or timberland were made during the first nine months of 1996.
DD&A expense was $10.8 million for the first nine months of 1997, a $9.6
million increase over DD&A expense of $1.2 million in the 1996 period. This
increase was primarily due to the significant increase in the Company's
depletion rate combined with a 128% increase in the volume of logs harvested
and sold during the first nine months of 1997 compared to the 1996 period. The
increase in the depletion rate was the result of the step-up in asset values
of the Klamath Falls Timberlands upon their acquisition from Weyerhaeuser.
Selling, general and administrative expenses were $4.3 million for the first
nine months of 1997, a decrease of 60% from comparable expenses of $10.8
million for the first nine months of 1996. This decrease in selling, general
and administrative expense was primarily the result of $4.9 million in one-
time payments for advisory services paid to affiliates of the Company in
connection with the Weyerhaeuser Acquisition and $2.8 million of management
fees paid to an affiliate of the Company for management services in the 1996
period. 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. Salaries and
wages increased primarily as a result of $0.5 million accrued in respect of
payments due to an incoming member of management in consideration for having
forfeited certain in-the-money options granted to him by his prior employer.
Professional fees increased as a result of the Company operating as an
independent entity rather than as a division of Weyerhaeuser. The Company
expects professional fees to continue at such a level in the near term.
Interest Expense. Interest expense was $17.8 million during the first nine
months of 1997 and related to $215.0 million of term debt and $90.0 million of
revolving debt incurred in connection with the Weyerhaeuser Acquisition in
August 1996 and $110.0 million of debt incurred in connection with the Ochoco
Aquisition on July 15, 1997. The Company incurred $1.9 million in interest
expense during the month of September 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.
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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 19, 1997. The amortization of deferred
financing fees and debt guarantee fee expense during the first nine months of
1997 and 1996 were $2.8 million and $0.3 million, respectively. In addition,
the Company incurred $0.2 million in other financing fees in connection with
its efforts to obtain financing which were expensed during the first nine
months of 1997. There was no deferred financing fee amortization or debt
guarantee fee expense during the first eight months of 1996.
Interest Income. Interest income was $1.2 million during the first nine
months of 1997. There was no interest income during the first nine months of
1996, as the Predecessor participated in Weyerhaeuser's centralized cash
management system.
Loss on Extinguishment of Debt. The Company refinanced certain long-term
borrowings during the first nine months of 1997 resulting in an extraordinary
loss on extinguishment of debt of $3.6 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 expense was
primarily the result of $4.9 million in one time payments for advisory
services paid to affiliates of the Company in connection with the Weyerhaeuser
Acquisition and $2.8 million of management fees paid to an affiliate of the
Company for management services. The advisory fees were incurred in connection
with the Weyerhaeuser Acquisition and its initial financing. The management
fee generally relates to services rendered in connection with the initial
formation of the Company 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.
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Interest Expense. Interest expense was $7.3 million in 1996 and related to
$215.0 million of term debt and $90.0 million of revolving debt incurred in
connection with the Weyerhaeuser Acquisition in August 1996. There was no
interest expense and no debt outstanding during 1995, as the Predecessor
participated in Weyerhaeuser's centralized cash management system.
Amortization of Deferred Financing Fees and Debt Guarantee Fees. The Company
deferred $4.1 million of fees incurred in connection with the financing of the
Weyerhaeuser Acquisition. These costs are being amortized over the life of the
related debt. In addition, the Company is accreting $3.6 million of estimated
Guarantee Fees from August 30, 1996 through the estimated Holdings Debt
extinguishment date of November 15, 1997. The Guarantee Fees payable to
Weyerhaeuser relate to the Holdings Debt which was incurred in connection with
the Weyerhaeuser Acquisition. The amortization of deferred financing fees and
debt guarantee fee expense during 1996 were $0.2 million and $1.1 million,
respectively. There was no deferred financing fee amortization or debt
guarantee fee expense during 1995.
Interest Income. Interest income was $0.4 million during 1996. There was no
interest income during 1995, as the Predecessor participated in Weyerhaeuser's
centralized cash management system.
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) expense, 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.
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Other Income and Expense, Net. Other income and expense, net, showed a
change from an expense of $0.1 million in 1994 to income of $0.6 million in
1995. Nonrecurring income from easements and road use permits represents $0.4
million of the 1995 income.
LIQUIDITY AND CAPITAL RESOURCES
Since inception of operations on August 30, 1996, the Company's primary
source of liquidity has been cash and cash equivalents from borrowings under
its revolving credit facility drawn on at the closing of the Weyerhaeuser
Acquisition. On July 14, 1997, this revolving credit facility and certain term
debt was refinanced. See the further discussion of this refinancing below. As
of September 30, 1997, the Company had a cash balance of $24.0 million and
virtually no working capital and had $2.0 million of internal borrowing
capacity under its new revolving credit facility based on the terms of the
credit facility.
The following comparison of cash flows from operating, investing and
financing activities for 1996 are based on combining the periods January 1,
1996 through August 29, 1996 (the period prior to the Weyerhaeuser
Acquisition) and August 30, 1996 through September 30, 1996 for the nine-month
comparison. The 1996 12-month period is based on combining January 1, 1996
through August 29, 1996 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 for the
nine months ended September 30, 1997 were $9.7 million as compared to cash
flows provided by operating activities of $2.8 million for the nine months
ended September 30, 1996. The $6.9 million increase in cash flows provided by
operating activities was primarily due to an increase in the volume of log and
stumpage sales, proceeds from a timber deed sale and $0.8 million of advance
deposits on stumpage sales contracts, as well as $4.9 million of one-time
payments to certain affiliates of the Company in connection with the
Weyerhaeuser Acquisition during the nine months ended September 30, 1996.
These increases were partially offset by a $12.9 million increase in interest
payments.
Cash flows provided by operating activities for the year ended December 31,
1996 were $2.5 million as compared to $11.8 million for the year ended
December 31, 1995. The $9.3 million decrease in cash flows from operating
activities from 1995 to 1996 is primarily attributable to $4.9 million in one
time payments to certain affiliates of the Company in connection with the
Weyerhaeuser Acquisition, $2.8 million in management fees paid to an affiliate
of the Company and $2.1 million in interest payments. The Predecessor had no
interest costs, as the Predecessor participated in Weyerhaeuser's centralized
cash management system. The increase in accounts receivable from December 31,
1995 to December 31, 1996 is attributable to the change in ownership of the
Company's Timberlands. The Predecessor reflected receivables from other
Weyerhaeuser entities as a component of Weyerhaeuser's Investment and
Advances, net rather than as accounts receivable. The decrease in inventories
from December 31, 1995 to December 31, 1996 is attributable to the build up of
fiber log inventories in 1995 due to the profitability of the chip market
during that period. As the chip market softened in 1996, these inventories
were liquidated.
Investing Activities. Cash flows used by investing activities were $101.3
million for the first nine months of 1997, as compared to cash flows used by
investing activities of $292.9 million during the 1996 period. During the
first nine months of 1997, $110.9 million was used in the Ochoco Acquisition
and a $10.0 million receivable from an affiliate was repaid. During the first
nine months of 1996, $283.5 million was used in the Weyerhaeuser Acquisition
and $10.0 million was paid to an affiliate. This was partially offset by a
$1.2 million advance from an affiliate.
Cash flows used in investing activities were $291.9 million for 1996 as
compared to $1.9 million in 1995. In 1996, $283.5 million was used in the
Weyerhaeuser Acquisition and $10.0 million was paid to an affiliate. This was
partially offset by $2.4 million in proceeds from logging equipment
dispositions as a result of the Company's discontinuance of the company
logging crews upon consummation of the Weyerhaeuser Acquisition.
Financing Activities. Cash flows provided by financing activities were $99.0
million for the first nine months of 1997, as compared to $306.1 million
during the 1996 period. During the first nine months of 1997,
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the Company refinanced $175.0 million of long-term debt incurred in connection
with the Weyerhaeuser Acquisition and incurred an additional $110.0 million of
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 obtaining financing for the Ochoco Acquisition. In
addition, the Company distributed $1.2 million to a member related to his 1997
estimated tax liability and incurred $1.8 million of costs in connection with
this offering. Cash flows provided by financing activities during the first
nine months of 1996 principally represent borrowings under debt facilities and
equity contributions from members in connection with the Weyerhaeuser
Acquisition. These 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.
Cash flows provided by financing activities were $306.0 million for 1996.
These cash flows principally represent borrowings under debt facilities and
equity contributions from members in connection with the Weyerhaeuser
Acquisition. Cash flows used in financing activities of $10.0 million in 1995
reflects the Predecessor's normal practice of distributing net operating and
investment cash flows to Weyerhaeuser.
On August 29, 1996, the Company 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 to finance the
Weyerhaeuser Acquisition pursuant to a loan agreement with a commercial bank
and on July 15, 1997, increased its 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
September 30, 1997, the USTK Debt consists of a $200.0 million seven-year
amortizing secured facility and $83.0 million outstanding under an $85.0
million secured revolving credit facility.
Concurrent with the closing of this offering, the Master Partnership will
issue 7,458,684 Common Units in the MLP Offering for gross proceeds of $156.6
million (assuming that the underwriters' over-allotment option with respect to
the MLP Offering is not exercised) and the Company will enter into the Bank
Credit Facility providing for the $25.0 million Working Capital Facility and
the $75.0 million Acquisition Facility. See "Description of Bank Credit
Facility" and "Description of Notes". The Company will use the net proceeds of
this offering and the MLP Offering, approximately $24.1 million of borrowings
under the Acquisition Facility and cash on hand at the closing of the
Transactions (estimated to be approximately $30.2 million) to retire the
Holdings Debt and the USTK Debt.
Capital expenditures for the nine months ended September 30, 1997 totaled
approximately $0.8 million. Capital expenditures incurred were mainly in the
nature of land management/silvicultural expenses and office equipment and
vehicle purchases. Capital expenditures were financed through cash flow
generated by operations. As the Company does not currently own and does not
plan to own manufacturing facilities, and all logging is subcontracted to
third parties, it is anticipated that capital expenditures in the future will
not be material and will consist mainly of land management/silvicultural
expenditures. It is not currently anticipated that the Company will either
maintain log inventories, although small log inventories may be maintained for
a short period of time, or incur material capital expenditures for machinery
and equipment. The Company anticipates that capital expenditures will be
approximately $0.8 million in 1998. Capital expenditures will consist
primarily of capitalized silvicultural expenses and miscellaneous equipment
and computer hardware and software expenses.
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.
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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 do tend to reflect inflationary trends.
OTHER
Pursuant to an agreement dated as of July 29, 1997 between Mr. Stephens and
the Company, Old Services, Mr. Rudey and certain of his affiliates, Mr.
Stephens' interest in Old Services will be redeemed for 95,238 Subordinated
Units upon the consummation of the Transactions and $1.0 million payable in
January 1998. Pursuant to an agreement dated as of July 29, 1997 between Mr.
Hornig and the Company, Old Services, Mr. Rudey and certain of his affiliates,
Mr. Hornig's interest in Old Services will be redeemed upon the closing of the
Transactions for 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 630,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 1997 to
be approximately 2.2 BBF in Oregon east of the Cascade Range. Logs harvested
from the Timberlands are sold to unaffiliated domestic conversion facilities.
These logs are processed for sale as lumber, plywood and other wood products,
primarily for use in new residential home construction, home remodeling and
repair and general industrial applications. The Company also owns and operates
its own seed orchard and produces approximately five million conifer seedlings
annually from its nursery, approximately half of which are used for its own
internal reforestation programs, with the balance sold to other forest
products companies.
The Timberlands include substantial holdings of merchantable, good quality
timber. The Timberlands' merchantable timber consists of Ponderosa Pine
(approximately 42%) and Douglas Fir (approximately 14%), species which have
historically commanded premium prices over other softwood species, with the
balance consisting of Lodgepole Pine, White Fir and other softwood species.
The Timberlands have stands of varying ages and are unique in the forests east
of the Cascade Range in Oregon in that approximately 184,000 acres are
actively managed tree farms or Plantations. The Plantations were first
established by Weyerhaeuser in the early 1960s and acreage has been planted
each year since then. Currently, the Plantations contain age classes ranging
generally from two to 35 years old. Initial thinning of the Plantation stands,
including the thinning of commercial quantities of merchantable timber, is
expected to begin within the next five years. Because the timber on the
Plantations is generally not yet considered merchantable, volumes of timber on
the Plantations are not included in the Company's estimated merchantable
timber volume. The balance of the Timberlands are composed of natural stands.
The Company was formed in 1996. In August 1996, the Company 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, the Company 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.
The Company expects that during 1997, including the five and one-half months
of its operations on the Ochoco Timberlands, it will harvest approximately 153
MMBF of timber (including the sale of harvest rights) from the Timberlands.
The cash flows resulting from stumpage and timber deed sales will be
determined by contract; however, the timing of the actual harvests could vary
depending on the harvest plans of the buyer of such stumpage or timber deed.
During the period from January 1, 1994 through the acquisition of the
Klamath Falls Timberlands by the Company, 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 the Company's acquisition of the
Klamath Falls Timberlands, the Company 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
34
<PAGE>
addition to its sales under the Collins Supply Agreement, the Company sells
logs to conversion facilities located in the area surrounding the Timberlands
and operated by third parties. There are currently more than 50 primary
conversion facilities located within a 150 mile radius of the Company's base
of operations in Klamath Falls.
The Company believes that it is well positioned to compete successfully in
the timber business for the following reasons: (i) the Company has substantial
holdings of timber properties which include over 2.2 BBF of merchantable, good
quality timber, approximately 184,000 acres of plantation timberland and a
full-scale seed orchard and nursery operation located in a region where
conversion facilities have been experiencing shortages in the supply of wood
fiber; (ii) the Company focuses on owning timberlands rather than operating
conversion facilities, which minimizes the Company's cost structure and
capital expenditures, allows the Company to seek the most favorable markets
for its timber rather than being committed to supply to its own facilities,
and ensures that the Company will not compete with its customers; (iii) the
Company's senior operating management team has an average of more than 20
years of experience in the forest products industry, including experience in
identifying, evaluating, completing and integrating acquisitions of timber
properties; (iv) the Company's lean operating structure allows it to
efficiently manage its Timberlands, and should enable it to acquire additional
timberlands without commensurate increases in overhead; and (v) the Company's
GIS enables the Company to evaluate the optimal timing and patterns of the
harvest of its Timberlands and evaluate and integrate acquisitions of
additional timberlands.
BUSINESS STRATEGY
The Company's business strategy is to manage its Timberlands in a manner
that will enable the Master Partnership to pay the Minimum Quarterly
Distribution on all the Units and to increase the per Unit value of the Master
Partnership's assets and its cash flow. Management intends to pursue this
strategy in a number of ways:
Continue to Increase Productivity of the Timberlands
The Company intends to continue to utilize and increase the use of various
modern forestry practices on its Timberlands in order to increase their
productivity. Examples of these practices include the use of the Company's
GIS, which enables it to develop optimal harvest plans; the application of
selective harvesting and thinning practices, which improve the productivity of
the remaining stand while providing merchantable timber for sale; and the
development of genetically improved seedlings to grow trees with desirable
traits such as superior size and disease resistance. Certain members of senior
management were involved in the development of these practices while at
Weyerhaeuser, and the Company expects to benefit from their experience.
Maximize Investment in Ochoco Timberlands
In order to maximize its investment in the Ochoco Timberlands, the Company
intends to harvest the mature timber thereon over the next five to six years.
As a result, the Company will convert Ochoco's older, slower growing forests
to younger, more productive forests. In addition, by increasing the harvest on
the Ochoco Timberlands, the Company will be able to reduce the amount of
timber harvested on the Klamath Falls Timberlands, allowing these faster
growing Timberlands to continue to mature, thereby increasing their commercial
value.
Pursue Accretive Acquisition Opportunities
The Company intends to identify, evaluate and acquire undervalued
timberlands in North America with the objective of increasing both the value
of the Master Partnership's Units and its cash flow. The Company believes that
management's relationships within the timber industry, as well as its focus on
operating timberlands, rather than conversion facilities, give it a
competitive advantage in developing acquisition opportunities. The Company
believes that its use of independent contractors to conduct its silviculture
and harvesting activities should enable it to operate significantly increased
acreage without a commensurate increase in fixed overhead costs. The Company
intends to evaluate and pursue those opportunities that are located within
markets distinguished by strong demand, that include ages and species that
complement the Company's existing inventory, and that fit the Company's
current and long-term value objectives. In addition, the Company may in the
future acquire
35
<PAGE>
timberlands located in areas, and containing timber suitable for export. By
early January 1998, it is expected that Edward J. Kobacker, the current
Executive Vice President and Chief Operating Officer of the Manager, will
become the President and Chief Executive Officer of the Manager and that John
J. Stephens, the current President and Chief Executive Officer, will become
Vice Chairman of the Board of Directors of the Manager in order to devote more
time to the Company's acquisition program.
Implement Flexible Marketing Strategies
The Company's marketing strategy emphasizes flexibility in structuring the
sales of its timber assets. Depending upon the needs of its customers and
current market conditions, the Company can either sell harvested logs or
stumpage and can sell forest by-products, such as wood chips. The Company
believes that its strategy of owning timberlands rather than conversion
facilities that compete with its customers is an important factor in
developing and maintaining strong customer relationships. Since the
Weyerhaeuser Acquisition, the Company has sold logs to 22 different customers
and expects to sell to a greater number in the future. In addition to log and
stumpage sales, the Company may also sell or exchange parcels of land with
other timberland owners. For example, the Company may seek to realize the
value of portions of the Plantations by exchanging them for more mature timber
owned by timberland owners or by selling them for immediate cash proceeds.
Sell Land for Higher and Better Uses
The Company seeks to realize the value of land that may have a higher and
better use than for timberland management or that is otherwise a candidate for
sale or exchange. For example, some of the Timberlands may have greater value
if used for ranching, farming or recreational purposes. The Company intends to
sell approximately 30,000 acres of small tracts for higher and better uses
over the next ten years. The Company recently sold approximately 13,000 acres
from the Klamath Falls Timberlands. In addition, the Company has identified a
tract of approximately 23,000 acres that it intends to sell within the next
five years. The Company will also seek to exchange lands with significant
environmental and recreational values for lands that are more suitable for
commercial timberland management.
TRANSACTION BACKGROUND
The Company and Old Services were formed in mid-1996 to own and operate the
Klamath Falls Timberlands. The Company 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,
the Company 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 the Company. 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 the Company 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, the Company 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, the
Company entered into a loan agreement with a commercial bank to refinance the
USTK Debt incurred in connection with the Weyerhaeuser Acquisition and to
finance the Ochoco Acquisition. This debt consists of a $200.0 million seven-
year amortizing facility and an $85.0 million revolving credit facility. All
of the Company's outstanding indebtedness will be paid in full at the closing
of this offering. See "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
36
<PAGE>
Currently, all of the Timberlands are owned by the Company while all of the
management staff, operating equipment and systems and nursery operations
reside at Old Services. Old Services conducts all of the marketing activities
relating to the Timberlands pursuant to a cutting contract with the Company.
Following the closing of the Transactions, all of the Timberlands and related
assets will be owned, and all of the marketing activities will be conducted,
by the Company while all management will be employed by the Manager.
THE TIMBERLANDS
Timber Inventory
The Company currently owns and manages approximately 630,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 1997 to
be approximately 2.2 BBF in Oregon east of the Cascade Range. The Timberlands
include substantial holdings of merchantable, good-quality timber. A
merchantable tree is a tree that will produce a sound log 16 feet in length
and at least five inches in diameter, inside bark, at the small end. The
Company's merchantable timber inventory consists of premium species of
softwood, consisting of Ponderosa Pine (approximately 42%) and Douglas Fir
(approximately 14%), species which have historically commanded premium prices
over other softwood species, as well as Lodgepole Pine (approximately 20%),
White Fir (approximately 19%) and other species (approximately 5%).
The Timberlands have stands of varying sizes and ages and are unique in the
forests east of the Cascade Range in Oregon in that approximately 184,000
acres of the 630,000 acre total consist of actively managed pine Plantations
with stands ranging in age from two to 35 years. The Plantations are stocked
with high quality Ponderosa Pine (approximately 73%) and Lodgepole Pine
(approximately 27%). Because the timber on the Plantations is generally not
yet considered merchantable, volumes of timber on the Plantations are not
included in the Company's estimated merchantable timber volume. However,
initial thinning of the Plantation stands, including the thinning of
commercial quantities of merchantable timber, is expected to begin within the
next five years. See "--Harvest Plans."
The following table demonstrates the estimated merchantable timber inventory
by species within the Timberlands as of January 1, 1997 (all volumes are as
verified by Mason, Bruce & Girard, Inc. ("MBG"), are based, in some cases, on
information developed by Company personnel and include merchantable timber on
the 13,000 acres of timberlands that the Company recently sold):
MERCHANTABLE TIMBER INVENTORY BY SPECIES
(MMBF)
<TABLE>
<CAPTION>
KLAMATH
FALLS
SPECIES TIMBERLANDS OCHOCO TIMBERLANDS TOTAL
------- ------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ponderosa Pine................ 732.7 37% 214.2 78% 946.9 42%
Lodgepole Pine................ 451.4 23% -- 0% 451.4 20%
White Fir..................... 424.1 21% 17.1 6% 441.2 19%
Douglas Fir................... 266.9 14% 44.3(a) 16% 311.2 14%
Other Species(b).............. 102.9 5% 0.5 (c) 103.4 5%
------- ---- --------- -------- ------- ------
Total....................... 1,978.0 100% 276.1 100% 2,254.1 100.0%
======= ==== ========= ======== ======= ======
</TABLE>
- --------
(a) Includes Grand Fir
(b) Includes Cedar, Sugar Pine, Western Larch and other species
(c) Less than 1%
37
<PAGE>
Size and Species Distribution of Merchantable Timber
The Company's Timberlands are well diversified, not only by species mix but
also by size distribution. Timber on the Timberlands generally reaches
merchantable size between 40 and 50 years in natural stands and between 25 and
35 years in the Plantations. The following table describes the estimated
volume distribution of merchantable timber on the Timberlands by species and
diameter breast height ("DBH") classes (as verified by MBG) as of January 1,
1997. Lodgepole Pine having a DBH of 6" generally considered merchantable,
while the other timber species are generally considered merchantable at a DBH
of 7 1/2". Such other species, to the extent their DBH is less than 7 1/2",
are not included in any of the tables on this page. The data in the following
two tables include merchantable timber on the 13,000 acres of timberlands that
the Company recently sold.
MERCHANTABLE TIMBER VOLUME DISTRIBUTION BY SPECIES AND BY DBH
(MMBF)
<TABLE>
<CAPTION>
KLAMATH FALLS TIMBERLANDS
-------------------------------------------------
PONDEROSA LODGEPOLE WHITE DOUGLAS OTHER
DBH PINE PINE FIR FIR SPECIES TOTAL
--- --------- --------- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
6"-10"........................ 92.4 105.3 60.6 31.5 24.8 314.6
11"-15"....................... 355.8 229.5 198.3 115.6 31.8 931.0
16"-19"....................... 181.5 84.3 99.4 70.2 19.4 454.8
20"-23"....................... 52.1 23.7 29.1 24.0 9.6 138.5
24"+.......................... 50.9 8.6 36.7 25.6 17.3 139.1
----- ----- ----- ----- ----- -------
Total....................... 732.7 451.4 424.1 266.9 102.9 1,978.0
===== ===== ===== ===== ===== =======
<CAPTION>
OCHOCO TIMBERLANDS
-------------------------------------------------
PONDEROSA LODGEPOLE WHITE DOUGLAS OTHER
DBH PINE PINE FIR FIR SPECIES TOTAL
--- --------- --------- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
6"-10"........................ 24.4 -- 2.1 4.7 0.0 31.2
11"-15"....................... 51.6 -- 7.3 18.6 0.4 77.9
16"-19"....................... 33.0 -- 3.4 10.8 0.1 47.3
20"-23"....................... 33.1 -- 2.1 5.9 0.0 41.1
24"+.......................... 72.1 -- 2.2 4.3 0.0 78.6
----- ----- ----- ----- ----- -------
Total....................... 214.2 -- 17.1 44.3 0.5 276.1
===== ===== ===== ===== ===== =======
</TABLE>
The following table describes the acreage distribution of timber on the
Plantations by age class (as verified by MBG) as of January 1, 1997:
ACREAGE DISTRIBUTION BY AGE CLASS ON PLANTATIONS
<TABLE>
<CAPTION>
AGE CLASS IN YEARS ACREAGE
------------------ -------
<S> <C>
1-5........................................................... 28,987
6-10.......................................................... 11,893
11-15.......................................................... 20,531
16-20.......................................................... 75,441
21-25.......................................................... 43,296
26+............................................................ 4,220
-------
Total........................................................ 184,368
=======
</TABLE>
38
<PAGE>
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 60 years. This growth rate is based on
calculated volumes at the time of maturity. The Company has achieved higher
growth rates on the Plantations by planting seedlings which are able to begin
growing immediately (as compared to the slower natural regeneration process),
by eliminating competing non-timber growth from the Timberlands and by
applying modern forestry practices to assist the growth of the timber.
Management can take actions that help to enhance growth rate in the natural
stands as well. For example, selective harvesting in the slower growing
natural stands opens up the timber stand allowing for more vigorous growth of
the remaining trees. When it is no longer possible to maintain acceptable
growth rates in these stands they will be harvested entirely and converted to
faster growing plantations.
Harvest Plans
The Company strives to manage all of its Timberlands, including the
Plantations, in an economically prudent and environmentally sensitive manner
in order to maximize their value over time. Integral to this management
process are the Company's long-term harvest plans. The Company prepares its
harvest plans annually based on analyses of the size and age class
distribution of the Timberlands and the economic maturity of each harvest
tract. A tract is considered ready to be harvested when the expected value of
future tree growth on such tract falls below a target rate of return. The
factors the Company considers in determining its long-term harvest plans
include, among other things, current and expected market conditions,
competition, customer requirements, the age, size and species distribution of
the Company's timber, assumptions about timber growth rates (which improve
over time as a result of technological, biological and genetic advances that
improve forest management practices and the increasing proportion of the
Timberlands converted to Plantations), expected acquisitions and dispositions,
access to the Timberlands, availability of contractors, sales contracts and
environmental and regulatory constraints. The Company's harvest plans reflect
the Company's expectations for each year's harvest, including the sites to be
harvested, the manner of harvesting such sites, the volume of each species to
be harvested, the prices expected to be received for the Company's timber, the
amount of stumpage sales, logging and other costs, thinning operations and
other relevant information. The Company has the flexibility to update its
harvest plans during the year to take into consideration changes in these
factors. Under the current harvest plan, the Company intends to harvest 153
MMBF in 1997, 129 MMBF in 1998, 137 MMBF in 1999 and 130 MMBF in 2000 to
maximize the value of the mature, old growth timber located on the Ochoco
Timberlands. The harvest level for each such year includes stumpage and timber
deed sales. The cash flows resulting from such sales will be determined by
contract; however, the timing of the actual harvests could vary depending on
the harvest plans of the buyer of such stumpage or timber deed. From 2001
through 2009, the annual harvest level is expected to range from approximately
117 MMBF to approximately 132 MMBF, an average of approximately 123 MMBF per
annum. After 2009, the harvest level is expected to decline to an average of
approximately 110 MMBF per annum, which the Company considers to be a more
sustainable level over the long term. The Company believes this harvest plan
can be achieved; however, since harvest plans are based on certain
assumptions, many of which are beyond the Company's control, there can be no
assurance that the Company will be able to harvest the volumes projected in
its harvest plans. While the Company's debt obligations place certain
limitations on the harvest plans, the Company believes that it has sufficient
flexibility to permit modifications in response to fluctuations in the market
for logs and lumber and the other factors described above. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." If
the Company's current harvest plans are pursued unaltered for the next 12
years, if it consummates the land sales
39
<PAGE>
contemplated by its strategic plan and if its other strategic assumptions prove
to be accurate, the Company expects that its timber inventory would decline to
approximately 1.7 BBF by the end of 2009 and that its more valuable species of
timber would decline as a percentage of its total timber inventory by such
date. The Company expects that its inventory would remain relatively stable
thereafter. Such harvest plans, land sales and other strategic assumptions do
not take into account any acquisition that the Company may consummate during
such period. See "--Business Strategy," "--Timber Inventory," and "--Resource
Management--"Higher and Better Use' Timberlands."
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--Access to Timberlands May be Limited by Federal 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 93% of the Company's revenues in
1996.
Most of the timber on the Timberlands is softwood which, due to its long
fiber, strength, flexibility and other characteristics, is generally preferred
over hardwood for construction lumber and plywood. Once processed, sawlogs are
suitable for use as structural grade lumber, appearance grade boards, plywood
and laminated veneer and can also be manufactured for such end uses as window
trim, molding and door jambs. Chips, which can be used to make hardboard or
pulp, accounted for approximately 6% of the Company's revenues in 1996. The
market price of chips has historically been volatile, rising and falling with
the price of pulp. Sales of seedlings accounted for the remaining 1% of the
Company's revenues in 1996.
The Company's customers include numerous unaffiliated operators of conversion
facilities. Since its acquisition of the Klamath Falls Timberlands in August
1996, the Company has sold logs from such timberlands to 22 different
customers. Concurrent with the Weyerhaeuser Acquisition, the Company 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. For the nine months ended September
30,
40
<PAGE>
1997, timber sales to Collins, Boise Cascade Corporation and Crown Pacific
Partners accounted for approximately 25%, 20% and 17%, 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 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.
Competition
Due to transportation costs, domestic conversion facilities in the Pacific
Northwest tend to purchase raw materials within relatively confined geographic
areas, generally within a 200-mile radius. It is generally recognized that log
suppliers such as the Company provide their market with a commodity product.
The Company and its competitors all benefit from the same competitive
advantages in the region--namely, excess of demand, close proximity to
numerous mills, and positive demographic trends of the Pacific Northwest and
the West Coast. Therefore, the Company and its competitors are currently able
to sell all the logs they are able to produce. Additional competitive factors
within a market area generally will include species and grade, quality,
ability to supply logs which consistently meet the customers' specifications
and ability to meet delivery requirements. The Company believes that it has a
reputation as a stable and consistent supplier of well-merchandised, high-
quality logs. The Company has no conversion facilities and therefore does not
compete with its customers for logs. The Company believes that this gives it
an advantage over certain of its competitors that also own conversion
facilities.
The Company competes with numerous private land and timber owners in the
northwestern United States and the state agencies of Oregon, as well as
immaterial amounts of foreign imports, primarily from Canada and New Zealand.
In addition, the Company competes with the USFS, the BLM and the Bureau of
Indian Affairs. Certain of the Company's competitors have significantly
greater financial resources than the Company.
RESOURCE MANAGEMENT
Timber Resource Management
All of the silvicultural activities on the Timberlands and the harvesting
and delivery of logs are conducted by independent contractors who are not
employees of the Company. The Company's operations involve intensive timber
management and harvesting operations, which include road construction and
reforestation, as well as wildlife and watershed management, all of which are
carefully monitored using the Company's GIS. See "--Geographic Information
System." The Company employs a number of traditional and recently developed
harvesting techniques on its lands based on site-specific characteristics and
other considerations. Due to the topography of the Timberlands, over 95% of
the Timberlands can be harvested using lower-cost mechanical methods as
opposed to higher-cost cable systems.
Harvesting on the Timberlands is conducted using both selective and
regeneration harvesting. In selective harvesting, a partial harvest provides
merchantable timber and opens up the stand for supplemental growth on the
remaining stand. Harvest entries are separated by approximately 10 to 15 years
and each entry is prescribed for volume to be removed, spacing to be provided,
and diameter limits to be harvested. In regeneration harvesting, which is used
to harvest approximately 30% of the Company's timber, all merchantable volume
is removed in a single harvest. After an area has been regeneration harvested,
the Company employs a reforestation contractor to plant two-year-old seedlings
at a density of approximately 350 trees per acre. The Company also attempts to
protect and maintain the ecosystem within the Timberlands while providing for
a reasonable harvest.
41
<PAGE>
For example, the Company typically leaves a mix of green and dead trees at the
harvest site, including some large trees, snags and downed logs to enrich and
protect the soil for successive generations of trees and to provide habitats
for a variety of wildlife species.
Particular forestry practices vary by geographic region and depend upon
factors such as soil productivity, weather, terrain, tree size, age and
stocking. The rain, site and soil conditions on the east side of the Cascade
Range, for example, permit management to harvest on an optimal rotation, or
harvest cycle, of 55 to 65 years. Forest stands are thinned periodically to
improve growth and stand quality until harvested. The Company actively
utilizes commercial thinning timber management practices. Pre-commercial
thinning, which occurs only in the Plantation stands, is utilized when the
timber harvested is not merchantable. The Company believes that such thinning
improves the overall productivity of the Timberlands by enhancing the growth
of the remaining trees. Occasionally, revenues are generated from pre-
merchantable thinning, as was the case in 1995 due to the strong markets for
wood chips.
The Company's policy is to ensure that every acre harvested is reforested in
order to enhance the long-term value of its timberlands. Based on the
geographic and climatic conditions of a given harvest site, harvested areas
may be regenerated naturally, by leaving mature trees to reseed the area, or
replanted with seedlings. Natural regeneration methods are widely used on
approximately 70% of the Company's harvested land. Approximately 29% of the
Timberlands acreage currently consist of Plantations. The Company expects to
convert approximately 3,000 to 6,000 acres of natural stands to Plantations
annually. During 1996, the Company planted approximately 2.5 million
seedlings. The Company uses genetically improved seedlings (representing
approximately 90% to 95% of seedlings planted) to grow trees with desirable
traits such as superior growth characteristics, good form and disease
resistance, resulting in greater wood volume over a rotation than that
generated by naturally regenerated seedlings. The seedlings are grown in the
Company's nursery, which uses seeds from the Company's seed orchard, which was
established in 1973. Such seeds are generated by trees that are created by
grafting selected superior genetic stock to mature root stock.
Geographic Information System
The GIS is a computer software program that the Company acquired from
Weyerhaeuser as part of the acquisition of the Klamath Falls Timberlands. The
GIS data, which has been compiled over a period of four years, includes
detailed topographical field maps for every stand within the Timberlands
(including data for the Ochoco Timberlands which was recently added by the
Company), setting forth the characteristics, including age, species, size and
other characteristics for the timber growing on each such stand. Using the
data in the GIS, the Company can use a computer model to "grow" the timber
over time, enabling it to generate long-term harvest plans and to update its
inventory annually. To maintain the integrity of the data in the GIS, the
Company performs a detailed ground survey of the remaining timber inventory on
a tract after each harvest and updates the data in the GIS for that tract.
With the aid of the GIS, the Company is able to actively manage the
Timberlands, track its inventory and develop site-specific harvest plans on
multiple scales, adding additional layers of detail, such as the location of
roadways or wildlife nesting areas, as required. The GIS also permits the
Company to analyze the impact that new legislation may have on its timberlands
by inputting the proposed constraints imposed by such legislation in light of
the particular field characteristics of its Timberlands. For example, the
Company has recently analyzed the impact on its Timberlands of the potential
listing of the bull trout as an endangered species under the Endangered
Species Act, by using the GIS to review the particular characteristics of the
streams and rivers located on its properties for suitability for bull trout
habitat, and by overlaying the proposed regulatory restraints on harvest at
the sites it determined might be suitable habitat for bull trout. The GIS will
also be used to evaluate potential acquisition opportunities.
Although GIS systems are generally available for purchase, many of the
Company's competitors do not utilize GIS systems, mainly due to the relatively
high initial cost and to the length of time necessary to collect sufficient
data to optimize its use. Thus, the Company believes the GIS gives it an
advantage over its competitors.
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"Higher and Better Use" Timberlands
The Company seeks to realize the value of land that may have a higher and
better use than for timberland management or that is otherwise a candidate for
sale or exchange. For example, some of the Timberlands may have greater value
if used for ranching, farming or recreational purposes. The Company intends to
sell approximately 30,000 acres of small tracts for higher and better uses
over the next ten years. The Company recently sold approximately 13,000 acres
from the Klamath Falls Timberlands. In addition, the Company has identified a
tract of approximately 23,000 acres that it intends to sell within the next
five years. The Company will also seek to exchange lands with significant
environmental and recreational values for lands that are more suitable for
commercial timberland management.
FEDERAL AND STATE REGULATION
Endangered Species
The federal Endangered Species Act and counterpart state legislation protect
species threatened with possible extinction. Protection of endangered species
may include restrictions on timber harvesting, road building and other
silvicultural activities in areas containing the affected species. A number of
species indigenous to the Pacific Northwest have been protected under the
Endangered Species Act, including the northern spotted owl, marbled murrelet,
Columbian white-tail deer, mountain caribou, grizzly bear, bald eagle, red
cockaded woodpecker, northern goshawk, bull trout and various anadromous fish
species. Currently, the Company has identified several spotted owl, bald eagle
and northern goshawk nesting areas affecting the Timberlands and the presence
of bull trout in certain of its streams, which may affect harvesting on
approximately 26,000 acres.
In 1990, the United States Fish and Wildlife Service (the "USFWS") listed
the northern spotted owl as a threatened species throughout its range in
Washington, Oregon and California. At the time of the listing, the USFWS
issued suggested guidelines ("Guidelines") to be followed by landowners in
order to comply with the Endangered Species Act's prohibition against harming
or harassing owls. The Guidelines recommend several measures, including the
restriction of harvest activities in areas within a certain proximity of known
owl activity centers. The USFWS also proposed a rule for the conservation of
the owl on non-federal land. Such proposed rule was subsequently withdrawn.
The Oregon Forest Practices Act and related regulations also protect
endangered species and has specific provisions governing habitat protection
for the spotted owl, the bald eagle and other threatened species.
Weyerhaeuser regularly surveyed for bald eagles on its properties and
submitted the results of its surveys and its annual site management plan for
each known eagle site to the Oregon Department of Fish and Wildlife. The
latest survey showed that there were approximately 80 eagle sites on the
Klamath Falls Timberlands. The Company observes the harvesting restrictions
around the eagle sites. In addition, commencing in 1990, Weyerhaeuser utilized
independent wildlife consultants to survey for the presence of northern
spotted owls on or affecting the Klamath Falls Timberlands. The surveys have
been conducted every year in order to (i) meet the regulatory requirements for
timber harvest and other management activities, (ii) monitor existing sites
and determine the current status of such sites, (iii) determine if areas
identified as containing suitable habitat are supporting owls and (iv)
investigate potential spotted owl sightings. The most recent of such surveys
was completed in July 1997, and identified approximately 27 northern spotted
owl sites affecting the Klamath Falls Timberlands, three of which are located
on the Klamath Falls Timberlands. The Company has continued these practices
for 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 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
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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.
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
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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 September 30, 1997, the Company had 30 salaried employees, including
employees of the Manager 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 Manager will manage and operate the activities of the Company. At least
two of the members of the Board of Directors of the Manager who are neither
officers, employees or security holders of the Manager nor directors,
officers, employees or security holders of any affiliate of the Manager will
serve on a conflicts committee (the "Conflicts Committee"), which will have
the authority to review specific matters as to which the Board of Directors
believes there may be a conflict of interest in order to determine if the
resolution of such conflict proposed by the Manager is fair and reasonable to
the Master Partnership. Any matters approved by the Conflicts Committee will
be conclusively deemed to be fair and reasonable to the Master Partnership,
approved by all partners of the Master Partnership and not a breach by the
Manager, in its capacity as general partner, or its Board of Directors of any
duties they may owe the Master Partnership or the Unitholders of the Master
Partnership. The Board of Directors will also have an Audit Committee,
composed of the two independent directors as well as Robert F. Wright, which
will review the external financial reporting of the Company, will recommend
engagement of the Company's independent public accountants and will review the
Company's policies and procedures for internal auditing and the adequacy of
the Company's internal accounting controls. The Board of Directors will also
have a compensation committee (the "Compensation Committee"), which will
initially consist of five directors, including the two independent directors,
which will determine the compensation of the officers of the Manager and
administer its employee benefit plans.
The Company will not directly employ any of the persons responsible for
managing or operating the Company. In general, the current management of the
Company will manage and operate the Company's business as officers and
employees of the Manager and its affiliates.
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE MANAGER
The following table sets forth certain information with respect to the
members of the Board of Directors of the Manager, its executive officers and
certain key employees. Executive officers and directors are elected for one-
year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH MANAGER
- ---- --- ---------------------
<S> <C> <C>
John M. Rudey.................... 54 Chairman and Director(1)
John J. Stephens................. 69 President, Chief Executive Officer and
Director(2)
Edward J. Kobacker............... 59 Executive Vice President, Chief Operating
Officer and Director(3)
Michael J. Morgan................ 41 Vice President and Chief Financial Officer
John H. Beuter................... 61 Director(4)
Aubrey L. Cole................... 73 Director(5)
George R. Hornig................. 43 Director(6)
Robert F. Wright................. 72 Director(7)
Walter L. Barnes................. 55 Harvesting Manager
Robert A. Broadhead.............. 46 Marketing Manager
Martin Lugus..................... 56 General Manager
Kurt A. Muller................... 39 Planning Manager
Christopher J. Sokol............. 48 Forestry Manager
</TABLE>
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- --------
(1) Member of the Executive (Chairman), Nominating (Chairman), Finance and
Compensation (Chairman) Committees.
(2) Member of the Executive, Nominating, Finance and Compensation Committees.
The Company expects that on or prior to January 5, 1998, Mr. Stephens will
become the Vice Chairman of the Board of Directors of the Manager and will
resign as President and Chief Executive Officer.
(3) Member of the Executive and Finance (Chairman) Committees. The Company
expects that, upon the resignation of Mr. Stephens as an officer of the
Manager and subject to the approval of the Board of Directors of the
Manager, Mr. Kobacker will become the President and Chief Executive
Officer of the Manager.
(4) Member of the Nominating and Finance Committees.
(5) Member of the Executive and Nominating Committees.
(6) Member of the Executive and Finance Committees.
(7) Member of the Nominating, Finance, Compensation and Audit (Chairman)
Committees.
Shortly after the consummation of the Transactions, the Manager will appoint
two additional directors, who will be neither members, officers nor employees
of the Manager nor members, officers, directors or employees of any affiliate
of the Manager, to the Conflicts Committee, the Audit Committee and the
Compensation Committee.
John M. Rudey will serve as Chairman and a Director of the Manager. Since
1992, Mr. Rudey has served as Chief Executive Officer of Garrin Properties
Holdings, Inc., a private investment company that manages and advises
investment portfolios principally concentrated in the timber and forest
products industries and in real estate. He has previously acquired and managed
for his family investment group a subsidiary of Westinghouse Electric Co. and
a division of Monumental Life Insurance Company. Mr. Rudey holds a B.A. from
Harvard College and an M.B.A. from Harvard Business School.
John J. Stephens will initially serve as President and Chief Executive
Officer and a Director of the Manager. Since 1991, Mr. Stephens has served as
a business advisor to a number of agricultural and forestry projects. From
1982 to 1991, Mr. Stephens was the President and Chief Executive Officer of
Roseburg Forest Products Co. (a privately owned forest products company)
("Roseburg"). From 1972 to 1982, Mr. Stephens was employed by International
Paper Company (a publicly traded forest products company), serving for his
last eight years as Vice President and Group Executive of Wood Products and
Resources. For his initial two years at International Paper Company, Mr.
Stephens served as Vice President Finance. From 1960 to 1972, Mr. Stephens was
a Principal in the Consulting Division of Arthur Andersen & Co. Mr. Stephens
holds a B.S. in civil engineering from the Virginia Military Institute and a
B.S. in Business Administration from Youngstown State University, Ohio.
Edward J. Kobacker will initially serve as Executive Vice President and
Chief Operating Officer and a Director of the Manager. From 1992 to 1997, Mr.
Kobacker was the President of IP Forest Resources Company (a subsidiary of
International Paper Company and the general partner of IP Timberlands, Ltd., a
publicly traded forest products company) and Vice President of the Forestlands
Division of International Paper Company. From 1987 to 1992, Mr. Kobacker was
the general manager and group executive of the Kraft Paper Group. Mr. Kobacker
holds a B.S. in accounting from the University of Scranton and is a former CPA
licensed in New York.
Michael J. Morgan will serve as a Vice President and the Chief Financial
Officer of the Manager. Since October 1996, Mr. Morgan has served as the Vice
President of Finance of Old Services. From 1991 to 1996 Mr. Morgan was the
Assistant Treasurer and Tax Manager of Roseburg. From 1981 to 1991, Mr. Morgan
was employed in the tax department of Arthur Andersen & Co. Mr. Morgan holds a
B.S. from Portland State University. Mr. Morgan is a CPA licensed in Oregon.
John H. Beuter will serve as a Director of the Manager. Since 1993, Dr.
Beuter has been a consulting forester with and the President of Duck Creek
Associates, Inc. (a natural resources consulting firm). From 1991 to 1993, Dr.
Beuter served as Deputy and Acting Assistant Secretary of the Department of
Agriculture overseeing
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the U.S. Forest Service and Soil Conservation Service. From 1970 to 1987, Dr.
Beuter was a professor of forest management at Oregon State University, during
which time he served as Chair of the Department of Forest Management,
Associate Dean and Director of the University Research Forests. Dr. Beuter
holds a B.S. in forestry and an M.S. in forest economics from Michigan State
University and a Ph.D. in forestry and economics from Iowa State University.
Aubrey L. Cole will serve as a Director of the Manager. Since 1989 Mr. Cole
has been a consultant for Aubrey Cole Associates, a sole proprietorship which
provides management consulting services and makes investments. From 1986 to
1989, Mr. Cole was the Vice Chairman of the Board and Director of Champion
International Corporation (a publicly traded forest products company) and from
1983 to 1993, Mr. Cole was the Chairman of Champion Realty Corporation (a land
sales subsidiary of Champion International). Mr. Cole holds a B.B.A. from the
University of Texas and serves on the Advisory Board of the Business School.
George R. Hornig will serve as a Director of the Manager. Since 1993, Mr.
Hornig has been a Managing Director of Deutsche Bank North America Holdings,
Inc. (the United States arm of Deutsche Bank, a German banking concern) and
affiliated entities. From 1991 to 1993, Mr. Hornig was the President and Chief
Operating Officer of Dubin & Swieca Holdings, Inc., an investment management
business. From 1988 to 1991, Mr. Hornig was a co-founder, Managing Director
and Chief Operating Officer of Wasserstein Perella & Co., Inc. (a mergers and
acquisitions investment bank). From 1983 to 1988, Mr. Hornig was an investment
banker in the Mergers and Acquisitions Group of The First Boston Corporation.
Prior to 1983, Mr. Hornig was an attorney with Skadden, Arps, Slate, 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.
Robert F. Wright will serve as a Director of the Manager. Since 1988, Mr.
Wright has served as President and Chief Executive Officer of Robert F. Wright
Associates, Inc., a firm making strategic investments and providing business
consulting services. Previously, Mr. Wright spent 40 years, 28 years as a
partner, at Arthur Andersen & Co. Mr. Wright holds a B.A. from Michigan State
University and an M.B.A. from New York University. Mr. Wright is a director of
the following companies: Hanover Direct Inc. (a catalog marketer), Reliance
Standard Life Insurance Co. and affiliates (life insurance companies), The
Navigators Group Inc. (a property insurance company), Norweb North America
Corporation (an Irish investment company), Rose Technology Group Limited (a
Canadian professional engineering company) and Williams Real Estate Co., Inc.
(a real estate company).
Walter L. Barnes will serve as Harvesting Manager of the Manager (the
position he currently holds with Old Services), responsible for all solid wood
logging and fiber operations. Mr. Barnes was employed by Weyerhaeuser for 28
years and has extensive experience managing different harvesting systems on
both the East and West sides of the Cascade Range. Mr. Barnes holds a B.S.
degree from the University of Wyoming.
Robert A. Broadhead will serve as Marketing Manager of the Manager (the
position he currently holds with Old Services), responsible for all log and
stumpage transactions. Mr. Broadhead was employed by Weyerhaeuser for 20 years
and gained additional experience in investing and planning while serving as
Planning Manager from 1981 to 1994. Mr. Broadhead holds a B.S. degree from
Humboldt State University.
Martin Lugus will serve as General Manager of the Manager (the position he
currently holds with Old Services), responsible for all land management and
operations on fee lands. Mr. Lugus was employed by Weyerhaeuser for 28 years,
during which time he served as Forestry Manager from 1981 to 1991 and
Timberlands Manager from 1991 to 1996. Mr. Lugus holds a B.S. from University
of Connecticut and a M.F. from Yale School of Forestry and Environmental
Studies.
Kurt A. Muller will serve as Planning Manager of the Manager (the position
he currently holds with Old Services), responsible for all short, medium and
long term harvest planning, as well as operating and developing the inventory
and GIS systems. From 1982 to 1989, Mr. Muller was President of Woodland
Consulting Services,
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<PAGE>
Inc., during which time he gained additional experience in contracting
forestry operations and forest land management as District Forester. Mr.
Muller was employed by Weyerhaeuser for eight years and holds a B.S. degree
from Oregon State University.
Christopher J. Sokol will serve as Forestry Manager of the Manager (the
position he currently holds with Old Services), responsible for forestry
operations, environmental relationships, harvest prescriptions and
nursery/orchard operations. Mr. Sokol was employed by Weyerhaeuser for 22
years and gained additional experience in forest regeneration and timber sales
while servicing as District Forester from 1982 to 1991. Mr. Sokol holds a B.S.
from Oregon State University.
REIMBURSEMENT OF EXPENSES OF THE MANAGER AND ITS AFFILIATES
The Manager will not receive any management fee or other compensation in
connection with its management of the Company. The Manager and its affiliates
performing services for the Company will be 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 Amended and Restated Operating
Agreement of the Company (the "Operating Company Agreement") provides that the
Manager will determine the expenses that are allocable to the Company in any
reasonable manner determined by the Manager in its sole discretion.
EXECUTIVE COMPENSATION
The Company was formed in June 1996 but has had none of its own employees
since that time. The Master Partnership and the Manager were formed in June
1997. Accordingly, neither the Company nor the Manager paid any 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 Manager may participate in employee benefit plans and
arrangements sponsored by the Manager, including plans which may be
established by the Manager in the future. Under the terms of the Operating
Company Agreement and the MLP Partnership Agreement, the Company is required
to reimburse the Manager 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 Manager has entered into employment agreements with Messrs. Rudey,
Stephens and Kobacker and is currently negotiating the terms of an employment
agreement with Mr. Morgan (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. No assurances can be given that Mr. Morgan will enter into an
employment agreement or if so, that such employment agreement will reflect the
terms described below. Each agreement will have a term of approximately five
years and will include confidentiality provisions and noncompete provisions.
In each agreement, the confidentiality provisions will continue for 18 months
(12 months in the case of Messrs. Stephens and Morgan) following the later to
occur of the Executive's termination of employment or, in the case of Messrs.
Rudey, Stephens and Kobacker, 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 (six months in the case of Mr. Morgan).
The agreements will provide for an annual base salary of $300,000, $450,000,
$350,000 and $126,000 for each of Messrs. Rudey, Stephens, Kobacker and
Morgan, respectively, subject to such increases as the Board of Directors of
the Manager may authorize from time to time. In addition, each of the
Executives will be eligible to
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<PAGE>
receive an annual cash bonus to be determined by the Compensation Committee
not to exceed 100% of his base salary. Mr. Kobacker will also be entitled to
receive three annual payments of $150,000 in each of 1998, 1999 and 2000 in
consideration for having forfeited certain in-the-money options granted to him
by his prior employer and a 5% interest in the Manager. Each of the Executives
will participate in the Long-Term Incentive Plan and Management Incentive Plan
(as defined below) of the Manager as described below. The Executives will also
be entitled to participate in such other benefit plans and programs as the
Manager may provide for its employees in general. Under his agreement, Mr.
Stephens may, after January 1, 1998, elect to resign as President and Chief
Executive Officer of the Manager and become Vice Chairman of the Board of
Directors of the Manager and the Company expects that Mr. Stephens will so
resign. Upon such resignation, it is expected that his responsibility for the
day-to-day operations of the Company will be assumed by Mr. Kobacker. As Vice
Chairman, Mr. Stephens will become responsible for conducting the Company's
acquisition program and his compensation will be the same as that of other
non-executive directors of the Manager plus $200 per hour (up to a maximum of
$1,600 per day) for services rendered in respect of such acquisition program.
The agreements provide that in the event an Executive's employment is
terminated without "Cause" (as defined in the Employment Agreements) or if the
Executive terminates his employment for "Good Reason" (as defined below), such
individual will be entitled to receive a severance payment in an amount equal
to his base salary for the remainder of the employment term under the
Employment Agreement or 12 months (14 months in the case of Mr. Morgan),
whichever is less (in the case of Mr. Kobacker, if his employment is
terminated without "Cause" prior to July 1, 1999, he will be entitled to
receive a severance payment in an amount equal to his base salary for 24
months), plus a prorated bonus for the year of such termination calculated
based on the bonus being equal to 100% of base salary. In the event of
termination due to death or disability, the Executive will be entitled to
accrued salary and benefits up to the date of the termination. In the event
the individual's employment is terminated for "Cause," he will receive accrued
salary and benefits up to the date of termination.
Good Reason is defined in the agreements generally as: (i) in the case of
Messrs. Rudey, Stephens and Kobacker, failure of the Manager's members to
elect or re-elect the Executive to the Board of Directors (if applicable), or
to vest in him the position, duties and responsibilities contemplated by the
Employment Agreement, (ii) failure of the Manager to pay any portion of the
individual's compensation, (iii) any material breach by the Manager of any
material provision of the Employment Agreement and (iv) a material reduction
in the individual's duties, responsibilities or status upon a "change of
control" as defined in the Employment Agreement. In addition, Mr. Morgan will
be deemed to have resigned for Good Reason if he resigns his employment prior
to July 1, 1998 for any reason other than due to disability. "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 MLP 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
Manager or (vi) any fraud, misappropriation of funds, embezzlement or other
similar acts of misconduct with respect to the Company.
Long-Term Incentive Plan
The Manager intends to adopt the U.S. Timberlands 1997 Long-Term Incentive
Plan (the "Long-Term Incentive Plan") for key employees and directors of the
Manager which will be effective upon consummation of the Transactions. The
summary of the Long-Term Incentive Plan contained herein does not purport to
be complete and is qualified in its entirety by reference to the Long-Term
Incentive Plan, which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Long-Term Incentive Plan
will consist of two components, a unit option plan (the "Unit Option Plan")
and a restricted unit plan (the "Restricted Unit Plan"). Initially, the Long-
Term Incentive Plan will permit the grant of Restricted Units and Unit Options
covering an aggregate of 745,868 Common Units (857,749 Common Units if the
over-allotment option granted to the underwriters in connection with the MLP
Offering is exercised in full).
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Unit Option Plan. Initially, the Unit Option Plan will permit the grant of
options ("Unit Options") covering 745,868 Common Units. From these, 633,987
Unit Options will be granted to key employees and directors upon the
consummation of the Transactions, subject to the vesting conditions described
below and subject to other customary terms and conditions, as follows: (i)
Unit Options covering 93,233 Common Units will be granted to each of Messrs.
Rudey, Stephens, Kobacker and Hornig and (ii) Unit Options covering 55,941
Common Units will be granted to Mr. Morgan. Unit Options covering 205,114
Common Units will be allocated among six other key employees of the Manager. A
total of eleven individuals are currently eligible to receive awards under the
Unit Option Plan. Unit Options covering the remaining 111,881 Common Units
under the Unit Option Plan will be reserved and may be granted in the future
to key employees or directors on such terms and conditions (including vesting
conditions) as are described below or as the Compensation Committee shall
determine. Each of the amounts set forth above will be adjusted upward by an
amount equal to 10% of the Common Units issued upon any exercise of the
underwriters' over-allotment option in the MLP Offering.
Unit Options granted at the closing of this offering will have an exercise
price equal to the initial public offering price for Common Units and will
become exercisable automatically upon, and in the same proportions as, the
conversion of the Subordinated Units to Common Units. If a grantee's
employment is terminated by reason of his death, disability or retirement, the
grantee's Unit Options will become immediately exercisable. In addition, a
grantee's Unit Options will become immediately exercisable in the event of a
"change of control" of the Company (as defined in the Long-Term Incentive
Plan).
Upon exercise of a Unit Option, the Manager 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 Manager, or any combination of the foregoing. The Manager will be
entitled to reimbursement by the Company for the difference between the cost
incurred by the Manager in acquiring such Common Units and the proceeds
received by the Manager from an optionee at the time of exercise. Thus, the
cost of the Unit Options will be borne by the Company. If the Master
Partnership issues new Common Units upon exercise of the Unit Options, the
total number of Units outstanding will increase and the Manager will remit the
proceeds received from the optionee to the Company.
The Unit Option Plan has been designed to furnish additional compensation to
key executives and key directors and to increase their proprietary interest in
the future performance of the Company measured in terms of growth in the
market value of Common Units.
Restricted Unit Plan. A Restricted Unit is a "phantom" unit that entitles
the grantee to receive a Common Unit upon the vesting of the phantom unit. No
grants will initially be made under the Restricted Unit Plan. The Compensation
Committee may, in the future, determine to make grants under such plan to key
employees and directors containing such terms as the Committee shall
determine. Restricted Units granted during the Subordination Period will vest
automatically upon, and in the same proportions as, the conversion of the
Subordinated Units to Common Units. Common Units to be delivered upon the
"vesting" of rights may be Common Units acquired by the Manager in the open
market, Common Units already owned by the Manager, Common Units acquired by
the Manager directly from the Company or any other person, or any combination
of the foregoing. The Manager will be entitled to reimbursement by the Company
for the cost incurred in acquiring such Common Units. If the Master
Partnership 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 Manager'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
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<PAGE>
Manager'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 Manager intends to adopt the U.S. Timberlands Company, L.P. Management
Incentive Plan (the "Management Incentive Plan") following the consummation of
this offering and the MLP Offering. The Management Incentive Plan is designed
to enhance the financial performance of the Manager'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 (as
defined in the Glossary) 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
Manager's 2% interest during such year, and (iii) there are no outstanding
Common Unit Arrearages. Any incentive payments will be at the discretion of
the Compensation Committee, and the Manager will be able to amend or change
the Management Incentive Plan at any time.
COMPENSATION OF DIRECTORS
No additional remuneration will be paid to employees who also serve as
directors. The Company anticipates that each independent director (there are
expected to be two) will receive $50,000 annually, for which they each agree
to participate in four regular meetings of the Board of Directors and four
Audit/Conflicts Committee meetings. Each other non-employee director will
receive $50,000 annually (to be paid in cash or Subordinated Units, as
determined by each director), for which they each agree to participate in four
regular meetings of the Board of Directors. Each non-employee director will
receive $1,250 for each additional meeting in which he participates. In
addition, each non-employee director will be reimbursed for his out-of-pocket
expenses in connection with attending meetings of the Board of Directors or
committees thereof. Each director will be fully indemnified by the Company for
his actions associated with being a director to the extent permitted under
Delaware law.
ACQUISITION FEES
The Compensation Committee expects to adopt a policy to compensate
individuals, including directors of the Manager, who bring to the Company
acquisition transactions that ultimately are consummated, at levels that
reflect the market for such fees from time to time.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Units that will
be issued upon the consummation of the Transactions held by beneficial owners
of five percent or more of the Units, by directors and executive officers of
the Manager and by all directors and executive officers of the Manager as a
group.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
COMMON COMMON SUBORDINATED SUBORDINATED TOTAL UNITS
UNITS TO BE UNITS TO BE UNITS TO BE UNITS TO BE TO BE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED OWNED
- ------------------------ ------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Rudey Timber Company,
L.L.C. (1)............. - -% 2,894,157 67.6% 24.6%
U.S. Timberlands
Management Company,
L.L.C.(2).............. - - 1,244,565 29.1 10.6
U.S. Timberlands
Holdings, L.L.C.(3).... - - 2,894,157 67.6 24.6
John M. Rudey(4)........ - - 4,138,722 96.7 35.2
John J. Stephens(5)(7).. - - 95,238 2.2 *
Edward J. Kobacker...... - - - - -
Michael J. Morgan....... - - - - -
George R. Hornig(6)(7).. - - 48,160 1.1 *
Robert F. Wright........ - - - - -
Aubrey L. Cole.......... - - - - -
John H. Beuter.......... - - - - -
All directors and
executive officers as a
group (8 persons)(7)... - -% 4,282,120 100% 36.5%
</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. Excludes 143,398 Subordinated Units to be received by Old Services
in the Transaction which will be transferred to Messrs. Stephens and
Hornig in redemption of their interests therein.
(3) Current address is 625 Madison Avenue, Suite 10-B, New York, New York
10022.
(4) Current address is 625 Madison Avenue, Suite 10-B, New York, New York
10022. Includes 1,244,565 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 P.O. Box 10 6400 Highway 66, Klamath Falls, Oregon
97601.
(6) Current address is 31 West 52nd Street, New York, New York 10019.
(7) Includes only interests directly and indirectly owned by such persons.
With respect to beneficial ownership which may be attributable to Mr.
Rudey, see footnote (4).
Upon consummation of the Transactions, all of the outstanding member
interests in the Manager will be owned by management, directors and related
persons and entities. The members of the Manager have entered into an
operating agreement, which, among other things, provides that the member
interests of management and directors who retire, resign or otherwise
terminate their relationship with the Manager will be repurchased by the
Manager. 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 Manager by Mr. Rudey's affiliates.
53
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RIGHTS OF THE MANAGER
After the Common Units offering, Old Services will own 1,244,565
Subordinated Units, Holdings, an affiliate of the Manager, will own 2,894,157
Subordinated Units, and Messrs. Stephens and Hornig, founding directors and
members of the Manager, will own an aggregate of 143,398 Subordinated Units.
The 4,282,120 Subordinated Units owned by Old Services, Holdings and Messrs.
Stephens and Hornig will represent an aggregate 35.8% limited partner interest
in the Company (32.6% if the over-allotment option granted to the underwriters
in connection with the MLP Offering is exercised in full). Through the
Manager's ability to manage and operate the Company and the ownership of all
of the outstanding Subordinated Units by affiliates of the Manager
(effectively giving the Manager the ability to veto certain actions of the
Company), the Manager will have the ability to control the management of the
Company.
CONTRIBUTION, CONVEYANCE AND ASSUMPTION AGREEMENT
In connection with the Transactions, the Company, the Master Partnership,
the Manager, Old Services and certain other parties will enter into the
Contribution, Conveyance and Assumption Agreement (the "Contribution
Agreement"), which will generally govern the Transactions, including the
transfer of certain assets to and the assumption of certain liabilities by the
Company. The Contribution Agreement will not be the result of arm's-length
negotiations, and there can be no assurance that it, or that any of the
transactions provided for therein, will be effected on terms at least as
favorable to the parties to such agreement as could have been obtained from
unaffiliated third parties. All of the transaction expenses incurred in
connection with the Transactions, including the expenses associated with
transferring assets into the Company, will be paid from the proceeds of the
MLP Offering.
CONSULTING AGREEMENTS
The Manager intends to enter into consulting agreements with each of Duck
Creek Associates (a consulting firm affiliated with Mr. Beuter), Aubrey Cole
Associates (a consulting firm affiliated with Mr. Cole), Robert F. Wright
Associates, Inc. (a consulting firm affiliated with Mr. Wright) and George R.
Hornig pursuant to which each such person or firm will provide consulting
services to the Manager. Each such agreement will provide for an annual
retainer of $25,000, plus $150 per hour (with a maximum per diem of $1,200)
for services rendered at the request of the Manager. In addition, Mr.
Stephens' employment agreement provides that, upon his resignation as
President and Chief Executive Officer of the Manager, he will enter into a
consulting arrangement with an annual retainer of $25,000, plus $200 per hour
(with a maximum per diem of $1,600) for services rendered at the request of
the Company. 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
In connection with the Weyerhaeuser Acquisition, the Company paid a fee of
approximately $4.1 million to U.S. Timberlands Management Group, L.L.C.
("TMG"), an entity 100% owned and controlled by Rudey Timber Company L.L.C.,
and a fee of $0.4 million to each of Mr. Rudey and Mr. Stephens. In addition,
for the period from August 30, 1996 to December 31, 1996, the Company paid TMG
management fees of $2.8 million.
During the period from August 30, 1996 through December 31, 1996, the
Company paid $10.0 million to TMG. Such amount, with related interest, was
repaid to the Company in February 1997.
Pursuant to an agreement dated as of July 29, 1997 between Mr. Stephens and
the Company, Old Services, Mr. Rudey and certain of his affiliates, Mr.
Stephen's interest in Old Services will be redeemed for 95,238 Subordinated
Units upon the consummation of the Transactions and $1.0 million payable in
January 1998. Pursuant to an agreement dated as of July 29, 1997 between Mr.
Hornig and the Company, Old Services, Mr. Rudey and certain of his affiliates,
Mr. Hornig's interest in Old Services will be redeemed upon the closing of the
Transactions for 48,160 Subordinated Units.
54
<PAGE>
THE OPERATING COMPANY AGREEMENT
The following paragraphs are a summary of the material provisions of the
Operating Company Agreement. The discussions presented below of the material
provisions of the Operating Company Agreement are qualified in their entirety
by reference to the Operating Company Agreement the form of which is filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
ORGANIZATION AND DURATION
The Company was organized in 1996 to acquire the Klamath Falls Timberlands.
Following the consummation of the Transactions, the Master Partnership will
own a 98.9899% non-managing member interest in the Company and the Manager
will own a 1.0101% interest in the Company and will manage and operate the
Company's business as the managing member. The Manager will also serve as the
general partner of the Master Partnership, owning an aggregate 2% interest in
the Company and the Master Partnership on a combined basis. The Company will
continue in existence until December 31, 2087 or until the earlier dissolution
of the Company pursuant to the terms of the Operating Company Agreement.
CASH DISTRIBUTIONS
The Company will distribute to the Manager and the Master Partnership, on a
quarterly basis, all of its Available Cash. Distributions will be made 1.0101%
to the Manager and 98.9899% to the Master Partnership.
INDEMNIFICATION
The Operating Company Agreement provides that the Company will indemnify the
Manager, any Departing Manager (as defined in the Glossary), any person who is
or was an affiliate of a Manager or any Departing Manager, any person who is
or was a member, partner, officer, director, employee, agent or trustee of a
Manager or any Departing Manager or any affiliate of a Manager or any
Departing Manager, or any person who is or was serving at the request of a
Manager or any Departing Manager or any affiliate of any such person, any
affiliate of a Manager or any Departing Manager 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 Manager 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 Manager 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.
TERMINATION AND DISSOLUTION
The Company will continue until December 31, 2087, unless sooner terminated
pursuant to the Operating Company Agreement. The Company will be dissolved
upon (i) the election of the Manager to dissolve the Company and the approval
of all members, (ii) the sale of all or substantially all of the assets and
properties of the Company, (iii) the entry of a decree of judicial dissolution
of the Company, (iv) the dissolution of the Master Partnership, or (v) the
withdrawal or removal of the Manager or any other event that results in its
ceasing to be
55
<PAGE>
the general partner of the Master Partnership or the managing member of the
Company, as the case may be, (other than by reason of a transfer of its
general partner interest in accordance with the MLP Partnership Agreement or
its managing member interest in accordance with the Operating Company
Agreement, as the case may be, or withdrawal or removal following approval and
admission of a successor). Upon a dissolution pursuant to clause (v) the
Master Partnership may, prior to the effective date of such withdrawal, elect
a successor Manager; provided, however, that such successor shall be the same
person, if any, that is elected by the limited partners of the Master
Partnership as the successor to the Manager in its capacity as the general
partner of the Master Partnership, 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 of the Master Partnership or
of a member of the Company and (y) neither the Master Partnership, the
reconstituted limited partnership nor the 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.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Company, unless the Company is reconstituted and
continued as a new limited liability company, the person authorized to wind up
the affairs of the Company (the "Liquidator") will, acting with all of the
powers of the Manager that such Liquidator deems necessary or desirable in its
good faith judgment in connection therewith, liquidate the Company's assets
and apply the proceeds of the liquidation as follows: (i) first towards the
payment of creditors of the Company in the order of priority provided in the
Operating Company Agreement and by law and (ii) then to the Master Partnership
and the Manager in accordance with their respective capital account balances
as so adjusted. Under certain circumstances and subject to certain
limitations, the Liquidator may defer liquidation or distribution of the
Company's assets for a reasonable period of time or distribute assets to
partners in kind if it determines that a sale would be impractical or would
cause undue loss to the members.
REMOVAL AND WITHDRAWAL OF THE MANAGER
The Manager shall be removed as manager of the Company if it has been
removed as the general partner of the Master Partnership pursuant to the MLP
Partnership Agreement. The Manager may not be removed as general partner of
the Master Partnership 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 Manager and its affiliates) and the Company receives an Opinion of
Counsel (as defined in the Glossary). The ownership of the Subordinated Units
by certain affiliates of the Manager effectively gives the Manager the ability
to prevent its removal. The Manager has agreed not to voluntarily withdraw as
managing member of the Company and general partner of the Master Partnership
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.
56
<PAGE>
DESCRIPTION OF BANK CREDIT FACILITY
Concurrent with the closing of this offering, the Company will enter into
the Bank Credit Facility with one or more commercial banks. The following is a
summary of the terms of the Bank Credit Facility, the form of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is
a part. This summary is qualified in its entirety by reference to the Bank
Credit Facility.
The Bank Credit Facility will consist of a $75.0 million Acquisition
Facility and a $25.0 million Working Capital Facility. The Company's
obligations under the Bank Credit Facility will be unsecured general
obligations, will rank pari passu with the Notes and will be non-recourse to
the Manager. The Bank Credit Facility will bear interest at a rate based upon,
at the 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 shall 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 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 Company, including limitations on the 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 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.
Under the Bank Credit Facility, so long as no Event of Default (as defined
in the Bank Credit Facility) exists or would result, the Company will be
permitted to make quarterly cash distributions to the Master Partnership 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 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.
57
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") among
the Issuers and State Street Bank & Trust Company, as trustee (the "Trustee").
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Notes are subject to all such terms,
and holders of Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of certain provisions of the
Notes and the Indenture does not purport to be complete and is qualified in
its entirety by reference to the Notes and the Indenture, including the
definitions therein of certain terms used below. A copy of the proposed form
of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part and is available from the Company upon request
as set forth under "Available Information." The definitions of certain terms
used in the following summary are set forth below under "--Certain
Definitions."
The Notes will be unsecured general joint and several obligations of the
Issuers and will rank senior in right of payment to all existing and future
subordinated indebtedness of the Issuers and pari passu in right of payment
with all existing and future senior indebtedness of the Issuers. At September
30, 1997, after giving pro forma effect to this offering and the other
transactions described herein, the Company would have had long-term
indebtedness of approximately $265.3 million, including $40.3 million
outstanding under the Bank Credit Facility. See "Capitalization" and
"Description of Bank Credit Facility." At such date, the Company would have
had no indebtedness subordinated to the Notes.
The Notes will be effectively subordinated to any secured indebtedness of
the Company to the extent of the value of the assets securing such
Indebtedness and to claims of creditors (other than the Company) and preferred
stockholders of the Company's Subsidiaries that are not Subsidiary Guarantors.
Claims of creditors (other than the Company) of the Company's Subsidiaries
that are not Subsidiary Guarantors, including trade creditors, secured
creditors, taxing authorities and creditors holding guarantees, and claims of
holders of preferred stock of such Subsidiaries will generally have priority
as to assets of such Subsidiaries over the claims and equity interest of the
Company and, thereby indirectly, the holders of indebtedness of the Company,
including the Notes.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $225.0 million
and will mature on November 15, 2007. Interest on the Notes will accrue at the
rate of 9 5/8% per annum and will be payable semi-annually in arrears on May
15 and November 15, commencing on May 15, 1998, to holders of record on the
immediately preceding May 1 and November 1. Interest on the Notes will accrue
from the most recent date to which interest has been paid or, if no interest
has been paid, from the date of original issuance. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Notes will be payable at the
office or agency of the Issuers maintained for such purpose within the City
and State of New York or, at the option of the Issuers, payment of interest
may be made by check mailed to the holders of the Notes at their respective
addresses set forth in the register of holders of Notes; provided that all
payments with respect to Global Notes will be required to be made by wire
transfer of immediately available funds to the accounts specified by the
holders thereof. Until otherwise designated by the Issuers, the Issuers'
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Notes will be issued in registered form, without coupons,
and in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Notes are not redeemable prior to November 15, 2002. Thereafter, the
Notes will be subject to redemption at the option of the Issuers, in whole or
in part, upon not less than 30 nor more than 60 days' notice,
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<PAGE>
at the redemption prices (expressed as percentages of principal amount) set
forth below, plus accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the 12-month period beginning on November
15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.............................. 104.8125%
2003.............................. 103.2083%
2004.............................. 101.6042%
2005 and thereafter............... 100.0000%
</TABLE>
Notwithstanding the foregoing, at any time on or before November 15, 2000,
the Company may redeem up to 35% of the original aggregate principal amount of
the Notes at a redemption price of 109.625% of the principal amount thereof,
plus accrued and unpaid interest thereon to the redemption date, with the net
proceeds of a Public Equity Offering; provided that at least 65% of the
aggregate principal amount of Notes originally issued remain outstanding
immediately after the occurrence of such redemption; provided, further, that
such redemption shall occur within 120 days of the date of the closing of such
Public Equity Offering; provided, further, that in the event of a Public
Equity Offering by the Master Partnership, the Master Partnership contributes
to the capital of the Company the portion of the net cash proceeds of such
Public Equity Offering necessary to pay the aggregate redemption price (plus
accrued and unpaid interest thereon to the redemption date) of the Notes to be
redeemed.
If less than all the Notes are to be redeemed pursuant to the optional
redemption provisions of the Indenture, the Trustee shall select the Notes to
be redeemed among the holders of Notes pro rata, by lot or in accordance with
a method which the Trustee considers to be fair and appropriate (and in such
manner as complies with applicable legal and stock exchange requirements, if
any). Notices of redemption shall be mailed by first class mail at least 30
but not more than 60 days before the redemption date to each holder of Notes
to be redeemed at its registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Note. On and
after the redemption date, interest ceases to accrue on Notes or portions
thereof called for redemption.
SUBSIDIARY GUARANTEES OF NOTES
Although the Company currently does not conduct any business through
Subsidiaries, future operations of the Company could be conducted through
Subsidiaries. Under the circumstances described below, the Company's payment
obligations under the Notes may in the future be jointly and severally
guaranteed by future Restricted Subsidiaries of the Company as Subsidiary
Guarantors. Although the Indenture does not contain any requirement that any
Restricted Subsidiary execute and deliver a Subsidiary Guarantee, a covenant
described below requires a future Restricted Subsidiary in the future to
execute and deliver a Subsidiary Guarantee prior to its guarantee of other
Indebtedness of the Company. See "--Certain Covenants--Limitation on Non-
Guarantor Restricted Subsidiaries." However, no Subsidiary Guarantees will be
issued in connection with the initial offering and sale of the Notes.
Each Subsidiary Guarantor will guarantee, jointly and severally, to each
holder of Notes and the Trustee, the full and prompt performance of the
Company's obligations under the Indenture and the Notes, including the payment
of principal of (or premium, if any, on) and interest on the Notes pursuant to
its Subsidiary Guarantee.
Each of the Subsidiary Guarantees will be an unsecured general obligation of
the Subsidiary Guarantor and will rank senior in right of payment to all
existing and future subordinated indebtedness of the Subsidiary Guarantor and
pari passu in right of payment with all existing and future senior
indebtedness of the Subsidiary Guarantor. The Subsidiary Guarantees will be
effectively subordinated to any secured indebtedness of the Subsidiary
Guarantors to the extent of the value of the assets securing such
Indebtedness.
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The obligations of each Subsidiary Guarantor will be limited to the maximum
amount, after giving effect to all other contingent and fixed liabilities of
such Subsidiary Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Subsidiary Guarantor in respect of
the obligations of such other Subsidiary Guarantor under its Subsidiary
Guarantee or pursuant to its contribution obligations under the Indenture, as
will result in the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. Each Subsidiary Guarantor that makes a
payment or distribution under a Subsidiary Guarantee shall be entitled to a
contribution from each other Subsidiary Guarantor in a pro rata amount based
on the Adjusted Net Assets of each Subsidiary Guarantor.
Each Subsidiary Guarantor may consolidate with or merge into or sell or
otherwise dispose of all or substantially all of its assets to the Company or
another Subsidiary Guarantor without limitation. Each Subsidiary Guarantor may
consolidate with or merge into or sell all or substantially all of its assets
to a Person other than the Company or another Subsidiary Guarantor (whether or
not Affiliated with the Subsidiary Guarantor), provided that (a) if the
surviving Person is not a Subsidiary Guarantor, the surviving Person agrees to
assume such Subsidiary Guarantor's Subsidiary Guarantee and all its
obligations pursuant to the Indenture (except to the extent the following
paragraph would result in the release of such Subsidiary Guarantee and
obligations) and (b) such transaction does not result in a Default or Event of
Default immediately thereafter that is continuing.
Upon (a) (i) the sale or other disposition of all of the Capital Stock of a
Subsidiary Guarantor to a Person other than the Company or another Subsidiary
Guarantor or (ii) the merger or consolidation of a Subsidiary Guarantor with
or into another Person or the sale of all or substantially all of the assets
of a Subsidiary Guarantor to another Person, in either case pursuant to a
transaction that is in compliance with the Indenture (including as described
in the foregoing paragraph) or (b) the release of all guarantees by a
Subsidiary Guarantor of Indebtedness of the Company, such Subsidiary Guarantor
shall be automatically and unconditionally released and discharged from its
Subsidiary Guarantee and all of its obligations in respect of the Indenture.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders," the
Issuers are not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Issuers to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase (the "Change of Control
Payment"). Within 30 days following any Change of Control, the Issuers will
mail a notice to each holder stating: (a) that the Change of Control Offer is
being made pursuant to the covenant entitled "Change of Control" and that all
Notes tendered will be accepted for payment; (b) the purchase price and the
purchase date, which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date");
(c) that any Note not tendered will continue to accrue interest; (d) that,
unless the Issuers default in the payment of the Change of Control Payment,
all Notes accepted for payment pursuant to the Change of Control Offer will
cease to accrue interest after the Change of Control Payment Date; (e) that
holders electing to have any Notes purchased pursuant to a Change of Control
Offer will be required to surrender the Notes, with the form entitled "Option
of Holder to Elect Purchase" on the reverse of the Notes completed, to the
Paying Agent at the address specified in the notice prior to the close of
business on the third Business Day preceding the Change of Control Payment
Date; (f) that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the expiration
date of the Change of Control Offer, a telegram, telex, facsimile transmission
or letter setting forth the name of the holder, the principal amount of
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Notes delivered for purchase, and a statement that such holder is withdrawing
his election to have such Notes purchased; (g) that holders whose Notes are
being purchased only in part will be issued new Notes equal in principal
amount to the unpurchased portion of the Notes surrendered, which unpurchased
portion must be equal to $1,000 in principal amount or an integral multiple
thereof; and (h) the material circumstances and material facts regarding such
Change of Control. The Issuers will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with a Change of Control.
The Company will not be required to make a change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful, (a) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer, (b) deposit with the Paying Agent therefor an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (c) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an officers' certificate stating
the aggregate amount of the Notes or portions thereof tendered to the Issuers.
The Paying Agent will promptly mail to each holder of Notes so accepted the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail to each holder a new Note equal in principal amount to
the unpurchased portion of the Notes surrendered, if any; provided that each
such new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Issuers will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
"Change of Control" means (a) any "person" or "group" (as such terms are
used in Sections 13(d) and 14(d) of the Exchange Act), excluding Permitted
Holders or any Person of which one or more Permitted Holders beneficially own
in the aggregate at least a majority of the Voting Stock, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, of more than 50% of the total voting power with
respect to the total Voting Stock of the Master Partnership or the Company,
(b) the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the Master Partnership or the Company to any Person or
group (as such term is used in Section 13(d)(3) of the Exchange Act) other
than Permitted Holders or any Person of which one or more Permitted Holders
beneficially own in the aggregate at least a majority of the Voting Stock, (c)
the merger or consolidation of the Master Partnership or the Company with
another partnership, limited liability company or corporation other than a
Permitted Holder or any Person of which one or more Permitted Holders
beneficially own in the aggregate at least a majority of the Voting Stock, in
any such event pursuant to a transaction in which the outstanding Voting Stock
of the Master Partnership or the Company, as applicable, is converted into or
exchanged for cash, securities or other property, other than any such
transaction where the Voting Stock of the Master Partnership or the Company,
as applicable, outstanding immediately prior to such transaction is converted
into or exchanged for Voting Stock of the surviving or transferee Person
constituting a majority of the outstanding shares of such Voting Stock of such
surviving or transferee person (immediately after giving effect to such
issuance), (d) the liquidation or dissolution of the Master Partnership, the
Company or the Manager, or (e) the occurrence of any transaction, the result
of which is that Permitted Holders beneficially own in the aggregate, directly
or indirectly, less than a majority of the Voting Stock of the Manager.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Notes to require
that the Issuers repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.
With respect to the sale of assets referred to in the definition of "Change
of Control" above, the phrase "all or substantially all" as used in the
Indenture varies according to the facts and circumstances of the subject
transaction, has no clearly established meaning under New York law (which
governs the Indenture) and is subject to judicial interpretation. Accordingly,
in certain circumstances there may be a degree of uncertainty in
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ascertaining whether a particular transaction would involve a disposition of
"all or substantially all" of the assets of a Person and therefore it may be
unclear whether a Change of Control has occurred and whether the Notes are
subject to a Change of Control Offer.
The Company's ability to pay cash to the holders of Notes upon a repurchase
may be limited by the Company's then existing financial resources. If the
Company does not have sufficient financial resources to repurchase the Notes,
the failure of the Company to repurchase the Notes upon a Change of Control
Offer would constitute an Event of Default under the Indenture.
Asset Sales
The Company will not, and will not permit any of its Restricted Subsidiaries
to, (a) sell, lease, convey or otherwise dispose of any assets (including by
way of a Sale and Leaseback Transaction) other than sales of inventory in the
ordinary course of business and consistent with past practice (provided, that
the sale, lease, conveyance or other disposition of all or substantially all
of the assets of the Company shall be governed by the provisions of the
Indenture described above under the caption "Change of Control" or the
provisions described below under the caption "Merger, Consolidation or Sale of
Assets" and not by the provisions of this covenant) or (b) issue or sell
Capital Stock of any of its Restricted Subsidiaries, in the case of either
clause (a) or (b) above, whether in a single transaction or a series of
related transactions that has a fair market value (as determined in good faith
by the Board of Directors of the Manager) in excess of $1.0 million or for net
cash proceeds of $1.0 million (each of the foregoing, an "Asset Sale"), unless
(i) the Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (as determined in good faith by the Board of Directors of the Manager)
of the assets sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary
is in the form of cash or cash equivalents; provided, however, that the amount
of (A) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet or in the notes thereto) of the Company
or any Restricted Subsidiary that are assumed by the transferee of any such
assets and (B) any notes or other obligations received by the Company or any
such Restricted Subsidiary from such transferee that are converted by the
Company or such Restricted Subsidiary into cash (to the extent of the cash
received) within 90 days of such Asset Sale, shall be deemed to be cash for
purposes of this provision; and provided further, that the 75% limitation
referred to in this clause (ii) shall not apply to any Asset Sale in which the
cash portion of the consideration received therefrom, determined in accordance
with the foregoing proviso, is equal to or greater than what the after-tax
proceeds would have been had such Asset Sale complied with the aforementioned
75% limitation. Notwithstanding the foregoing, Asset Sales shall not be deemed
to include (a) any transfer of assets or Capital Stock by the Company or any
of its Restricted Subsidiaries to a Restricted Subsidiary of the Company, (b)
any transfer of assets pursuant to a Permitted Investment, (c) the sale of
Timberlands in a like-kind exchange for a like interest in other Timberlands
having a fair market value (as determined in good faith by the Board of
Directors of the Manager) at least equal to the fair market value (as
determined in good faith by the Board of Directors of the Manager) of the
Timberlands sold, (d) the sale of not more than 10,000 acres in the aggregate
of Timberlands designated in good faith by the Board of Directors of the
Manager for a higher and better use, (e) a disposition of obsolete equipment
in the ordinary course of business, (f) any sale of Capital Stock of, or
Indebtedness or other securities of, an Unrestricted Subsidiary, and (g)
timber deed, bulk, pay-as-cut and stumpage sales in the ordinary course of
business.
In the event that the aggregate Net Proceeds received by the Company or any
of its Restricted Subsidiaries from one or more Asset Sales exceed the
Adjusted Asset Sales Amount since the Issue Date, within 270 days after the
date such aggregate Net Proceeds exceed such amount (or such longer period as
may be required to comply with any agreement in effect on the Issue Date), the
Company, at its option, shall apply the amount of such aggregate Net Proceeds
(less the amount of any such Net Proceeds previously applied during such
fiscal year for the purposes set forth in clauses (a) or (b) below) to (a)
reduce senior Indebtedness of the Company or Indebtedness of a Restricted
Subsidiary (with a permanent reduction of availability in the case of the
Working Capital Facility) or (b) make, or commit, pursuant to a binding
written contract (provided that the contract is
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consummated substantially in accordance with the terms thereof within 30 days
after the end of the 270-day period), to make, an investment in assets used or
useful in the Business. Pending the final application of any such Net
Proceeds, the Company or any Restricted Subsidiary may temporarily reduce
borrowings under the Bank Credit Facility or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture. Any such Net
Proceeds that are not applied or invested as provided in the first sentence of
this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10 million, the Issuers shall
make an offer to all holders of Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of Notes that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase, in accordance with the procedures set forth in the Indenture. The
Issuers will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes in
connection with an Asset Sale Offer. To the extent that the aggregate amount
of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company or any Restricted Subsidiary may use such deficiency for
general business purposes. If the aggregate principal amount of Notes
surrendered by holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
Limitation on Harvesting
In the event that the Company or any of its Restricted Subsidiaries receive
any Net Proceeds from one or more Excess Harvests, within 270 days after the
date of such receipt (or such longer period as may be required to comply with
any agreement in effect on the Issue Date), the Company, at its option, shall
apply the amount of such aggregate Net Proceeds (less the amount of any such
Net Proceeds previously applied during such fiscal year for the purposes set
forth in clauses (a) or (b) below) to (a) reduce senior Indebtedness of the
Company or Indebtedness of a Restricted Subsidiary (with a permanent reduction
of availability in the case of the Working Capital Facility) or (b) make, or
commit, pursuant to a binding written contract (provided that the contract is
consummated substantially in accordance with the terms thereof within 30 days
after the end of the 270-day period), to make, an investment in assets used or
useful in the Business. Pending the final application of any such Net
Proceeds, the Company or any Restricted Subsidiary may temporarily reduce
borrowings under the Bank Credit Facility or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture. Any such Net
Proceeds that are not applied or invested as provided in the first sentence of
this paragraph will be deemed to constitute "Excess Harvest Proceeds." When
the aggregate amount of Excess Harvest Proceeds exceeds $10 million, the
Issuers shall make an offer to all holders of Notes (an "Excess Harvest
Offer") to purchase the maximum principal amount of Notes that may be
purchased out of the Excess Harvest Proceeds, at an offer price in cash in an
amount equal to 100% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase, in accordance with the procedures
set forth in the Indenture. The Issuers will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and
regulations to the extent such laws and regulations are applicable in
connection with the repurchase of the Notes in connection with an Excess
Harvest Offer. To the extent that the aggregate amount of Notes tendered
pursuant to an Excess Harvest Offer is less than the Excess Harvest Proceeds,
the Company or any Restricted Subsidiary may use such deficiency for general
business purposes. If the aggregate principal amount of Notes surrendered by
holders thereof exceeds the amount of Excess Harvest Proceeds, the Trustee
shall select the Notes to be purchased on a pro rata basis. Upon completion of
such Excess Harvest Offer, the amount of Excess Harvest Proceeds shall be
reset at zero.
CERTAIN COVENANTS
Limitation on Additional Indebtedness
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or in any
manner become directly or indirectly liable, contingently or otherwise, for
the payment of (in each case, to "incur"), any Indebtedness (including,
without limitation, any Redeemable
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Capital Stock and Acquired Indebtedness), unless at the time of such
incurrence, and after giving pro forma effect to the receipt and application
of the proceeds of such Indebtedness, the Consolidated Fixed Charge Coverage
Ratio of the Company is greater than 2.25 to 1.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may incur Permitted Indebtedness.
Limitation on Restricted Payments
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(a) declare or pay any dividend or make any other distribution or payment
on or in respect of Capital Stock of the Company or any of its Restricted
Subsidiaries or any payment made to the direct or indirect holders (in
their capacities as such) of Capital Stock of the Company or any of its
Restricted Subsidiaries (other than (i) dividends or distributions payable
solely in Capital Stock of the Company (other than Redeemable Capital
Stock) or in options, warrants or other rights to purchase Capital Stock of
the Company (other than Redeemable Capital Stock), (ii) the declaration or
payment of dividends or other distributions to the extent declared or paid
to the Company or any Restricted Subsidiary of the Company and (iii) the
declaration or payment of dividends or other distributions by any
Restricted Subsidiary of the Company to all holders of Capital Stock of
such Restricted Subsidiary on a pro rata basis (including, in the case of
the Company, to the Manager)),
(b) purchase, redeem, defease or otherwise acquire or retire for value
any Capital Stock of the Company or any of its Restricted Subsidiaries
(other than any such Capital Stock owned by a Wholly-Owned Restricted
Subsidiary of the Company),
(c) make any principal payment on, or purchase, defease, repurchase,
redeem or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Subordinated Indebtedness (other than any such
Indebtedness owned by the Company or a Wholly-Owned Restricted Subsidiary
of the Company), or
(d) make any Investment (other than any Permitted Investment) in any
Person
(such payments or Investments described in the preceding clauses (a), (b), (c)
and (d) are collectively referred to as "Restricted Payments"), unless, at the
time of and after giving effect to the proposed Restricted Payment, (A) no
Default or Event of Default shall have occurred and be continuing and (B) such
Restricted Payment, together with the aggregate of all other Restricted
Payments made by the Company and its Restricted Subsidiaries during the fiscal
quarter during which such Restricted Payment is made, shall not exceed (1) if
the Consolidated Fixed Charge Coverage Ratio of the Company shall be greater
than 1.75 to 1, an amount equal to Available Cash for the immediately
preceding fiscal quarter or (2) if the Consolidated Fixed Charge Coverage
Ratio of the Company shall be equal to or less than 1.75 to 1, an amount equal
to the sum of (x) $ 7.5 million less the aggregate amount of all Restricted
Payments made by the Company and its Restricted Subsidiaries pursuant to this
clause (2) (x) during the period ending on the last day of the fiscal quarter
of the Company immediately preceding the date of such Restricted Payment and
beginning on the later of (I) the Issue Date and (II) the first day of the
sixteenth full fiscal quarter immediately preceding the date of such
Restricted Payment, plus (y) the aggregate net cash proceeds of any
substantially concurrent (I) capital contribution to the Company from any
Person (other than a Restricted Subsidiary of the Company) or (II) issuance
and sale of shares of Capital Stock (other than Redeemable Capital Stock) of
the Company to any Person (other than to a Restricted Subsidiary of the
Company) (excluding any cash proceeds received pursuant to any transaction
occurring on or
prior to the Issue Date). The amount of any such Restricted Payment, if other
than cash, shall be the fair market value (as determined in good faith by the
Board of Directors of the Manager) on the date of such Restricted Payment of
the asset(s) proposed to be transferred by the Company or such Restricted
Subsidiary, as the case may be, pursuant to such Restricted Payment.
None of the foregoing provisions will prohibit: (a) the payment of any
dividend or distribution within 60 days after the date of its declaration, if
at the date of declaration such payment would be permitted by the
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foregoing paragraph; (b) the redemption, repurchase or other acquisition or
retirement of any shares of any class of Capital Stock of the Company or any
Restricted Subsidiary of the Company in exchange for, or out of the net cash
proceeds of, a substantially concurrent (i) capital contribution to the
Company from any Person (other than a Restricted Subsidiary of the Company) or
(ii) issue and sale of other shares of Capital Stock (other than Redeemable
Capital Stock) of the Company to any Person (other than to a Restricted
Subsidiary of the Company); provided, however, that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase or other
acquisition or retirement shall be excluded from the calculation of Available
Cash; or (c) any redemption, repurchase or other acquisition or retirement of
Subordinated Indebtedness by exchange for, or out of the net cash proceeds of,
a substantially concurrent (i) capital contribution to the Company from any
Person (other than a Restricted Subsidiary of the Company) or (ii) issue and
sale of (A) Capital Stock (other than Redeemable Capital Stock) of the Company
to any Person (other than to a Restricted Subsidiary of the Company) or (B)
Indebtedness of the Company issued to any Person (other than a Restricted
Subsidiary of the Company), so long as such Indebtedness is Permitted
Refinancing Indebtedness; provided, however, in each case, that the amount of
any such net cash proceeds that are utilized for any such redemption,
repurchase or other acquisition or retirement shall be excluded from the
calculation of Available Cash. In computing the amount of Restricted Payments
previously made for purposes of the preceding paragraph, Restricted Payments
made under clause (a) shall be included and Restricted Payments made under
clauses (b) and (c) shall not be so included.
Limitation on Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create, incur, assume or suffer to exist any Liens, other than Permitted
Liens, upon any of its respective property or assets, whether owned on the
Issue Date or thereafter acquired, unless the Notes and the Subsidiary
Guarantees, as applicable, are secured equally and ratably with (or prior to,
in the case of Subordinated Indebtedness) the obligations secured by such
Lien.
Limitation on Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into or suffer to exist any transaction or
series of related transactions (including, without limitation, the sale,
transfer, disposition, purchase, exchange or lease of assets, property or
services), with, or for the benefit of, any Affiliate of the Company, unless
(a) such transaction or series of related transactions is between the Company
and its Restricted Subsidiaries or between two Restricted Subsidiaries or
(b)(i) such transaction or series of related transactions is on terms that are
no less favorable to the Company or such Restricted Subsidiary, as the case
may be, than those which would have been obtained in a comparable transaction
at such time from Persons who are not Affiliates of the Company or a
Restricted Subsidiary and (ii) with respect to (A) a transaction or series of
transactions involving aggregate payments or value equal to or greater than $5
million, the Company shall have delivered an Officers' Certificate to the
Trustee certifying that such transaction or series of transactions complies
with the preceding clause (i) and that such transaction or series of
transactions has been approved by a majority of the Board of Directors of the
Manager (including a majority of the Disinterested Directors) and (B) a
transaction or series of transactions involving aggregate payments or value
equal to or greater than $10 million, the Company delivers to the Trustee an
opinion as to the fairness to the Company or such Restricted Subsidiary from a
financial point of view issued by an accounting or investment banking firm of
national standing; provided, however, that this covenant will not apply to (i)
any employment agreement, stock option agreement, restricted stock agreement,
consulting agreement or similar agreement entered into in the ordinary course
of business, (ii) transactions permitted by the provisions of the Indenture
described under the covenant "Restricted Payments," (iii) any agreement in
effect on the Issue Date or any amendment thereto (so long as such amendment
is no less favorable to the holders of the Notes than the original agreement
as in effect on the Issue Date) and any transactions contemplated thereby,
(iv) any transaction described in "Certain Relationships and Related
Transactions" and (v) the payment of reasonable fees to, and indemnities
provided on behalf of, officers, directors, employees or consultants of the
Company, the Manager or any Restricted Subsidiary in the ordinary course of
business.
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Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or consensual restriction on the ability of any
Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any
other distributions on or in respect of its Capital Stock, (b) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make
loans or advances to, or any investment in, the Company or any other
Restricted Subsidiary, or (d) transfer any of its properties or assets to the
Company or any other Restricted Subsidiary (collectively, "Payment
Restrictions"), except for such encumbrances or restrictions existing under or
by reason of (i) applicable law, rules or regulations, or any order or ruling
by any governmental authority; (ii) any agreement in effect at or entered into
on the Issue Date (including, without limitation, the Credit Agreement) or any
agreement relating to any Permitted Indebtedness; provided, however, that the
encumbrances and restrictions contained in the agreements governing such
Permitted Indebtedness are no more restrictive with respect to such Payment
Restrictions than those set forth in the Credit Agreement as in effect on the
Issue Date; (iii) customary non-assignment provisions of any contract, license
or any lease governing a leasehold interest of the Company or any Restricted
Subsidiary; (iv) customary restrictions on cash or other deposits imposed by
customers under contracts entered into in the ordinary course of business; (v)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (d) above
on the property so acquired; (vi) contracts for the sale of assets, including,
without limitation, customary restrictions with respect to a Restricted
Subsidiary pursuant to an agreement that has been entered into for the sale of
all or substantially all of the Capital Stock or assets of such Restricted
Subsidiary; (vii) any agreement or other instrument governing Indebtedness of
a Person acquired by the Company or any Restricted Subsidiary (or of a
Restricted Subsidiary of such Person) in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the properties, assets or Subsidiaries
of the Person, so acquired; (viii) provisions contained in agreements or
instruments relating to Indebtedness which prohibit the transfer of all or
substantially all of the assets of the obligor thereunder unless the
transferee shall assume the obligations of the obligor under such agreement or
instrument; or (ix) Permitted Refinancing Indebtedness, provided that the
encumbrances or restrictions of the type referred to in clause (a), (b), (c)
or (d) above, contained in agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreement
governing the Indebtedness being refinanced.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries
to, enter into any Sale and Leaseback Transaction with respect to any property
of the Company or any of its Restricted Subsidiaries. Notwithstanding the
foregoing, the Company and its Restricted Subsidiaries may enter into Sale and
Leaseback Transactions with respect to property acquired or constructed after
the Issue Date; provided that (a) the Company or such Restricted Subsidiary
would be permitted under the Indenture to incur Indebtedness secured by a Lien
on such property in an amount equal to the Attributable Debt with respect to
such Sale and Leaseback Transaction, or (b) the lease in such Sale and
Leaseback Transaction is for a term not in excess of the lesser of (i) three
years and (ii) 60% of the remaining useful life of such property.
Limitation on Finance Corp.
In addition to the restrictions set forth under "--Limitation on Additional
Indebtedness" above, Finance Corp. may not incur any Indebtedness unless (a)
the Company is a co-obligor and guarantor of such Indebtedness or (b) the net
proceeds of such Indebtedness are lent to the Company, used to acquire
outstanding debt securities issued by the Company or used directly or
indirectly to refinance or discharge Indebtedness permitted under the
limitation of this paragraph. Finance Corp. may not engage in any business not
related directly or indirectly to obtaining money or arranging financing for
the Company.
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Merger, Consolidation or Sale of Assets
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving Person), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions to,
another Person unless (a) the Company is the surviving Person, or the Person
formed by or surviving such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation, partnership or
limited liability company organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (b) the Person formed
by or surviving any such consolidation or merger (if other than the Company)
or the Person to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made assumes all the obligations of the
Company, pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee, under the Notes and the Indenture;
(c) immediately after such transaction no Default or Event of Default exists;
and (d) the Company or such other Person formed by or surviving any such
consolidation or merger, or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made (A) will have
Consolidated Net Worth (immediately after the transaction but prior to any
purchase accounting adjustments resulting from the transaction) equal to or
greater than the Consolidated Net Worth of the Company immediately preceding
the transaction and (B) will, at the time of such transaction and after giving
pro forma effect thereto as if such transaction had occurred at the beginning
of the applicable Four-Quarter Period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Consolidated Fixed Charge Coverage
Ratio test set forth in the covenant entitled "Incurrence of Additional
Indebtedness." Notwithstanding the foregoing clause (d), any Restricted
Subsidiary may consolidate or merge with or into, or dispose of all or any
part of its properties and assets to, the Company.
The Indenture will also provide that Finance Corp. may not consolidate or
merge with or into (whether or not Finance Corp. is the surviving Person), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions to, another Person unless (a) Finance Corp. is the surviving
Person, or the Person formed by or surviving such consolidation or merger (if
other than Finance Corp.) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state thereof
or the District of Columbia and a Wholly-Owned Restricted Subsidiary of the
Company; (b) the Person formed by or surviving any such consolidation or
merger (if other than Finance Corp.) or the Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of Finance Corp., pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee, under the Notes
and the Indenture; and (c) immediately after such transaction no Default or
Event of Default exists.
Line of Business
The Company and its Restricted Subsidiaries will not engage to any material
extent in any business other than the Business.
Limitation on Non-Guarantor Restricted Subsidiaries
The Indenture will provide that the Company will not permit any Restricted
Subsidiary that is not a Subsidiary Guarantor to guarantee the payment of any
Indebtedness of the Company unless: (a) (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Subsidiary Guarantee of the Notes by such Restricted
Subsidiary and (ii), with respect to any guarantee of Subordinated
Indebtedness by a Subsidiary, any such guarantee shall be subordinated to such
Restricted Subsidiary's Subsidiary Guarantee at least to the same extent as
such Subordinated Indebtedness is subordinated to the Notes; and (b) such
Subsidiary waives, and agrees not to exercise any right or claim or take the
benefit or advantage of, any rights of reimbursement, indemnity or subrogation
or any other rights against the Company or any other Subsidiary as a result of
any payment by such Subsidiary under its Subsidiary Guarantee until such time
as the obligations guaranteed thereby are paid in full; provided that this
covenant shall not be applicable to any guarantee of any Subsidiary that (A)
existed at the time such Person became a Subsidiary of the Company
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and (B) was not incurred in connection with, or in contemplation of, such
Person becoming a Subsidiary of the Company. Further, a pledge of assets to
secure any Indebtedness for which the pledgor is not otherwise liable shall
not be considered a guarantee.
Notwithstanding the foregoing and the other provisions of the Indenture, any
Subsidiary Guarantee shall provide by its terms that it shall be automatically
and unconditionally released upon the occurrence of the events described in
the final paragraph of the section captioned "Subsidiary Guarantees of Notes."
Reports
Whether or not required by the rules and regulations of the Securities and
Exchange Commission (the "Commission"), so long as any Notes are outstanding,
the Issuers will furnish to the holders of Notes (a) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Issuers were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Issuers' certified independent
accountants and (b) all reports that would be required to be filed with the
Commission on Form 8-K if the Issuers were required to file such reports. In
addition, whether or not required by the rules and regulations of the
Commission, the Issuers will file a copy of all such information with the
Commission for public availability (unless the Commission will not accept such
a filing) and make such information available to investors who request it in
writing.
EVENTS OF DEFAULT AND REMEDIES
The following will be "Events of Default" under the Indenture:
(a) default by the Issuers or any Subsidiary Guarantor in the payment of
the principal of or premium, if any, on any Note when the same becomes due
and payable (upon Stated Maturity, acceleration, optional redemption,
required purchase or otherwise); or
(b) default by the Issuers or any Subsidiary Guarantor in the payment of
an installment of interest on any of the Notes, when the same becomes due
and payable, which default continues for a period of 30 days; or
(c) failure to perform or observe any other term, covenant or agreement
contained in the Notes, any Subsidiary Guarantee or the Indenture (other
than a default specified in clause (a) or (b) above) and such default
continues for a period of 60 days after written notice of such default
requiring the Issuers to remedy the same shall have been given (i) to the
Issuers or such Subsidiary Guarantor by the Trustee or (ii) to the Issuers
and the Trustee by holders of 25% in aggregate principal amount of the
Notes then outstanding; or
(d) default or defaults under one or more agreements, instruments,
mortgages, bonds, debentures or other evidences of Indebtedness under which
the Company or any Restricted Subsidiary of the Company then has
outstanding Indebtedness, which default (i) is caused by a failure to pay
at its Stated Maturity or within the applicable grace period, if any,
provided with respect to such Indebtedness, principal, premium or interest
with respect to Indebtedness of the Company or a Restricted Subsidiary
(collectively, a "Payment Default") or (ii) results in the acceleration of
such Indebtedness prior to its Stated Maturity and, in each case, the
principal amount of any such Indebtedness, together with the principal
amount of any other such
Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $10 million or more; or
(e) a final judgment or judgments (which is or are non-appealable or
which has or have not been stayed pending appeal) shall be rendered against
the Master Partnership, the Company, any Restricted Subsidiary or the
Manager for the payment of money in excess of $10 million in the aggregate
(other than that portion of a final judgment as to which a reputable
insurance company has accepted liability) and such judgments shall not be
discharged or execution thereon stayed pending appeal or review within 60
days after entry of
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such judgment, or, in the event of such a stay, such judgment shall not be
discharged within 30 days after such stay expires; or
(f) any Subsidiary Guarantee shall for any reason cease to be, or be
asserted by the Company or any Subsidiary Guarantor, as applicable, not to
be, in full force and effect (except pursuant to the release of any such
Subsidiary Guarantee in accordance with the Indenture); or
(g) certain events of bankruptcy, insolvency or reorganization with
respect to the Issuers or any of their respective Significant Subsidiaries
that are Restricted Subsidiaries shall have occurred.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to any Issuer, any Significant
Subsidiary that is a Restricted Subsidiary or any group of Subsidiaries that
are Restricted Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
immediately without further action or notice. Holders of the Notes may not
enforce the Indenture or the Notes except as provided in the Indenture.
Subject to certain limitations, holders of a majority in principal amount of
the then outstanding Notes may direct the Trustee in its exercise of any trust
or power. The Trustee may withhold from holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines in good
faith that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of principal of, premium, if any, or interest on the Notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuers are required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF MEMBERS, DIRECTORS, OFFICERS, EMPLOYEES, PARTNERS AND
STOCKHOLDERS
No member of the Company or director, officer, employee, partner,
incorporator or stockholder of the Master Partnership, the Manager or Finance
Corp., as such, shall have any liability for any obligations of the Issuers
under the Notes or the Indenture or for any claim based on, in respect of, or
by reason of, such obligations or their creation. Each holder of Notes by
accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws
and it is the view of the Commission that such a waiver is against public
policy.
NON-RECOURSE
Except as provided for in any Subsidiary Guarantee, the obligations of the
Issuers under the Indenture and the Notes will be non-recourse to the Manager
and the Master Partnership (and their respective Affiliates (other than the
Issuers)), and payable only out of the cash flow and assets of the Issuers.
The Trustee has, and each holder of a Note, by accepting a Note, will be
deemed to have, agreed in the Indenture that neither the Manager nor its
assets nor the Master Partnership nor its assets (nor any of their respective
Affiliates (other than the Issuers) nor their respective assets) shall be
liable for any of the obligations of the Issuers under the Indenture or the
Notes (except as provided for by any Subsidiary Guarantee).
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuers may, at their option and at any time, elect to have all of their
obligations and the obligations of any Subsidiary Guarantors discharged with
respect to the outstanding Notes and any Subsidiary Guarantees ("Legal
Defeasance") except for (a) the rights of holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due, (b) the Issuers' obligations with
respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(c) the rights, powers, trusts, duties and immunities of the Trustee, and the
Issuers' obligations in connection therewith and (d) the Legal Defeasance
provisions of the Indenture. In addition, the Issuers may, at their option and
at any time, elect to have the obligations of the Issuers and all Subsidiary
Guarantors released with respect to certain covenants that are described in
the Indenture ("Covenant Defeasance") and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the Notes. In the event Covenant Defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (a) the
Issuers or any Subsidiary Guarantor must irrevocably deposit with the Trustee,
in trust, for the benefit of the holders of the Notes, cash in U.S. dollars,
non-callable Government Securities (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of
a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding Notes on the
stated maturity or on the applicable redemption date, as the case may be, of
such principal or installment of principal of, premium, if any, or interest on
the outstanding Notes; (b) in the case of Legal Defeasance, the Issuers shall
have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (i) the Issuers shall
have received from, or there shall have been published by, the Internal
Revenue Service a ruling or (ii) since the date of the Indenture, there shall
have been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the holders of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will
be subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Legal Defeasance had not
occurred; (c) in the case of Covenant Defeasance, the Issuers shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred; (d) no Event of
Default shall have occurred and be continuing on the date of such deposit or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (e) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Issuers or any of their
Restricted Subsidiaries or Subsidiary Guarantors is a party or by which the
Issuers or any of their Restricted Subsidiaries or Subsidiary Guarantors is
bound; (f) the Issuers shall have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (g) the Issuers shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Issuers or the
Subsidiary Guarantor with the intent of preferring the holders of Notes over
the other creditors of the Issuers or the Subsidiary Guarantor with the intent
of defeating, hindering, delaying or defrauding creditors of the Issuers or
the Subsidiary Guarantor or others; and (h) the Issuers shall have delivered
to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
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AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraphs, the Indenture or the
Notes may be amended or supplemented with the consent of the holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder): (a) reduce the
principal amount of Notes whose holders must consent to an amendment,
supplement or waiver, (b) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the
Notes (other than provisions relating to the covenants described above under
the caption "Repurchase at the Option of Holders"), (c) reduce the rate of or
change the time for payment of interest on any Note, (d) waive a Default or
Event of Default in the payment of principal of or premium, if any, or
interest on the Notes (except a rescission of acceleration of the Notes by the
holders of at least a majority in aggregate principal amount of the Notes and
a waiver of the payment default that resulted from such acceleration), (e)
make any Note payable in money other than that stated in the Notes, (f) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of holders of Notes to receive payments of principal
of, premium, if any, or interest on the Notes, (g) waive a redemption payment
with respect to any Note (other than provisions relating to the covenants
described above under the caption "Repurchase at the Option of Holders"), (h)
release any Subsidiary Guarantee other than in accordance with the Indenture
or (i) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Issuers, the Subsidiary Guarantors and the Trustee may amend or supplement
the Indenture, any Subsidiary Guarantee or the Notes to cure any ambiguity,
defect or inconsistency, to provide for uncertificated Notes in addition to or
in place of certificated Notes, to provide for the assumption of the Issuers'
and the Subsidiary Guarantors' obligations to holders of the Notes in the case
of a merger or consolidation, to make any change that could provide any
additional rights or benefits to the holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such holder, to
add or release any Subsidiary Guarantor pursuant to the terms of the Indenture
(provided that such addition or release will not adversely affect the
interests of the holders in any material respect), or to comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Issuers, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full definition of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
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"Acquired Indebtedness" means, with respect to any specified Person, (a)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person
and (b) Indebtedness encumbering any asset acquired by such specified Person.
"Acquisition Facility" means the loan facility of the Company provided for
in the Credit Agreement for the purpose of financing acquisitions.
"Acquisition Principal Amount" means $75.0 million.
"Adjusted Asset Sales Amount" means $50.0 million as increased by 10% of the
purchase price of Asset Acquisitions (other than like-kind exchanges)
subsequent to the Issue Date.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the
amount by which the fair value of the properties and assets of such Subsidiary
Guarantor exceeds the total amount of liabilities, including, without
limitation, contingent liabilities (after giving effect to all other fixed and
contingent liabilities incurred or assumed on such date), but excluding
liabilities under its Subsidiary Guarantee, of such Subsidiary Guarantor at
such date.
"Affiliate" means, with respect to any specified Person, (a) any other
Person directly or indirectly controlling or controlled by, or under direct or
indirect common control with, such specified Person or (b) any other Person
who is a director or executive officer of (i) such specified Person or (ii)
any other Person described in the preceding clause (a). For purposes of this
definition, control shall mean the power to direct the management and
policies, whether through the ownership of voting securities, by contract or
otherwise; provided, that beneficial ownership of 10% or more of any class, or
any series of any class, of Capital Stock of a Person, whether or not Voting
Stock, shall be deemed to be control.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company, or shall be merged with
or into the Company or any Restricted Subsidiary of the Company, (b) the
acquisition by the Company or any Restricted Subsidiary of the Company of the
assets of any Person (other than a Restricted Subsidiary of the Company) which
constitute all or substantially all of the assets of such Person, (c) the
acquisition by the Company or any Restricted Subsidiary of the Company of
merchantable Timber or Timberlands outside the ordinary course of business, or
(d) the acquisition by the Company or any Restricted Subsidiary of the Company
of any division or line of business of any Person (other than a Restricted
Subsidiary of the Company).
"Attributable Debt" means, with respect to any Sale and Leaseback
Transaction not involving a Capital Lease, as of any date of determination,
the total obligation (discounted to present value at the rate of interest
implicit in the lease included in such transaction) of the lessee for rental
payments (other than amounts required
to be paid on account of property taxes, maintenance, repairs, insurance,
assessments, utilities, operating and labor costs and other items which do not
constitute payments for property rights) during the remaining portion of the
term (including extensions which are at the sole option of the lessor) of the
lease included in such transaction (in the case of any lease which is
terminable by the lessee upon the payment of a penalty, such rental obligation
shall also include the amount of such penalty, but no rent shall be considered
as required to be paid under such lease subsequent to the first date upon
which it may be so terminated).
"Available Cash," as to any quarter means: (a) the sum of (i) all cash and
cash equivalents of the Company and any Subsidiary of the Company, treated as
a single consolidated entity (together the "Partnership Group"), on hand at
the end of such quarter, and (ii) all additional cash and cash equivalents of
the Partnership Group on hand on the date of determination of Available Cash
with respect to such quarter resulting from borrowings for working capital
purposes subsequent to the end of such quarter, less (b) the amount of any
cash reserves that is
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necessary or appropriate in the reasonable discretion of the Manager to
(i) provide for the proper conduct of the business of the Partnership Group
(including reserves for future capital expenditures and for anticipated future
credit needs of the Partnership Group) subsequent to such quarter, (ii) comply
with applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any member of the
Partnership Group is a party or by which it is bound or its assets are subject
or (iii) provide funds for distributions under Sections 6.4 or 6.5 of the MLP
Partnership Agreement in respect of any one or more of the next four quarters;
provided, however, that the Manager may not establish cash reserves pursuant
to (iii) above if the effect of such reserves would be that the Master
Partnership is unable to distribute the Minimum Quarterly Distribution (as
defined in the MLP Partnership Agreement) on all Common Units (as defined in
the MLP Partnership Agreement) with respect to such Quarter; provided,
further, that disbursements made by a member of the Partnership Group or cash
reserves established, increased or reduced after the end of such quarter but
before the date of determination of Available Cash with respect to such
quarter shall be deemed to have been made, established, increased or reduced,
for purposes of determining Available Cash, within such quarter if the Manager
so determines; provided, further, that Available Cash attributable to any
Restricted Subsidiary or the Company shall be excluded to the extent dividends
or distributions of such Available Cash by such Restricted Subsidiary are not
at the date of determination permitted by the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or other
regulation.
"Bank Credit Facility" means the Acquisition Facility and the Working
Capital Facility.
"Business" means the acquisition, ownership, management and harvesting of
Timber and activities reasonably related or incidental thereto.
"Capital Lease" means, as applied to any Person, any lease of any property
(whether real, personal or mixed) by such Person (as lessee or guarantor or
other surety) which would, in accordance with GAAP, be required to be
classified and accounted for as a capital lease on a balance sheet of such
Person.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, units representing interests, participations, rights in or other
equivalents (however designated) of such Person's capital stock, including,
with respect to partnerships, partnership interests (whether general or
limited) and any other interest or participation that confers upon a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, such partnership, and any rights (other than debt securities
convertible into capital stock), warrants or options exchangeable for or
convertible into such capital stock.
"Consolidated Cash Flow Available for Fixed Charges" means, with respect to
the Company and its Restricted Subsidiaries for any period, the sum of,
without duplication, the amounts for such period, taken as a single accounting
period, of (a) Consolidated Net Income, (b) Consolidated Non-cash Charges, (c)
Consolidated Interest Expense and (d) Consolidated Income Tax Expense.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to the
Company and its Restricted Subsidiaries, the ratio of the aggregate amount of
Consolidated Cash Flow Available for Fixed Charges for the four full fiscal
quarters for which financial information in respect thereof is available
immediately preceding the date of the transaction (the "Transaction Date")
giving rise to the need to calculate the Consolidated Fixed Charge Coverage
Ratio (such four full fiscal quarter period being referred to herein as the
"Four Quarter Period") to the aggregate amount of Consolidated Fixed Charges
of such Person for the Four Quarter Period. In addition to and without
limitation of the foregoing, for purposes of this definition, "Consolidated
Cash Flow Available for Fixed Charges" and "Consolidated Fixed Charges" shall
be calculated after giving effect on a pro forma basis for the period of such
calculation to, without duplication, (a) the incurrence or repayment of any
Indebtedness of the Company or any of its Restricted Subsidiaries (and, in the
case of any incurrence, the application of the net proceeds thereof) during
the period commencing on the first day of the Four Quarter Period to and
including the Transaction Date (the "Reference Period"), including, without
limitation, the incurrence of the Indebtedness giving rise to the need to make
such calculation (and the application of the net proceeds thereof), as if such
incurrence (and application) occurred on the first day of the Reference Period
(including any
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actual interest payments made with respect to Indebtedness under the Working
Capital Facility), and (b) any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company or one of its Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness) occurring during the Reference Period, as if such Asset Sale or
Asset Acquisition occurred on the first day of the Reference Period; provided,
however, that (i) Consolidated Fixed Charges shall be reduced by amounts
attributable to businesses or assets that are so disposed of or discontinued
only to the extent that the obligations giving rise to such Consolidated Fixed
Charges would no longer be obligations contributing to the Consolidated Fixed
Charges subsequent to the date of determination of the Consolidated Fixed
Charge Coverage Ratio and (ii) Consolidated Cash Flow Available for Fixed
Charges generated by an acquired business or asset shall be determined by (x)
in the case of an Asset Acquisition of Timber or Timberlands by the Company or
a Restricted Subsidiary during such period, by using the projected net cash
flow of the Timber or Timberlands so acquired, based on the harvest plan
prepared in the ordinary course of business and in good faith by the Manager,
for the first 12 full months of operations of the acquired Timber or
Timberlands following the date of the Asset Acquisition; provided that such
harvest plan shall not assume the harvesting or sale of more than 10% (or, in
the case of an acquisition under a cutting contract with a term of less than
10 years, such higher percentage as shall be equal to the quotient of 100%
divided by the term of such cutting contract (expressed in years)) of the
total merchantable Timber so acquired in the first 12 full months following
the date of the Asset Acquisition; provided further, in determining projected
cash flow from acquired Timber or Timberlands, prices shall be assumed to
equal the average prices realized by the Company for comparable Timber sold
during such period; and (y) in all the cases of all other Asset Acquisitions
the actual gross profit (revenues minus cost of goods sold) of such acquired
business or asset during the immediately preceding four full fiscal quarters
in the Reference Period minus the pro forma expenses that would have been
incurred by the Company and its Restricted Subsidiaries in the operation of
such acquired business or asset during such period computed on the basis of
personnel expenses for employees retained or to be retained by the Company and
its Restricted Subsidiaries in the operation of the acquired business or asset
and non-personnel costs and expenses incurred by the Company and its
Restricted Subsidiaries in the operation of the Company's business at
similarly situated facilities. If the applicable Reference Period for any
calculation of the Consolidated Fixed Charge Coverage Ratio shall include a
portion prior to the date of the Indenture, then such Consolidated Fixed
Charge Coverage Ratio shall be calculated based upon the Consolidated Cash
Flow Available for Fixed Charges and the Consolidated Fixed Charges of the
Company on a pro forma basis for such portion of the Reference Period prior to
the Issue Date, giving effect to the transactions occurring on the Issue Date,
and the Consolidated Cash Flow Available for Fixed Charges and the
Consolidated Fixed Charges for the remaining portion of the Reference Period
on and after the Issue Date, giving pro forma effect, as described in the two
foregoing sentences, to all applicable transactions occurring on the Issue
Date or otherwise. Furthermore, in calculating "Consolidated Fixed Charges"
for purposes of determining the "Consolidated Fixed Charge Coverage Ratio,"
(i) interest on outstanding Indebtedness (other than Indebtedness referred to
in clause (ii) below) determined on a fluctuating basis as of the last day of
the Four Quarter Period and which will continue to be so determined thereafter
shall be deemed to have accrued at a fixed rate per annum equal to the rate of
interest on such Indebtedness in effect on such date; (ii) only actual
interest payments associated with Indebtedness incurred in accordance with
clause (d) of the definition of Permitted Indebtedness and all Permitted
Refinancing Indebtedness in respect thereof, during the Four Quarter Period
shall be included in such calculation; and (iii) if interest on any
Indebtedness actually incurred on such date may optionally be determined at an
interest rate based upon a factor of a prime or similar rate, a eurocurrency
interbank offered rate, or other rates, then the interest rate in effect on
the last day of the Four Quarter Period will be deemed to have been in effect
during such period.
"Consolidated Fixed Charges" means, with respect to the Company and its
Restricted Subsidiaries for any period, the sum of, without duplication, (a)
the amounts for such period of Consolidated Interest Expense and (b) the
product of (i) the aggregate amount of dividends and other distributions paid
or accrued during such period in respect of Preferred Stock and Redeemable
Capital Stock of the Company and its Restricted Subsidiaries on a consolidated
basis and (ii) a fraction, the numerator of which is one and the denominator
of
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which is one minus the then applicable current combined federal, state and
local statutory tax rate, expressed as a percentage.
"Consolidated Income Tax Expense" means, with respect to the Company and its
Restricted Subsidiaries for any period, the provision for federal, state,
local and foreign income taxes of the Company and its Restricted Subsidiaries
for such period as determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the Company and its
Restricted Subsidiaries for any period, without duplication, the sum of (a)
the interest expense of the Company and its Restricted Subsidiaries for such
period as determined on a consolidated basis in accordance with GAAP,
including, without limitation, (i) any amortization of debt discount, (ii) the
net cost under Interest Rate Agreements, (iii) the interest portion of any
deferred payment obligation, (iv) all commissions, discounts and other fees
and charges owed with respect to letters of credit and bankers' acceptance
financing and (v) all accrued interest and (b) the interest component of
Capital Leases paid, accrued or scheduled to be paid or accrued by the Company
and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means the net income of the Company and its
Restricted Subsidiaries, as determined on a consolidated basis in accordance
with GAAP and as adjusted to exclude (a) net after-tax extraordinary gains or
losses, (b) net after-tax gains or losses attributable to Asset Sales to the
extent the Net Proceeds therefrom result in the aggregate Net Proceeds
received by the Company or any Restricted Subsidiary from all Asset Sales
since the Issue Date exceeding the Adjusted Asset Sales Amount, (c) the net
income or loss of any Person which is not a Restricted Subsidiary and which is
accounted for by the equity method of accounting, provided that Consolidated
Net Income shall include the amount of dividends or distributions actually
paid to the Company or any Restricted Subsidiary, (d) the net income or loss
prior to the date of acquisition of any Person combined with the Company or
any Restricted Subsidiary in a pooling of interest, (e) the net income of any
Restricted Subsidiary to the extent that dividends or distributions of such
net income are not at the date of determination permitted by the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule
or other regulation and (f) the cumulative effect of any changes in accounting
principles.
"Consolidated Net Worth" means, with respect to the Company and its
Restricted Subsidiaries at any date, the consolidated stockholders' equity,
partners' capital or members' capital of the Company and its Restricted
Subsidiaries less the amount of such stockholders' equity, partners' capital
or members' capital attributable to Redeemable Capital Stock as determined in
accordance with GAAP.
"Consolidated Non-cash Charges" means, with respect to the Company and its
Restricted Subsidiaries for any period, the aggregate depreciation, depletion,
amortization and any other non-cash charges, in each case reducing
Consolidated Net Income of the Company and its Restricted Subsidiaries for
such period, determined on a consolidated basis in accordance with GAAP.
"Contribution Agreement" means the Contribution, Conveyance and Assumption
Agreement, dated as of the Issue Date, among the Company, the Master
Partnership, the Manager and certain other parties together with the
additional conveyance documents and instruments contemplated or referenced
thereunder.
"Credit Agreement" means the Credit Agreement, dated as of November 19,
1997, among the Company, Bank of America National Trust and Savings
Association, as agent and as letter of credit issuing bank, and the several
financial institutions which are or become parties from time to time thereto,
evidencing the Bank Credit Facility, and as it may be amended, supplemented or
otherwise modified from time to time, including all exhibits and schedules
thereto, and any successor or replacement facility entered into in compliance
with the Indenture.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designation Amount" means, with respect to the designation of a Restricted
Subsidiary or a newly acquired or formed Subsidiary as an Unrestricted
Subsidiary, an amount equal to (a) the net book value of all assets of such
Subsidiary at the time of such designation in the case of a Restricted
Subsidiary or (b) the cost of acquisition or formation in the case of a newly
acquired or formed Subsidiary.
"Disinterested Director" means, with respect to any transaction or series of
transactions with Affiliates, a member of the Board of Directors of the
Manager who has no financial interest, and whose employer has no financial
interest, in such transaction or series of transactions.
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"ERISA" means the Employee Retirement Income Security Act of 1974, as the
same may be amended from time to time.
"Event of Default" has the meaning set forth under "Events of Default"
herein.
"Excess Harvest" means a harvest of Timber (including timber deed, bulk,
pay-as-cut and stumpage sales) in excess in the aggregate of the following
limitations: (a) 150% of the Planned Volume during any fiscal year of the
Company, (b) 140% of the Planned Volume during any period of two consecutive
fiscal years of the Company, (c) 130% of the Planned Volume during any period
of three consecutive fiscal years of the Company and (d) 120% of the Planned
Volume during any period of four consecutive fiscal years of the Company. In
the event that the Company or any of its Restricted Subsidiaries sells Timber
pursuant to a timber deed, bulk, pay-as-cut or stumpage contract, the Timber
shall be deemed harvested in equal monthly amounts over the life of the
contract, regardless of when the purchaser actually severs the Timber. The
Company's harvest plans set forth in "Business and Properties--The
Timberlands--Harvest Plans" do not take into account this formula. If the
Company's current and planned stumpage sales and timber deeds were deemed
harvested in equal annual amounts over the life of the contracts, the
Company's planned harvests would be approximately 144 MMBF in 1997, 142 MMBF
in 1998, 134 MMBF in 1999 and 124 MMBF in 2000.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States of America, which are applicable from time to
time.
"Guaranty" as applied to any Person, any direct or indirect liability,
contingent or otherwise, of such Person with respect to any Indebtedness,
lease, cash dividend or other obligation of another, including, without
limitation (a) any such obligation directly or indirectly guaranteed or
endorsed (otherwise than for collection or deposit in the ordinary course of
business) by such Person, or in respect of which such Person is otherwise
directly or indirectly liable, (b) any other obligation under any contract
which, in economic effect, is substantially equivalent to a guaranty,
including, without limitation, any such obligation of a partnership in which
such Person is a general partner or of a joint venture in which such Person is
a joint venturer, or (c) any obligation in effect guaranteed by such Person
through any agreement (contingent or otherwise) to purchase, repurchase or
otherwise acquire such obligation or any security therefor, or to provide
funds for the payment or discharge of such obligation (whether in the form of
loans, advances, stock purchases, capital contributions or otherwise), or to
maintain the solvency or any balance sheet or other financial condition of the
obligor of such obligation, or to make payment for any products, materials or
supplies or for any transportation or services regardless of the non-delivery
or nonfurnishing thereof, in any such case if the purpose or intent of such
agreement is to provide assurance that such obligation will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such obligation will be protected against loss in respect
thereof.
"Indebtedness" means as applied to any Person (without duplication):
(a) any indebtedness for borrowed money and all obligations evidenced by
any bond, note, debenture or other similar instrument or letter of credit
(or reimbursement agreements in respect thereof) which such Person has
directly or indirectly created, incurred or assumed (other than obligations
with respect to letters of credit securing obligations (other than
obligations described in paragraphs (a) through (c) of this definition)
entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon, or, if and to the extent
drawn upon, such drawing is reimbursed no later than the fifth Business Day
following receipt by such Person of a demand for reimbursement following
payment on the letter of credit);
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(b) any indebtedness for borrowed money and all obligations evidenced by
any bond, note, debenture or other similar instrument secured by any Lien
in respect of property owned by such Person, whether or not such Person has
assumed or become liable for the payment of such indebtedness, provided
that the amount of such Indebtedness, if such Person has not assumed the
same or become liable therefor, shall in no event be deemed to be greater
than the fair market value from time to time (as determined in good faith
by such Person) of the property subject to such Lien;
(c) any indebtedness, whether or not for borrowed money (excluding trade
payables and accrued expenses arising in the ordinary course of business),
with respect to which such Person has become directly or indirectly liable
and which represents the deferred purchase price (or a portion thereof) or
has been incurred to finance the purchase price (or a portion thereof) of
any property or service or business acquired by such Person, whether by
purchase, consolidation, merger or otherwise;
(d) the principal component of any obligations under Capital Leases to
the extent such obligations would, in accordance with GAAP, appear on a
balance sheet of such Person;
(e) all Attributable Debt of such Person in respect of Sale and Lease-
Back Transactions not involving a Capital Lease;
(f) any indebtedness of any other Person of the character referred to in
clause (a), (b), (c), (d) or (e) of this definition with respect to which
the Person whose Indebtedness is being determined has become liable by way
of a Guaranty;
(g) all Redeemable Capital Stock of such Person valued at the greater of
its voluntary or involuntary maximum fixed repurchase price;
(h) any Preferred Stock (other than Redeemable Capital Stock) of any
Restricted Subsidiary of such Person that is not a Subsidiary Guarantor
valued at the liquidation preference thereof or any mandatory redemption
payment obligations in respect thereof; and
(i) any amendment, supplement, modification, deferral, renewal, extension
or refunding of any liability of the types referred to in clauses (a)
through (h) above.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Capital Stock as if such
Redeemable Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such
price is based upon, or measured by, the fair market value of such Redeemable
Capital Stock, such fair market value shall be determined in good faith by the
board of directors of the issuer of such Redeemable Capital Stock.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, interest rate collar agreement or other similar agreement
or arrangement designed to protect the Company or any Restricted Subsidiary
from fluctuations in interest rates.
"Investment" means as applied to any Person, any direct or indirect purchase
or other acquisition by such Person of stock or other securities of any other
Person, or any direct or indirect loan, advance or capital
contribution by such Person to any other Person, and any other item which
would be classified as an "investment" on a balance sheet of such Person
prepared in accordance with GAAP, including, without limitation, any direct or
indirect contribution by such Person of property or assets to a joint venture,
partnership or other business entity in which such Person retains an interest
(it being understood that a direct or indirect purchase or other acquisition
by such Person of assets of any other Person (other than stock or other
securities) shall not constitute an "Investment" for purposes of the
Indenture). The amount involved in Investments made during any period shall be
the aggregate cost to the Company and its Restricted Subsidiaries of all such
Investments made during such period, determined in accordance with GAAP, but
without regard to unrealized increases or decreases in value, or write-ups,
write-downs or write-offs, of such Investments and without regard to the
existence of any undistributed earnings or accrued interest with respect
thereto accrued after the respective dates on which such Investments were
made, less any net return of capital realized during such period upon the
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sale, repayment or other liquidation of such Investments (determined in
accordance with GAAP, but without regard to any amounts received during such
period as earnings (in the form of dividends not constituting a return of
capital, interest or otherwise) on such Investments or as loans from any
Person in whom such Investments have been made).
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any
property of any kind. A Person shall be deemed to own subject to a Lien any
property which such Person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, Capital Lease or other
title retention agreement.
"Manager" means U.S. Timberlands Services Company, L.L.C., a Delaware
limited liability company (formerly known as New Services, L.L.C.), and any
successors in the capacity of managing member of the Company (including, if
applicable, more than one successor in any such capacity at the same time).
"Maturity Date" means, with respect to any Note, the date on which any
principal of such Note becomes due and payable as therein or herein provided,
whether at the Stated Maturity with respect to such principal or by
declaration of acceleration, call for redemption or purchase or otherwise.
"MLP Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership of the Master Partnership, as in effect on the Issue Date,
and as the same may from time to time be amended, supplemented or otherwise
modified in accordance with the terms thereof.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Amount of Unrestricted Investment" means, without duplication, the sum
of (a) the aggregate amount of all Investments made after the Issue Date
pursuant to subdivision (h) of the definition of Permitted Investments
(computed as provided in the last sentence of the definition of Investment)
and (b) the aggregate of all Designation Amounts in connection with the
designation of Unrestricted Subsidiaries less all Designation Amounts in
respect of Unrestricted Subsidiaries which have been designated as Restricted
Subsidiaries and otherwise reduced in a manner consistent with the provisions
of the last sentence of the definition of Investment.
"Net Proceeds" means, with respect to any Asset Sale or Excess Harvest, the
proceeds thereof in the form of cash or cash equivalents including payments in
respect of deferred payment obligations when received in the form of cash or
cash equivalents (except to the extent that such deferred payment obligations
are financed or sold with recourse to the Company or any Restricted Subsidiary
of the Company) net of (a) brokerage commissions and other fees and expenses
(including, without limitation, fees and expenses of legal counsel and
accountants and fees, expenses, discounts or commissions of underwriters,
placement agents and investment bankers) related to such Asset Sale or Excess
Harvest, (b) provisions for all taxes payable as a result of such Asset Sale
or Excess Harvest, (c) amounts required to be paid to any Person (other than
the Company or any Restricted Subsidiary of the Company) owning a beneficial
interest in the assets subject to such Asset Sale or Excess Harvest, (d)
appropriate amounts to be provided by the Company or any Restricted Subsidiary
of the Company, as the case may be, as a reserve required in accordance with
GAAP against any liabilities associated with such Asset Sale or Excess Harvest
and retained by the Company or any Restricted Subsidiary of the Company, as
the case may be, after such Asset Sale or Excess Harvest, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale or Excess Harvest and (e) amounts
required to be applied to the repayment of Indebtedness secured by a Lien on
the asset or assets sold in such Asset Sale or Excess Harvest.
"Permitted Holders" means (a) John M. Rudey, any member of Mr. Rudey's
immediate family, any of Mr. Rudey's lineal descendants and any member of such
lineal descendent's immediate family, (b) any trust (to the extent that it is
for the benefit of any of the foregoing), (c) any of Rudey Timber Company,
L.L.C., U.S.
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Timberlands Management Company, L.L.C., U.S. Timberlands Holdings, L.L.C. and
the Master Partnership, and (d) in the event of the incompetence or death of
any of the individuals described in clause (a) above, such individual's
estate, executor, administrator, committee or other personal representatives,
or beneficiaries.
"Permitted Indebtedness" means any of the following:
(a) Indebtedness of the Company evidenced by the Notes;
(b) Indebtedness outstanding on the Issue Date;
(c) Indebtedness of the Company or a Restricted Subsidiary incurred for
any purpose permitted under the Acquisition Facility, provided that the
aggregate principal amount of such Indebtedness outstanding at any time may
not exceed the Acquisition Principal Amount;
(d) Indebtedness of the Company or a Restricted Subsidiary incurred for
any purpose permitted under the Working Capital Facility, provided that the
aggregate principal amount of such Indebtedness outstanding at any time may
not exceed the Working Capital Principal Amount;
(e) Indebtedness of the Company owing to the Master Partnership or the
Manager or an Affiliate of the Master Partnership or the Manager that is
unsecured and that is Subordinated Indebtedness; provided that the
aggregate principal amount of such Indebtedness outstanding at any time may
not exceed $10 million;
(f) Indebtedness owed by the Company or any Restricted Subsidiary to any
Restricted Subsidiary;
(g) Indebtedness under Interest Rate Agreements;
(h) Permitted Refinancing Indebtedness;
(i) Indebtedness of the Company and its Restricted Subsidiaries
represented by letters of credit supporting (i) obligations under workmen's
compensation laws and (ii) the repayment of Permitted Indebtedness;
(j) surety bonds and appeal bonds required in the ordinary course of
business or in connection with the enforcement of rights or claims of the
Company or any of its Subsidiaries or in connection with judgments that do
not result in a Default or Event of Default;
(k) the Subsidiary Guarantees of the Notes (and any assumption of the
obligations guaranteed thereby);
(l) the incurrence by the Company or any Restricted Subsidiary of
Indebtedness in respect of Capital Leases, mortgage financings or purchase
money obligations, in each case incurred for the purpose of financing all
or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company or such
Restricted Subsidiary, in an aggregate principal amount which, when
aggregated with the principal amount of all other Indebtedness then
outstanding and incurred pursuant to this clause (l) (together with any
Permitted Refinancing Indebtedness with respect thereto) does not exceed $5
million at any time outstanding;
(m) the incurrence by the Company or any Restricted Subsidiary of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (m), not to exceed $10
million.
For purposes of determining compliance with the covenant captioned "--
Limitation on Additional Indebtedness," in the event that an item of
Indebtedness meets the criteria of more than one of the categories of
Permitted Indebtedness described in clauses (a) through (m) above or is
entitled to be incurred pursuant to the first paragraph of such covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in
any manner that complies with this covenant and such item of Indebtedness will
be treated as having been incurred pursuant to only one of such clauses or
pursuant to the first paragraph of such covenant.
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"Permitted Investments" means any of the following:
(a) Investments made or owned by the Company or any Restricted Subsidiary
in (i) any evidence of Indebtedness with a maturity of 365 days or less
issued by or directly, fully and unconditionally guaranteed or insured by
the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) deposits, certificates of deposit or
acceptances with a maturity of 365 days or less of any institution that is
a member of the Federal Reserve System having combined capital and surplus
and undivided profits of not less than $500.0 million; (iii) commercial
paper with a maturity of 365 days or less issued by a corporation (other
than an Affiliate of the Company) incorporated or organized under the laws
of the United States or any state thereof or the District of Columbia and
rated at least "A-1" by S&P or "P-1" by Moody's; (iv) repurchase agreements
and reverse repurchase agreements relating to marketable direct obligations
issued by or directly, fully and unconditionally guaranteed or insured by
the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof), in each case maturing within 365 days from the
date of acquisition, (v) marketable direct obligations issued by any state
of the United States of America or any political subdivision of any such
state or any public instrumentality thereof maturing within one year from
the date of acquisition thereof and having as at such date the highest
rating obtainable from either S&P or Moody's, or (vi) money market mutual
or similar funds that invest in obligations referred to in clauses (i)
through (v) of this definition, in each case having assets in excess of
$100.0 million.
(b) the acquisition by the Company or any Restricted Subsidiary of
Capital Stock or other ownership interests, whether in a single transaction
or in a series of related transactions, of a Person engaged in
substantially the same business as the Company such that upon the
completion of such transaction or series of transactions, such Person
becomes a Restricted Subsidiary;
(c) subject to the provisions of subdivision (h) below, the making or
ownership by the Company or any Restricted Subsidiary of Investments (in
addition to Investments permitted by subdivisions (a), (b), (d), (e), (f)
and (g)) in any Person which is engaged in substantially the same business
as the Company, provided that the aggregate amount of all such Investments
made by the Company and its Restricted Subsidiaries following the Issue
Date and outstanding pursuant to this subdivision (c) and subdivision (h)
below shall not at any date of determination exceed 10% of Total Assets
(the "Investment Limit"), provided that, in addition to Investments that
would be permitted under the Investment Limit, during any fiscal year the
Company and its Restricted Subsidiaries may invest up to $11 million (the
"Annual Limit") pursuant to the provisions of this subdivision (c), but the
unused amount of the Annual Limit shall not be carried over to any future
years;
(d) the making or ownership by the Company or any Restricted Subsidiary
of Investments (i) arising out of loans and advances to employees incurred
in the ordinary course of business, (ii) arising out of extensions of trade
credit or advances to third parties in the ordinary course of business and
(iii) acquired by reason of the exercise of customary creditors' rights
upon default or pursuant to the bankruptcy, insolvency or reorganization of
a debtor;
(e) the creation or incurrence of liability by the Company or any
Restricted Subsidiary with respect to any Guaranty constituting an
obligation, warranty or indemnity, not guaranteeing Indebtedness of any
Person, which is undertaken or made in the ordinary course of business;
(f) the creation or incurrence of liability by the Company or any
Restricted Subsidiary with respect to any Interest Rate Agreements;
(g) the making by the Company or any Restricted Subsidiary of Investments
in the Company or another Restricted Subsidiary;
(h) the making or ownership by the Company or any Restricted Subsidiary
of Investments in Unrestricted Subsidiaries; provided that the Net Amount
of Unrestricted Investment shall not at any time exceed $5 million (and
subject to the limitations specified in subdivision (c) above); and
(i) the making or ownership by the Company or any Restricted Subsidiary
of Investments in Finance Corp.
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"Permitted Liens" means any of the following:
(a) Liens for taxes, assessments or other governmental charges the
payment of which is not yet due and is being contested in good faith by
appropriate proceedings promptly initiated and diligently conducted and as
to which reserves or other appropriate provision, if any, as shall be
required by GAAP shall have been made therefor and be adequate in the good
faith judgment of the obligor;
(b) Liens of lessors, landlords and carriers, vendors, loggers,
warehousemen, mechanics, materialmen, repairmen and other like Liens
incurred in the ordinary course of business for sums not yet due or the
payment of which is being contested in good faith by appropriate
proceedings promptly initiated and diligently conducted and as to which
reserves or other appropriate provision, if any, as shall be required by
GAAP shall have been made therefor and be adequate in the good faith
judgment of the obligor, in each case (i) not incurred or made in
connection with the borrowing of money, the obtaining of advances or credit
or the payment of the deferred purchase price of property or (ii) incurred
in the ordinary course of business securing the unpaid purchase price of
property or services constituting current accounts payable, and banker's
Liens in the nature of rights of setoff arising in the ordinary course of
business of the Company and its Subsidiaries in connection with
Indebtedness permitted by the Indenture;
(c) Liens (other than any Lien imposed by ERISA) incurred or deposits
made in the ordinary course of business (i) in connection with workers'
compensation, unemployment insurance and other types of social security, or
(ii) to secure (or to obtain letters of credit that secure) the performance
of tenders, statutory obligations, surety and appeal bonds, bids, leases,
performance bonds, purchase, construction or sales contracts and other
similar obligations, in each case not incurred or made in connection with
the borrowing of money;
(d) other deposits made to secure liability to insurance carriers under
insurance or self insurance arrangements;
(e) Liens securing reimbursement obligations under letters of credit,
provided in each case that such Liens cover only the title documents and
related goods (and any proceeds thereof) covered by the related letter of
credit;
(f) any attachment or judgment Lien relating to a judgment that does not
constitute an Event of Default;
(g) leases or subleases granted to others, easements, rights-of-way,
restrictions and other similar charges or encumbrances, which, in each case
either (i) are granted, entered into or created in the ordinary course of
the business of the Company or any Restricted Subsidiary or (ii) do not
materially impair the value or intended use of the property covered
thereby;
(h) Liens on property or assets of any Restricted Subsidiary securing
Indebtedness of such Restricted Subsidiary owing to the Company or a
Restricted Subsidiary;
(i) Liens on assets of the Company or any Restricted Subsidiary existing
on the Issue Date;
(j) Liens existing on any property of any Person at the time it becomes a
Subsidiary of the Company, or existing at the time of acquisition upon any
property acquired by the Company or any such Subsidiary through purchase,
merger or consolidation or otherwise, whether or not assumed by the Company
or such Subsidiary, or created to secure Indebtedness incurred to pay all
or any part of the purchase price or cost of construction or improvement (a
"Purchase Money Lien") of property (including, without limitation, Capital
Stock and other securities) acquired by the Company or a Restricted
Subsidiary; provided that (i) any such Lien shall be confined solely to
such item or items of property and other property which is an improvement
to or is acquired for use specifically in connection with such acquired
property, or, in the case of construction, related unimproved land, (ii) in
the case of a Purchase Money Lien, the principal amount of the Indebtedness
secured by such Purchase Money Lien shall at no time exceed an amount equal
to 100% of the purchase price or cost of construction or improvement to the
Company and the Restricted Subsidiaries of such property, (iii) any such
Purchase Money Lien shall be created not later than 180 days after the
acquisition of such property and (iv) any such Lien (other than a Purchase
Money Lien) shall not have been created or assumed in contemplation of such
Person's becoming a Subsidiary of the Company or such acquisition of
property by the Company or any Subsidiary;
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(k) easements, exceptions or reservations in any property of the Company
or any Restricted Subsidiary granted or reserved for the purpose of
pipelines, roads, the removal of oil, gas, coal or other minerals, and
other like purposes, or for the joint or common use of real property,
facilities and equipment, which are incidental to, and do not materially
interfere with, the ordinary conduct of the business of the Company or any
Restricted Subsidiary; or
(l) any Lien renewing or extending any Lien permitted by subdivision (i)
or (j), provided that (i) the principal amount of the Indebtedness secured
by any such Lien shall not exceed the principal amount of such Indebtedness
outstanding immediately prior to the renewal or extension of such Lien, and
(ii) no assets encumbered by any such Lien other than the assets encumbered
immediately prior to such renewal or extension shall be encumbered thereby.
"Permitted Refinancing Indebtedness" means Indebtedness incurred by the
Company or any Restricted Subsidiary to substantially concurrently (excluding
any notice period on redemptions) repay, refund, renew, replace, extend or
refinance, in whole or in part, any Permitted Indebtedness of the Company or
any Restricted Subsidiary or any other Indebtedness incurred by the Company or
any Restricted Subsidiary pursuant to the "Limitation on Additional
Indebtedness" covenant, to the extent (a) the principal amount of such
Permitted Refinancing Indebtedness does not exceed the principal or accreted
amount plus the amount of accrued and unpaid interest of the Indebtedness so
repaid, refunded or refinanced (except that, in the case of the Notes, such
Permitted Refinancing Indebtedness may include the redemption premiums set
forth above under "Optional Redemption"), (b) the Permitted Refinancing
Indebtedness ranks no more favorably in right of payment with respect to the
Notes than the Indebtedness so repaid, refunded, renewed, replaced, extended
or refinanced, and (c) the Permitted Refinancing Indebtedness has a Weighted
Average Life to Stated Maturity and Stated Maturity equal to, or greater than,
the Indebtedness so repaid, refunded, renewed, replaced, extended or
refinanced; provided, however, that Permitted Refinancing Indebtedness shall
not include Indebtedness incurred by a Restricted Subsidiary to repay, refund,
renew, replace, extend or refinance Indebtedness of the Company.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
charitable foundation, unincorporated organization, government or any agency
or political subdivision thereof or any other entity.
"Planned Volume" means, as of the Closing Date, 125 million board feet per
calendar year of Timber. In the event of the acquisition of merchantable
Timber or Timberlands (other than in a like-kind exchange of Timber or
Timberlands for other Timber or Timberlands and other than Timber or
Timberlands acquired with the Net Proceeds of an Excess Harvest) constituting
an Asset Acquisition, Planned Volume will be increased for 10 years by 10% of
the volume of merchantable Timber so acquired; provided that if such Asset
Acquisition is made under a cutting contract with a term of less than 10
years, Planned Volume will be increased for each year during the term of the
cutting contract by a number of board feet equal to the number of board feet
so acquired multiplied by the quotient of 100% divided by the number of years
in the cutting contract. In the event of a disposition of merchantable Timber
or Timberlands constituting an Asset Sale, Planned Volume will be reduced by
10% of the volume of merchantable Timber sold in such Asset Sale. In the event
of an Excess Harvest, Planned Volume will be reduced by 10% of the amount of
the Excess Harvest.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock (other than the Common Units) of any class or classes (however
designated), which is preferred as to the payment of distributions, dividends,
or upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares or units of Capital Stock of any other class of such
Person.
"Public Equity Offering" means a public offering by the Master Partnership
or the Company of its Capital Stock (other than Redeemable Capital Stock)
pursuant to a registration statement declared effective under the Securities
Act; provided that the MLP Offering (including any over-allotment option in
respect thereof) shall be excluded from the definition of Public Equity
Offering.
"Redeemable Capital Stock" means any shares of any class or series of
Capital Stock, that, either by the terms thereof, by the terms of any security
into which it is convertible or exchangeable or by contract or otherwise, is
or upon the happening of an event or passage of time would be, required to be
redeemed prior to
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the Stated Maturity with respect to the principal of any Note or is redeemable
at the option of the holder thereof at any time prior to the Stated Maturity
of the Notes, or is convertible into or exchangeable for debt securities at
any time prior to the Stated Maturity of the Notes.
"Restricted Subsidiary" means a Subsidiary of the Company, which, as of the
date of determination, is not an Unrestricted Subsidiary of the Company.
"Sale and Leaseback Transaction" of any Person (a "Transferor") means any
arrangement (other than between the Company and a Restricted Subsidiary or
between Restricted Subsidiaries) whereby (a) property (the "Subject Property")
has been or is to be disposed of by such Transferor to any other Person with
the intention on the part of such Transferor of taking back a lease of such
Subject Property pursuant to which the rental payments are calculated to
amortize the purchase price of such Subject Property substantially over the
useful life of such Subject Property, and (b) such Subject Property is in fact
so leased by such Transferor or an Affiliate of such Transferor.
"Significant Subsidiary" shall have the same meaning as in Rule 1.02(w) of
Regulation S-X under the Securities Act.
"S&P" means Standard & Poor's Ratings Group, and its successors.
"Stated Maturity" means, (a) when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable, and (b) when used with respect to any other Indebtedness,
means the date or dates specified in the instrument governing such
Indebtedness as the fixed date or dates on which each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect of such
Indebtedness, or any installment of interest thereon, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or any
Subsidiary Guarantor which is expressly subordinated in right of payment to
the Notes or the Subsidiary Guarantee, respectively.
"Subsidiary" means, with respect to any Person, (a) a corporation a majority
of whose Voting Stock (or, in the case of a partnership, a majority of the
partners' Capital Stock, considering all partners' Capital Stock as a single
class) is at the time, directly or indirectly, owned by such Person, by one or
more Subsidiaries of such Person or by such Person and one or more
Subsidiaries thereof and (b) any other Person, including, without limitation,
a joint venture, in which such Person, one or more Subsidiaries thereof or
such Person and one or more Subsidiaries thereof, directly or indirectly, at
the date of determination thereof, has at least majority ownership interest
entitled to vote in the election of directors, managers, general partners or
trustees thereof (or other Person performing similar functions) or, if such
Persons are not elected, to vote on any matter that is submitted to the vote
of all Persons holding ownership interests in such entity. For purposes of
this definition, any directors' qualifying shares or investments by foreign
nationals mandated by applicable law shall be disregarded in determining the
ownership of a Subsidiary.
"Subsidiary Guarantee" means any guarantee of the Notes by any Subsidiary
Guarantor in accordance with the provisions described under "--Subsidiary
Guarantees of Notes."
"Subsidiary Guarantor" means (i) each of the Company's Subsidiaries, if any,
executing a supplemental indenture in which such Subsidiary agrees to be bound
by the terms of the Indenture and (ii) any Person that becomes a successor
guarantor of the Notes in compliance with the provisions described under "--
Subsidiary Guarantees of Notes."
"Timber" means all crops and all trees, timber, whether severed or unsevered
and including standing and down timber, stumps and cut timber, and logs, wood
chips and other forest products, whether now located on or hereafter planted
or growing in or on the Timberlands or otherwise or now or hereafter removed
from the Timberlands or otherwise for sale or other disposition.
"Timberlands" means, at any date of determination, all real property owned
by or leased to the Company that is suitable for Timber production.
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"Total Assets" means as of any date of determination, the consolidated total
assets of the Company and the Restricted Subsidiaries as would be shown on a
consolidated balance sheet of the Company and the Restricted Subsidiaries
prepared in accordance with GAAP as of that date.
"Unrestricted Subsidiary" means any Subsidiary of the Company or a
Restricted Subsidiary that is designated as such by the Manager, provided that
no portion of the Indebtedness or any other obligation (contingent or
otherwise) of such Subsidiary (a) is guaranteed by the Company or any
Restricted Subsidiary, (b) is recourse to or obligates the Company or any
Restricted Subsidiary in any way or (c) subjects any property or assets of the
Company or any Restricted Subsidiary, directly or indirectly, contingently or
otherwise, to the satisfaction thereof. Notwithstanding the foregoing, the
Company or a Restricted Subsidiary may Guaranty or agree to provide funds for
the payment or maintenance of, or otherwise become liable with respect to
Indebtedness of an Unrestricted Subsidiary, but only to the extent that the
Company or a Restricted Subsidiary would be permitted to (a) make an
Investment in such Unrestricted Subsidiary pursuant to subdivision (h) of the
definition of Permitted Investments and (b) incur the Indebtedness represented
by such Guaranty or agreement pursuant to the covenant captioned "Limitation
on Additional Indebtedness." The Board of Directors may designate an
Unrestricted Subsidiary to be a Restricted Subsidiary, provided that
immediately after giving effect to such designation, (a) there exists no
Default or Event of Default and (b) if such Unrestricted Subsidiary has, as of
the date of such designation, outstanding Indebtedness (other than Permitted
Indebtedness), the Company could incur at least $1.00 of Indebtedness (other
than Permitted Indebtedness). Notwithstanding the foregoing, (a) no Subsidiary
may be designated an Unrestricted Subsidiary if such Subsidiary, directly or
indirectly, holds Capital Stock of a Restricted Subsidiary and (b) Finance
Corp. may not be designated an Unrestricted Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect a least a majority of the board of directors, managers, general
partners or trustees of any Person (irrespective of whether or not, at the
time, Capital Stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency) or, with respect
to a partnership (whether general or limited), any general partner interest in
such partnership.
"Weighted Average Life to Stated Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the sum
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness; provided, however, that with respect to
any revolving Indebtedness, the foregoing calculation of Weighted Average Life
to Stated Maturity shall be determined based upon the total available
commitments and the required reductions of commitments in lieu of the
outstanding principal amount and the required payments of principal,
respectively.
"Wholly-Owned Restricted Subsidiary" means any Subsidiary of the Company of
which 98% of the outstanding Capital Stock is owned by the Company or by one
or more Wholly-Owned Restricted Subsidiaries of the Company or by the Company
and one or more Wholly-Owned Restricted Subsidiaries of the Company. For
purposes of this definition, any directors' qualifying shares or investments
by foreign nationals mandated by applicable law shall be disregarded in
determining the ownership of a Subsidiary.
"Working Capital Facility" means the working capital facility of the Company
provided for in the Credit Agreement.
"Working Capital Principal Amount" means $25.0 million.
DEPOSITARY
Upon issuance, all Notes will be represented by one or more fully registered
Global Notes. Each such Global Note will be deposited with, or on behalf of,
The Depository Trust Company, as depositary (the "Depositary"),
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and registered in the name of the Depositary or a nominee thereof. Unless and
until it is exchanged in whole or in part for Notes in definitive form, no
Global Note may be transferred except as a whole by the Depositary to a
nominee of such Depositary or by a nominee of such Depositary to such
Depositary or to another nominee of such Depositary or by such Depositary or
any such nominee to a successor of such Depositary or a nominee of such
successor.
The Depositary has advised the Company as follows: the Depositary is a
limited-purpose trust company organized under the Banking Law of the State of
New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary was created to hold securities of its participants
("Participants") and to facilitate the clearance and settlement of securities
transactions among its Participants in such securities through electronic
book-entry changes in accounts of the Participants, thereby eliminating the
need for physical movement of securities certificates. The Depositary's
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations, and certain other organizations. The Depositary is
owned by a number of Participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depositary's book-entry system is also available
to others, such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Purchases of Notes must be made by or through Participants, which will
receive a credit on the records of the Depositary. The ownership interest of
each actual purchaser of a Note (the "Beneficial Owner") is in turn to be
recorded on the Participants' or Indirect Participants' records. Beneficial
Owners will not receive written confirmation from the Depositary of their
purchase, but Beneficial Owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the Participant or Indirect Participant through which the
Beneficial Owner entered into the transaction. Ownership of beneficial
interests in Global Notes will be shown on, and the transfer of such ownership
interests will be effected only through, records maintained by the Depositary
(with respect to interests of Participants) and on the records of Participants
(with respect to interests of persons held through Participants). The laws of
some states may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to own, transfer or pledge beneficial interests in Global
Notes.
So long as the Depositary, or its nominee, is the registered owner of a
Global Note, the Depositary or its nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by such Global
Note for all purposes under the Indenture. Except as provided below,
Beneficial Owners of a Global Note will not be entitled to have the Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of the Notes in definitive form and
will not be considered the owners or holders thereof under the Indenture.
Accordingly, each person owning a beneficial interest in a Global Note must
rely on the procedures of the Depositary and, if such person is not a
Participant, on the procedures of the Participant through which such person
owns its interest, to exercise any rights of a holder under the Indenture. The
Company understands that under existing industry practices in the event that
the Company requests any action of holders of Notes or an owner of a
beneficial interest in a Global Note desires to give or take any action which
the holder of a Note is entitled to give or take under the Indenture, the
Depositary would authorize the Participants holding the relevant beneficial
interests to give or take such action, and such Participants would authorize
Beneficial Owners owning through such Participants to give or take such action
or would otherwise act upon the instructions of Beneficial Owners. Conveyance
of notices and other communications by the Depositary to Participants, by
Participants to Indirect Participants, and by Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Payment of the principal of, premium, if any, and interest on Notes
registered in the name of the Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the holder of the Global
Note or Global Notes representing such Notes. None of the Issuers, the Trustee
or any other agent of the Issuers
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or agent of the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests or for supervising or reviewing any records relating to
such beneficial ownership interests. The Company expects that the Depositary,
upon receipt of any payment of principal, premium, if any, or interest in
respect of a Global Note will credit the accounts of the Participants with
payment in amounts proportionate to their respective holdings in principal
amount of beneficial interest in such Global Note as shown on the records of
the Depositary. The Company also expects that payments by Participants to
Beneficial Owners will be governed by standing customer instructions and
customary practices, as is now the case with securities held for the accounts
of customers in bearer form or registered in "street name," and will be the
responsibility of such Participants.
If (x) the Depositary is at any time unwilling, unable or ineligible to
continue as Depositary and a successor depositary is not appointed by the
Company within 60 days after the Company is so informed in writing or becomes
aware of the same, or (y) an Event of Default has occurred and is continuing,
the Global Notes will be exchanged for Notes in definitive form of like tenor
and of an equal aggregate principal amount, in denominations of $1,000 and
integral multiples thereof. Such definitive Notes shall be registered in such
name or names as the Depositary shall instruct the Trustee. It is expected
that such instructions may be based upon directions received by the Depositary
from Participants with respect to ownership of beneficial interests in Global
Notes.
No service charge will be made for the registration of transfer or exchange
of Notes, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. Principal
of, premium, if any, and interest on definitive Notes (if issued) will be
payable and such Notes may be surrendered for registration of transfer or
exchange at the office or agency of the Company maintained for such purpose in
The City of New York, located initially at the corporate trust office of the
Trustee. At the option of the Company, payment of interest on definitive Notes
(if issued) may be made by check mailed to the addresses of the persons
entitled thereto as they appear on the securities register.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal of, premium, if any and interest on
the Notes will be made by the Company in immediately available funds, so long
as the Notes are maintained in book-entry form and the procedures of the
Depositary permit such payments to be made in immediately available funds.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code, prohibit certain transactions, including
extensions of credit, between persons who are "parties in interest" under
ERISA or "disqualified persons" under the Code and a plan subject to ERISA or
the Code (a "Plan"). Any person proposing to purchase the Notes using the
assets of a Plan should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and to whether any
exemption would be applicable and determine on its own whether all conditions
have been satisfied.
Accordingly, each purchaser of Notes from the Underwriters, by its
acceptance thereof, will be deemed to certify to the Company and the
Underwriters that (i) no part of the funds used to purchase the Notes
constitutes assets of an employee benefit plan or (ii) the acquisition and
continued holding of the Notes will be covered by a U.S. Department of Labor
class exemption (with respect to prohibited transactions set forth under
Section 406(a) of ERISA). Any transferee of the Notes shall also be deemed to
have made one of such representations.
Moreover, each person investing on behalf of a Plan should determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Notes in appropriate, taking into
account the overall investment policy of the Plan and the composition of the
Plan's portfolio.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Issuers
have agreed to sell to each of the Underwriters named below, and each of the
Underwriters has severally agreed to purchase from the Issuers, the principal
amount of Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
<S> <C>
Smith Barney Inc. ......................................... $112,500,000
BancAmerica Robertson Stephens............................. 67,500,000
Deutsche Morgan Grenfell Inc. ............................. 45,000,000
------------
Total.................................................... $225,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all Notes
offered hereby if any such Notes are taken.
Smith Barney Inc. ("Smith Barney"), BancAmerica Robertson Stephens and
Deutsche Morgan Grenfell Inc. ("DMG") (the "Underwriters") propose to offer
part of the Notes directly to the public at the offering price set forth on
the cover page of this Prospectus and part of such Notes to certain dealers at
such price less a concession not in excess of 0.250% of the principal amount.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of 0.125% of the principal amount to other Underwriters or to certain
other dealers. After the initial offering of the Notes to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters. The Underwriters have informed the Issuers that they do not
intend to confirm sales to accounts over which they exercise discretionary
authority without the prior written approval of the transaction by the
customer.
In connection with this offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Notes than the total amount shown
on the list of Underwriters that appears above) and may effect transactions
that stabilize, maintain or otherwise affect the market price of the Notes at
levels above those that might otherwise prevail in the open market. Such
transactions may include placing bids for the Notes or effecting purchases of
the Notes for the purposes of pegging, fixing or maintaining the price of the
Notes or for the purpose of reducing a syndicate short position created in
connection with this offering. In addition, the contractual arrangements among
the Underwriters include a provision whereby, if the Underwriters purchase
Notes in the open market for the account of the underwriting syndicate and the
Notes purchased can be traced to a particular Underwriter or member of the
selling group, the underwriting syndicate may impose a "penalty bid" whereby
it may require the Underwriter or selling group member in question to purchase
the Notes in question at the cost price to the syndicate or may recover from
(or decline to pay to) the Underwriter or selling group member in question the
selling concession applicable to the Notes in question. The Underwriters are
not required to engage in any of these activities and any such activities, if
commenced, may be discontinued at any time.
The Notes have been approved for listing on the NYSE, subject to official
notice of issuance, under the symbol "TIMBZ 07."
The Notes are a new issue of securities for which there currently is no
public market. Although the Notes have been approved for listing on the NYSE,
subject to official notice of issuance, no assurance can be given as the
liquidity of any market for the Notes. The Underwriters have informed the
Issuers that they currently intend to make a market in the Notes, although the
Underwriters are not obligated to do so and may discontinue such market-making
at any time. In addition, such market-making activity will be subject to
limits imposed by the Securities Act and the Exchange Act.
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Smith Barney and DMG are acting as underwriters in the MLP Offering. George
R. Hornig, who will serve as a Director of the Manager, is a Managing Director
of Deutsche Bank North America Holdings, Inc. (the North American operations
of Deutsche Bank, a German banking concern and the parent company of DMG) and
an officer of DMG. DMG has performed financial advisory services in the past
for the Company, for which it is entitled to customary compensation. Smith
Barney and the Company have entered into an engagement letter pursuant to
which Smith Barney will perform certain financial advisory services in
exchange for customary compensation. On July 14, 1997, the Company entered
into a long-term financing arrangement (the "Existing Credit Agreement") with
certain banks, including Bank of America National Trust and Savings
Association ("Bank of America"), an affiliate of BancAmerica Robertson
Stephens to finance the Ochoco Acquisition and to refinance borrowings under
the Company's revolving credit facility and term loan. Bank of America was
paid to customary compensation for its involvement in the Existing Credit
Agreement. Concurrently with the closing of this offering, the Company will
replace the Existing Credit Agreement with the Credit Agreement. Bank of
America is a lender under the Credit Agreement and was paid customary
compensation for its involvement in connection therewith.
On August 6, 1997, an affiliate of Smith Barney made a loan to John M. Rudey
and one of his affiliates. The loan bears interest at such Smith Barney
affiliate's base rate plus 0.25%. On the earlier to occur of November 30, 1997
and 30 days after the closing of the MLP Offering, a substantial portion of
the loan becomes payable. The remaining principal amount is payable on March
31, 1998. The loan is secured by Mr. Rudey's 99% interest in Rudey Timber
Company, LLC.
The Issuers and certain other parties have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under
the Securities Act.
VALIDITY OF THE NOTES
The validity of the Notes will be passed upon for the Issuers by Andrews &
Kurth L.L.P., New York, New York. Certain legal matters in connection with the
Notes offered hereby are being passed upon for the Underwriters by Baker &
Botts, L.L.P., Houston, Texas.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.
Information relating to the Company's timber inventory and acreage, and the
age, growth rate, size and species of the Company's timber included herein has
been reviewed by Mason, Bruce & Girard, Inc., an independent forest resource
consulting firm, and are included herein in reliance upon the authority of
such firm as an expert in timber inventory and appraisals.
89
<PAGE>
AVAILABLE INFORMATION
The Issuers have not previously been subject to the informational
requirements of the Exchange Act. The Issuers have filed with the Securities
and Exchange Commission (the "Commission") a Registration Statement on Form S-
1 (the "Registration Statement") under the Securities Act with respect to the
Notes offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement, certain items of which are contained in exhibits
and schedules to the Registration Statement as permitted by the rules and
regulations of the Commission. For further information with respect to the
Issuers and the Notes offered hereby, reference is made to the Registration
Statement, including the exhibits and schedules thereto. Statements made in
this Prospectus concerning the contents of any contract, agreement or other
document are not necessarily complete; with respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement is qualified in its entirety by such
reference. The Registration Statement and the exhibits and schedules thereto
filed with the Commission by the Issuers 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.
90
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
U.S. Timberlands Klamath Falls, L.L.C. Pro Forma Consolidated Financial
Statements (Unaudited):
Pro Forma Consolidated Balance Sheet--September 30, 1997................ F-2
Pro Forma Consolidated Statement of Operations--Year Ended December 31,
1996................................................................... F-4
Pro Forma Consolidated Statement of Operations--Nine Months Ended
September 30, 1997..................................................... F-5
Notes to Pro Forma Consolidated Financial Statements.................... F-6
U.S. Timberlands Combined Financial Statements:
Report of Independent Public Accountants................................ F-11
Combined Balance Sheets--December 31, 1995 and 1996 and September 30,
1997 (unaudited)....................................................... F-12
Combined Statements of Operations--Years Ended December 31, 1994 and
1995, Period from January 1, 1996 through August 29, 1996 and Period
from August 30, 1996 through December 31, 1996......................... F-13
Combined Statements of Changes in Weyerhaeuser Investment and Advances
and Members' Deficit--Years Ended December 31, 1994 and 1995, Period
from January 1, 1996 through August 29, 1996 and Period from August 30,
1996 through December 31, 1996......................................... F-14
Combined Statements of Cash Flows--Years Ended December 31, 1994 and
1995, Period from January 1, 1996 through August 29, 1996 and Period
from August 30, 1996 through December 31, 1996......................... F-15
Notes to Combined Financial Statements.................................. F-16
Combined Statements of Operations--Period from January 1, 1996 through
August 29, 1996, Period from August 30, 1996 through September 30, 1996
(unaudited), and Nine Months Ended September 30, 1997 (unaudited)...... F-24
Combined Statement of Changes in Members' Deficit--Nine Months Ended
September 30, 1997 (unaudited)......................................... F-25
Combined Statements of Cash Flows--Period from January 1, 1996 through
August 29, 1996, Period from August 30, 1996 through September 30, 1996
(unaudited), and Nine Months Ended September 30, 1997 (unaudited)...... F-26
U.S. Timberlands Finance Corp. Financial Statements:
Report of Independent Public Accountants................................ F-27
Balance Sheet--August 26, 1997.......................................... F-28
Note to Balance Sheet................................................... F-29
New Services, L.L.C. Financial Statements:
Report of Independent Public Accountants................................ F-30
Balance Sheet--July 29, 1997............................................ F-31
Note to Balance Sheet................................................... F-32
U.S. Timberlands Company, L.P. Financial Statements:
Report of Independent Public Accountants................................ F-33
Balance Sheet--July 29, 1997............................................ F-34
Note to Balance Sheet................................................... F-35
</TABLE>
F-1
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
AS OF SEPTEMBER 30, 1997
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
COMBINED CONSOLIDATED
ASSETS AS OF ASSETS AS OF
SEPTEMBER 30, 1997 ADJUSTMENTS SEPTEMBER 30, 1997
------------------ ----------- ------------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents........... $ 24,032 $ 145,158 (A) $
217,896 (B)
(416,575)(C)
(8,305)(C)
40,294 (C)
(1,000)(D) 1,500
Accounts receivable.... 4,557 -- 4,557
Other receivables...... 1,220 -- 1,220
Prepaid expenses....... 1,956 (1,394)(A)
(446)(B) 116
-------- --------- --------
Total current
assets.............. 31,765 (24,372) 7,393
TIMBER, TIMBERLANDS AND
LOGGING ROADS, net...... 373,230 -- 373,230
SEED ORCHARD AND NURSERY
STOCK................... 1,723 -- 1,723
PROPERTY, PLANT AND
EQUIPMENT, at cost:
Equipment.............. 925 -- 925
Buildings and land
improvements.......... 843 -- 843
Less- Accumulated
depreciation.......... (221) -- (221)
-------- --------- --------
Total property, plant
and equipment....... 1,547 -- 1,547
LONG-TERM RECEIVABLE..... 1,171 -- 1,171
DEFERRED FINANCING FEES.. 5,791 7,550 (B)
(5,791)(C) 7,550
-------- --------- --------
Total assets............. $415,227 $ (22,613) $392,614
======== ========= ========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
balance sheet.
F-2
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
AS OF SEPTEMBER 30, 1997
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
COMBINED CONSOLIDATED
LIABILITIES AND LIABILITIES
MEMBERS' DEFICIT AND MEMBERS'
AS OF EQUITY AS OF
SEPTEMBER 30, 1997 ADJUSTMENTS SEPTEMBER 30, 1997
------------------ ----------- ------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable....... $ 899 $ -- $ 899
Accrued liabilities.... 15,009 (3,300)(C)
(8,305)(C) 3,404
Deferred revenue....... 842 -- 842
Current portion of
long-term debt........ 15,000 (15,000)(C) --
-------- --------- --------
Total current
liabilities......... 31,750 (26,605) 5,145
ACQUISITION FACILITY..... -- 40,294 (C) 40,294
BORROWINGS UNDER
REVOLVING CREDIT
FACILITY................ 83,000 (83,000)(C) --
LONG-TERM DEBT........... 315,000 (130,000)(C)
(185,000)(C) --
NOTES.................... -- 225,000 (B) 225,000
MEMBERS' EQUITY
(DEFICIT):
Members' deficit prior
to the Transactions... (14,523) 143,764 (A)
(275)(C)
(5,791)(C)
(1,000)(D)
(122,175)(E) --
Non-Managing member's
interest.............. -- 120,953 (E) 120,953
Managing member's
interest.............. -- 1,222 (E) 1,222
-------- --------- --------
Total members' equity
(deficit)........... (14,523) 136,698 122,175
-------- --------- --------
Total liabilities and
members' equity
(deficit)........... $415,227 $ (22,613) $392,614
======== ========= ========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
balance sheet.
F-3
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PREDECESSOR U.S. TIMBERLANDS
HISTORICAL HISTORICAL COMBINED
STATEMENT OF STATEMENT OF PRO FORMA
OPERATIONS FOR OPERATIONS FOR THE CONSOLIDATED
THE PERIOD FROM PERIOD FROM STATEMENT OF
JANUARY 1, 1996 AUGUST 30, 1996 WEYERHAEUSER OPERATIONS FOR THE
THROUGH THROUGH ACQUISITION TRANSACTION YEAR ENDED
AUGUST 29, 1996 DECEMBER 31, 1996 ADJUSTMENTS ADJUSTMENTS DECEMBER 31, 1996
--------------- ------------------- ------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Logs.................. $14,077 $ 13,590 $ -- $ -- $ 27,667
By-products and
other................ 1,501 429 -- -- 1,930
------- -------- -------- ------- --------
Total revenues...... 15,578 14,019 -- -- 29,597
OPERATING COSTS:
Cost of products
sold................. 9,225 6,179 -- -- 15,404
Depreciation,
depletion and road
amortization......... 927 3,323 4,126 (i) -- 8,376
Selling, general and
administrative
expenses............. 2,730 9,284 (4,935)(ii) -- 7,079
------- -------- -------- ------- --------
Operating income
(loss)............. 2,696 (4,767) 809 -- (1,262)
INTEREST EXPENSE........ -- 7,316 13,664 (iii) 3,963 (F) 24,943
AMORTIZATION OF DEFERRED
FINANCING FEES AND DEBT
GUARANTEE FEES......... -- 1,326 2,649 (iv) (3,220)(G) 755
INTEREST INCOME......... -- (409) -- -- (409)
OTHER EXPENSE, net...... 1 36 -- -- 37
------- -------- -------- ------- --------
Net income (loss)... $ 2,695 $(13,036) $(15,504) $ (743) (26,588)
======= ======== ======== =======
MANAGING MEMBER'S
INTEREST IN NET LOSS... 266
--------
NON-MANAGING MEMBER'S
INTEREST IN NET LOSS... $(26,322)
========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
financial statement.
F-4
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS) (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL COMBINED PRO FORMA CONSOLIDATED
STATEMENT OF STATEMENT OF
OPERATIONS FOR THE OPERATIONS FOR THE
NINE MONTHS TRANSACTION NINE MONTHS
ENDED SEPTEMBER 30, 1997 ADJUSTMENTS ENDED SEPTEMBER 30, 1997
------------------------ ----------- ------------------------
<S> <C> <C> <C>
REVENUES:
Logs.................. $ 36,819 $ -- $36,819
Timber and property
sales................ 3,494 -- 3,494
By-products and
other................ 744 -- 744
-------- ------- -------
Total revenues...... 41,057 -- 41,057
OPERATING COSTS:
Cost of products
sold................. 12,101 -- 12,101
Cost of timber and
property sales....... 1,191 -- 1,191
Depreciation,
depletion and road
amortization......... 10,758 -- 10,758
Selling, general and
administrative
expenses............. 4,300 -- 4,300
-------- ------- -------
Operating income.... 12,707 -- 12,707
INTEREST EXPENSE........ 17,818 889 (F) 18,707
AMORTIZATION OF DEFERRED
FINANCING FEES AND DEBT
GUARANTEE FEES......... 2,954 (2,388)(G) 566
INTEREST INCOME......... (1,192) -- (1,192)
OTHER INCOME, net....... (48) -- (48)
-------- ------- -------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM..... (6,825) 1,499 (5,326)
EXTRAORDINARY ITEM--LOSS
ON EXTINGUISHMENT OF
DEBT................... 3,571 -- 3,571
-------- ------- -------
Net income (loss)... $(10,396) $ 1,499 $(8,897)
======== ======= =======
MANAGING MEMBER'S
INTEREST IN NET LOSS... 89
-------
NON-MANAGING MEMBER'S
INTEREST IN NET LOSS... $(8,808)
=======
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
financial statement.
F-5
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(ALL AMOUNTS IN THOUSANDS UNLESS OTHERWISE NOTED)
(UNAUDITED)
The pro forma consolidated financial statements are based upon the
historical financial position and results of operations of U.S. Timberlands
Klamath Falls, L.L.C. (the "Company"). The Company will include all of the
assets and liabilities of the entities currently included in the U.S.
Timberlands historical combined financial statements, which includes U.S.
Timberlands Services Company, L.L.C. ("Old Services"). The Company also
includes long-term debt obligations and related interest and debt guarantee
costs of U.S. Timberlands Holdings, L.L.C. ("Holdings"), the parent entity of
the Company prior to the consummation of the transactions described below,
that will be assumed by the Company concurrent with the closing of the Common
Units Offering discussed below.
The pro forma consolidated financial statements reflect the following
transactions (the "Transactions"), in addition to the Weyerhaeuser acquisition
adjustments discussed below, to occur at the closing (the "Closing") of the
public offering of Common Units by U.S. Timberlands, L.P. (the "Master
Partnership"), the parent entity of the Company: (i) the public offering by
the Master Partnership of 7,459 Common Units at an initial public offering
price of $21.00 per Common Unit resulting in aggregate gross proceeds to the
Master Partnership of $156,632 (the "Common Units Offering"), (ii) the
issuance by the Master Partnership of 4,282 Subordinated Units to New
Services, L.L.C., managing member of the Company and the general partner of
the Master Partnership (the "Manager") and its affiliates, (iii) the public
offering by the Company (the "Public Note Offering") of $225,000 of senior,
unsecured notes (the "Notes"), (iv) the entering into by the Company of a
$25,000 Working Capital Facility and a $75,000 Acquisition Facility and a
drawdown under the Acquisition Facility of $40,294, (v) the repayment of all
existing indebtedness of the Company, including indebtedness to be assumed at
the Closing, accrued interest thereon and certain loan guarantee and deferred
financing fees and (vi) the payment of underwriting discounts and commissions
and other fees and expenses associated with the Transactions. The pro forma
consolidated financial statements assume no exercise of the Underwriters'
over-allotment option.
In connection with the Common Units Offering and related formation of the
Manager, the Manager intends to issue income interests in the Manager to
certain officers and directors of the Manager at no cost. Such income
interests will participate pro rata in cash distributions from the Master
Partnership and the Company. In addition, under certain circumstances, if
these officers or directors terminate their employment, the Manager is
required to repurchase their income interests at fair market value as
determined by independent appraisal. The fair value of these income interests
will be recorded as compensation expense in the Company's post-Common Units
Offering financial statements with a corresponding increase to contributed
capital.
Upon completion of the Master Partnership's Common Units Offering, the
Company anticipates incurring incremental general and administrative costs
(e.g., costs of tax return preparation and quarterly reports to unitholders,
investor relations and registrar and transfer agent fees) at an annual rate of
approximately $1,500. The pro forma consolidated financial statements do not
reflect any adjustments for these estimated incremental costs.
Concurrent with the retirement of debt discussed in footnote (C), the
Company expects to pay estimated accrued interest of $11,965 of which $8,305
is accrued at September 30, 1997. The balance of $3,660 is the estimated
amount of additional interest expense expected to be incurred but not paid
from October 1, 1997 through the expected debt retirement date (November 19,
1997). The pro forma consolidated financial statements do not reflect any
adjustments for these additional costs to be incurred.
As discussed in Note 7 to the footnotes to the historical combined financial
statements, the Company paid an affiliate $2,800 in 1996 for management
services. The Company does not intend to provide such
F-6
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
management fees subsequent to completion of the Common Units Offering. The pro
forma consolidated financial statements do not reflect any adjustments for the
elimination of these costs.
All of the financial statements provided herein (including the financial
statements pertaining to the Predecessor) were prepared by, and are solely the
responsibility of, the Company.
WEYERHAEUSER ACQUISITION ADJUSTMENTS
In July and August 1996, respectively, the Company and Old Services were
formed and subsequently entered into an agreement with Weyerhaeuser Company on
August 30, 1996 to purchase approximately 600,000 acres of timber and
timberlands and certain other assets (the "Weyerhaeuser Acquisition"). The
following pro forma Weyerhaeuser Acquisition Adjustments were recorded to give
effect to the Weyerhaeuser Acquisition as if the acquisition occurred on
January 1, 1996. The acquisition was accounted for as a purchase.
OCHOCO ACQUISITION AND RELATED REFINANCING
The Company acquired certain timber and timberlands from Ochoco Lumber Co.
(the "Ochoco Timberlands") on July 15, 1997. In conjunction with the
acquisition, the Company refinanced certain of its existing indebtedness. As
of September 30, 1997 the effects of this acquisition are reflected in the
historical balance sheet, and historical results of operations for the nine
month period ended September 30, 1997 reflect activity on the Ochoco
Timberlands since July 15, 1997.
The Company believes that presenting the pro forma results of operations of
the Ochoco Timberlands would not be meaningful considering differences between
the past and intended future use of the Ochoco Timberlands. The accounting
related to the Ochoco Timberlands, including the recording of depletion, is
consistent with the Company's existing accounting policies as set forth in the
Notes to the Combined Financial Statements.
TRANSACTION ADJUSTMENTS
The pro forma transaction adjustments have been prepared as if the
Transactions had taken place on September 30, 1997, in the case of the pro
forma consolidated balance sheet, or as of January 1, 1996, in the case of the
pro forma consolidated statements of operations for the year ended December
31, 1996 and the nine month period ended September 30, 1997. The adjustments
are based upon currently available information and certain estimates and
assumptions, and therefore, the actual adjustments may differ from the pro
forma adjustments. However, management believes that the assumptions provide a
reasonable basis for presenting the significant effects of the transactions as
contemplated and that the pro forma adjustments give appropriate effect to
those assumptions and are properly applied in the pro forma consolidated
financial statements.
I. WEYERHAEUSER ACQUISITION ADJUSTMENTS
(i) Reflects the increase in depletion based on higher post-acquisition
depletion rates as a result of the increase in cost of timber, timberlands and
logging roads from the Weyerhaeuser Acquisition.
(ii) As discussed in Note 7 to the footnotes to the historical combined
financial statements, the Company provided certain affiliates with one-time
payments for advisory services, in connection with the Weyerhaeuser
Acquisition. Accordingly, the amount of these fees paid in 1996, $4,935, is
shown as a pro forma reduction of selling, general and administrative
expenses.
F-7
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(iii) Reflects the increase in interest expense related to the debt incurred
for the Weyerhaeuser Acquisition. This amount is computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Pro Forma Interest Expense
Interest related to $305,000 aggregate principal balance at
weighted average interest rate of 6.9%.......................... $20,980
Historical Interest Expense
Interest expense for period from August 30, through December 31,
1996............................................................. 7,316
-------
Pro forma increase in interest expense........................... $13,664
=======
</TABLE>
(iv) Reflects the incremental amortization expense related to deferred
financing and debt guarantee fees associated with the acquisition. The
adjustment is computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Pro Forma Amortization of Deferred Financing Fees and Debt
Guarantee Fees
Annual amortization based on deferred financing fees at
borrowing date of $4,053, amortized over 6 years, plus
accretion of debt guarantee fee for the 12 months ended
December 31, 1996 of $3,300.................................... $3,975
Historical Amortization of Deferred Financing Fees and Debt
Guarantee Fees
Amortization expense related to deferred financing fees and debt
guarantee fees for period from August 30, through December 31,
1996........................................................... 1,326
------
Pro forma increase in amortization of deferred financing and
debt guarantee fees............................................ $2,649
======
</TABLE>
II. TRANSACTION ADJUSTMENTS
The following adjustments were made to record the pro forma effect of the
Transactions on the consolidated balance sheet and statements of operations.
TRANSACTION ADJUSTMENTS--BALANCE SHEET
(A) Reflects the net proceeds to the Company of $143,764 from the issuance
and sale of 7,459 Common Units at $21.00 per Unit in the Common Units
Offering, net of the underwriters' discounts and commissions of approximately
$10,368 and offering expenses of approximately $2,500, including an estimated
amount of $1,394 incurred as of September 30, 1997.
(B) Reflects the net proceeds to the Company of $217,450 from the issuance
by the Company of $225,000 of the Notes at 9.6% concurrent with the Common
Units Offering and the incurrence of $7,550 of financing costs, including an
estimated amount of $446 incurred as of September 30, 1997.
(C) The Company intends to use the net proceeds from the Common Units
Offering, the Public Note Offering, and a $40,294 drawdown under the
Acquisition Facility, as well as cash on hand, to repay all indebtedness of
the Company, as shown in the table below. After the completion of the
Transactions, the Company will have a cash balance of $1,500.
F-8
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Indebtedness at September 30, 1997 to be retired at the Closing consists of
the following:
<TABLE>
<CAPTION>
AMOUNT TO BE
DEBT FACILITY RETIRED
------------- ------------
<S> <C>
Holdings Term Loan............................................ $130,000
Revolving Credit Facility..................................... 83,000
Term Loan..................................................... 200,000
--------
Total indebtedness.......................................... 413,000
Holdings term loan guarantee fee.............................. 3,575
--------
Total debt retirement payment............................... $416,575
========
</TABLE>
The Holdings term loan guarantee fee is payable to Weyerhaeuser Company upon
retirement of the Holdings term loan. As of September 30, 1997, $3,300 of such
loan guarantee fees had been accrued. An additional $275 will be accreted
between October 1, 1997 and November 19, 1997 (the estimated date of the
Holdings debt extinguishment) on the debt guarantee fee. As of September 30,
1997, $8,305 of interest expense was accrued on the Holdings term loan.
Deferred financing costs of $5,791 as of September 30, 1997 incurred in
connection with the Ochoco Acquisition and related debt refinancing will be
written off as an extraordinary loss on the extinguishment of debt. The
extraordinary loss is a non-recurring item and is therefore not reflected in
the pro forma statement of operations.
(D) Reflects the anticipated distribution of proceeds from the offering to
Old Services for the redemption of John J. Stephens' ownership interests in
Old Services. The redemption price totals $1,000 which will be distributed in
cash in January 1998 and 95 Subordinated Units to be issued concurrent with
the Common Units Offering. In addition, George R. Hornig's interest in Old
Services will be redeemed for 48 Subordinated Units concurrent with the Common
Units Offering.
(E) Reflects the allocation of members' equity resulting from the completion
of the Transactions. The allocations are summarized as follows:
<TABLE>
<S> <C>
Net proceeds from the Common Units Offering (A)................ $143,764
Accretion of debt guarantee fees (C)........................... (275)
Write-off of deferred financing fees--Ochoco Acquisition and
related debt refinancing (C).................................. (5,791)
Redemption of John J. Stephens' interest (D)................... (1,000)
Members' deficit prior to the Transactions .................... (14,523)
--------
122,175
Pro forma allocation to 1% managing member's interest.......... 1,222
--------
Pro forma allocation to non-managing member's interest......... $120,953
========
</TABLE>
F-9
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TRANSACTION ADJUSTMENTS--STATEMENTS OF OPERATIONS
(F) Reflects the effect on interest expense for the year ended December 31,
1996 and the nine months ended September 30, 1997 as if the Notes were issued
on January 1, 1996 and borrowings under the Acquisition Facility took place on
January 1, 1996. The pro forma effect on interest expense applicable to the
Company is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Pro Forma Interest Expense
Notes ($225,000 principal balance), at an annual
interest rate of 9.6%............................ $21,656 $16,242
Acquisition Facility ($40,294 principal balance),
at an annual interest rate of 8.2%............... 3,287 2,465
Historical Interest Expense
Interest expense included in historical financial
statements for the period (plus pro forma
interest expense related to the period from
January 1, 1996 through August 29, 1996 (see
(iii))........................................... 20,980 17,818
------- -------
Pro forma increase in interest expense............ $ 3,963 $ 889
======= =======
</TABLE>
(G) Reflects the effect on amortization of deferred financing and debt
guarantee fees for the year ended December 31, 1996 and the nine months ended
September 30, 1997 as if the Notes were issued on January 1, 1996. The pro
forma effect on amortization of deferred financing and debt guarantee fees
applicable to the Company is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Pro Forma Amortization Expense
Amortization of $7,550 deferred financing fees
over 10 year term (B)............................ $ 755 $ 566
Historical Amortization Expense
Amortization of deferred financing and debt
guarantee fees included in historical financial
statements (plus pro forma amortization of
deferred financing and debt guarantee fees
related to the period from January 1, 1996
through August 29, 1996 (see (iv))............... 3,975 2,954
------- -------
Pro forma decrease in amortization of deferred
financing and debt guarantee fees................ $(3,220) $(2,388)
======= =======
</TABLE>
F-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Members ofU.S. Timberlands:
We have audited the accompanying combined balance sheets of U.S.
Timberlands, as described in Note 1, as of December 31, 1996, and the related
combined statements of operations, changes in members' deficit, and cash flows
for the period from inception (August 30, 1996) through December 31, 1996. We
have also audited the accompanying balance sheet of the Predecessor, as
described in Note 1, as of December 31, 1995, and the related statements of
operations, changes in Weyerhaeuser investment and advances and cash flows for
each of the two years in the period ended December 31, 1995 and the period
from January 1, 1996 through August 29, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U.S. Timberlands as of
December 31, 1996, and the results of its operations and its cash flows for
the period from inception (August 30, 1996) through December 31, 1996, and the
financial position of the Predecessor as of December 31, 1995, and the results
of its operations and its cash flows for each of the two years in the period
ended December 31, 1995 and the period from January 1, 1996 through August 29,
1996 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Portland, Oregon,
June 10, 1997
(except for the matters
discussed in Note 6 and
Note 9, for which the
date is August 20, 1997)
F-11
<PAGE>
U.S. TIMBERLANDS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR U.S. TIMBERLANDS (A)
------------ --------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............ $ 1 $ 16,613 $ 24,032
Accounts receivable.................. 741 1,563 4,557
Other receivables.................... 75 131 1,220
Receivable from affiliate............ -- 10,121 --
Inventories.......................... 1,846 78 --
Prepaid expenses..................... 433 680 1,956
Logging equipment held for resale.... -- 400 --
-------- -------- --------
Total current assets............... 3,096 29,586 31,765
-------- -------- --------
TIMBER, TIMBERLANDS AND LOGGING ROADS,
net................................... 20,822 273,457 373,230
SEED ORCHARD AND NURSERY STOCK......... 2,443 1,901 1,723
PROPERTY, PLANT AND EQUIPMENT, at cost:
Equipment............................ 13,712 801 925
Buildings and land improvements...... 2,774 677 843
Less--Accumulated depreciation....... (11,900) (58) (221)
-------- -------- --------
Total property, plant and
equipment......................... 4,586 1,420 1,547
-------- -------- --------
LONG-TERM RECEIVABLE................... -- -- 1,171
DEFERRED FINANCING FEES................ -- 3,827 5,791
-------- -------- --------
Total assets....................... $ 30,947 $310,191 $415,227
======== ======== ========
LIABILITIES AND WEYERHAEUSER INVESTMENT AND ADVANCES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable..................... $ 561 $ 889 $ 899
Accrued liabilities.................. 1,231 7,238 15,009
Deferred revenue .................... -- -- 842
Current portion of long-term debt.... -- -- 15,000
-------- -------- --------
Total current liabilities.......... 1,792 8,127 31,750
BORROWINGS UNDER REVOLVING CREDIT FA-
CILITY................................ -- 90,000 83,000
LONG-TERM DEBT......................... -- 215,000 315,000
WEYERHAEUSER INVESTMENT AND ADVANCES
AND MEMBERS' DEFICIT:
Weyerhaeuser investment and
advances............................ 29,155 -- --
USTK--Members' deficit............... -- (1,809) (10,152)
Services--Members' deficit........... -- (1,127) (4,371)
-------- -------- --------
29,155 (2,936) (14,523)
-------- -------- --------
Total liabilities and Weyerhaeuser
investment and advances and
members' deficit.................. $ 30,947 $310,191 $415,227
======== ======== ========
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
balance sheets as of December 31, 1996 and September 30, 1997 are not
comparable to the balance sheet of the Predecessor. See the accompanying
notes for additional information.
The accompanying notes are an integral part of these combined balance sheets.
F-12
<PAGE>
U.S. TIMBERLANDS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR U.S. TIMBERLANDS
-------------------------------- ----------------
JANUARY 1, 1996 AUGUST 30, 1996
DECEMBER 31, THROUGH THROUGH
--------------- AUGUST 29, DECEMBER 31,
1994 1995 1996 1996
------- ------- --------------- ----------------
(A)
<S> <C> <C> <C> <C>
REVENUES:
Logs...................................................................... $29,102 $29,110 $14,077 $ 13,590
By-products and other..................................................... 3,240 2,623 1,501 429
------- ------- ------- --------
Total revenues.......................................................... 32,342 31,733 15,578 14,019
OPERATING COSTS:
Cost of products sold..................................................... 16,351 14,951 9,225 6,179
Depreciation, depletion and road amortization............................. 1,455 1,486 927 3,323
Selling, general and administrative expenses.............................. 4,454 4,235 2,730 9,284
------- ------- ------- --------
Operating income (loss)................................................. 10,082 11,061 2,696 (4,767)
INTEREST EXPENSE............................................................ -- -- -- 7,316
AMORTIZATION OF DEFERRED FINANCING FEES AND DEBT GUARANTEE FEES............. -- -- -- 1,326
INTEREST INCOME............................................................. -- -- -- (409)
OTHER (INCOME) EXPENSE, net................................................. 140 (555) 1 36
------- ------- ------- --------
NET INCOME (LOSS)........................................................... $ 9,942 $11,616 $ 2,695 $(13,036)
- --------------------------------------------------
======= ======= ======= ========
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
statement of operations for the period from August 30, 1996 through
December 31, 1996 is not comparable to the statements of operations of the
Predecessor. See the accompanying notes for additional information.
The accompanying notes are an integral part of these combined statements.
F-13
<PAGE>
U.S. TIMBERLANDS
COMBINED STATEMENTS OF CHANGES IN
WEYERHAEUSER INVESTMENT AND ADVANCES AND MEMBERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. U.S.
TIMBERLANDS TIMBERLANDS
KLAMATH SERVICES U.S.
FALLS, COMPANY, TIMBERLANDS
PREDECESSOR L.L.C. L.L.C. (COMBINED)
------------ ----------- ----------- -----------
(A) (A) (A)
WEYERHAEUSER TOTAL
INVESTMENT MEMBERS' MEMBERS' MEMBERS'
AND ADVANCES DEFICIT DEFICIT DEFICIT
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993.................................................. $ 29,643 $ -- $ -- $ --
Net income................................................................ 9,942 -- -- --
Net distributions to Weyerhaeuser Company................................. (11,160) -- -- --
Net asset transfers to Weyerhaeuser Company............................... (680) -- -- --
-------- -------- ------- --------
BALANCE, December 31, 1994.................................................. 27,745 -- -- --
Net income................................................................ 11,616 -- -- --
Net distributions to Weyerhaeuser Company................................. (9,951) -- -- --
Net asset transfers to Weyerhaeuser Company............................... (255) -- -- --
-------- -------- ------- --------
BALANCE, December 31, 1995.................................................. 29,155 -- -- --
Net income................................................................ 2,695 -- -- --
Net distributions to Weyerhaeuser Company................................. (5,054) -- -- --
Net asset transfers from Weyerhaeuser Company............................. 1,043 -- -- --
-------- -------- ------- --------
BALANCE, August 29, 1996.................................................... $ 27,839 -- -- --
========
Members' contributions.................................................... 10,000 100 10,100
Net loss.................................................................. (11,809) (1,227) (13,036)
======== ======= ========
BALANCE, December 31, 1996.................................................. $ (1,809) $(1,127) $ (2,936)
- --------------------------------------------------
======== ======= ========
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
statement of changes in members' deficit for the period from August 30,
1996 through December 31, 1996 is not comparable to the combined
statements of changes in Weyerhaeuser investment and advances of the
Predecessor. See the accompanying notes for additional information.
The accompanying notes are an integral part of these combined statements.
F-14
<PAGE>
U.S. TIMBERLANDS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S.
PREDECESSOR TIMBERLANDS
------------------------------- ------------
JANUARY 1, AUGUST 30,
DECEMBER 31, 1996 THROUGH 1996 THROUGH
----------------- AUGUST 29, DECEMBER 31,
1994 1995 1996 1996
-------- ------- ------------ ------------
(A)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)............... $ 9,942 $11,616 $ 2,695 $ (13,036)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities--
Depreciation, depletion and
amortization................. 1,455 1,486 927 3,549
(Gain) loss on sale of
property, plant and
equipment.................... (81) (200) 6 51
Changes in operating accounts--
Accounts receivable............. 1,580 1,057 699 (1,694)
Inventories..................... 493 (1,535) 1,348 921
Prepaid expenses................ 336 (308) 371 (680)
Accounts payable................ (449) (272) (292) 889
Accrued interest and debt guar-
antee fees..................... -- -- -- 6,354
Other accrued liabilities....... (103) (34) (242) 783
Interest receivable from affili-
ate............................ -- -- -- (121)
-------- ------- ------- ---------
Net cash provided by (used in)
operating activities......... 13,173 11,810 5,512 (2,984)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Weyerhaeuser Acquisition........ -- -- -- (283,464)
Receivable from affiliate....... -- -- -- (10,000)
Purchase of property, plant and
equipment...................... (1,431) (1,124) (6) (212)
Proceeds from sales of property,
plant and equipment............ 85 223 -- 2,374
Timber and road additions....... (39) (224) (26) (12)
Capitalized seed orchard and
nursery costs.................. (628) (734) (427) (136)
-------- ------- ------- ---------
Net cash used in investing ac-
tivities..................... (2,013) (1,859) (459) (291,450)
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Long-term borrowings............ -- -- -- 305,000
Deferred financing fees......... -- -- -- (4,053)
Weyerhaeuser investment and ad-
vances, net.................... (11,160) (9,951) (5,054) --
Members' contributions.......... -- -- -- 10,100
-------- ------- ------- ---------
Net cash provided by (used in)
financing activities......... (11,160) (9,951) (5,054) 311,047
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS............. -- -- (1) 16,613
CASH AND CASH EQUIVALENTS, begin-
ning of period................... 1 1 1 --
-------- ------- ------- ---------
CASH AND CASH EQUIVALENTS, end of
period........................... $ 1 $ 1 $ -- $ 16,613
======== ======= ======= =========
SUPPLEMENTAL CASH FLOW INFORMA-
TION:
Cash paid for interest.......... $ -- $ -- $ -- $ 2,062
NONCASH ACTIVITIES:
Net asset transfers (to) from
Weyerhaeuser Company,
principally property, plant and
equipment...................... $ (680) $ (255) $ 1,043 $ --
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
statement of cash flows for the period from August 30, 1996 through
December 31, 1996 is not comparable to statements of cash flows of the
Predecessor. See the accompanying notes for additional information.
The accompanying notes are an integral part of these combined statements.
F-15
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE NOTED)
1. SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION:
Nature of Operations
The primary activity of U.S. Timberlands (the Company) is the growing of
trees and the sale of logs and standing timber to third-party wood processors.
The logs are sold principally to wood processing companies generally within a
200-mile radius of Klamath Falls, Oregon. These logs are ultimately processed
by third-party wood processors for sale as lumber, plywood and other wood
products, primarily for use in new residential home construction, home
remodeling and repair and general industrial applications.
Basis of Presentation--U.S. Timberlands
The accompanying combined financial statements for U.S. Timberlands
represent the combined financial position, results of operations, equity and
cash flows of U.S. Timberlands Klamath Falls, L.L.C. (USTK--a Delaware limited
liability company) and U.S. Timberlands Services Company, L.L.C. (Services--a
Delaware limited liability company). The long-term debt obligations, related
interest costs and debt guarantee fees of U.S. Timberlands Holdings, L.L.C.
(Holdings), the parent entity of USTK, have been reflected in the accompanying
combined financial statements as such debt will be assumed by USTK concurrent
with the planned master limited partnership offering discussed in Note 9.
In July and August 1996, USTK and Services were formed and subsequently
entered into an agreement with Weyerhaeuser Company on August 30, 1996 to
purchase approximately 600,000 acres of timber and timberlands and certain
other assets (the Weyerhaeuser Acquisition) as discussed further in Note 3.
Because of common ownership and management of USTK and Services, the financial
statements have been presented on a combined basis. All intercompany
transactions between USTK and Services have been eliminated in the
accompanying combined financial statements.
Basis of Presentation--Predecessor
As a result of the Weyerhaeuser Acquisition, USTK acquired the Klamath Falls
Timberlands and certain related assets of Weyerhaeuser Company (as used
herein, the acquired timberlands and related assets are referred to as the
Predecessor). All of the financial statements provided herein (including the
financial statements pertaining to the Predecessor) were prepared by, and are
solely the responsibility of, U.S. Timberlands Company, L.P. The Weyerhaeuser
Acquisition was accounted for as a purchase and, therefore, the accompanying
financial statements as of and for the periods ended prior to the date of the
Weyerhaeuser Acquisition are accounted for under the pre-Weyerhaeuser
Acquisition basis of accounting. Because the Predecessor did not operate or
legally exist as a stand-alone entity, there are no separate meaningful equity
accounts of the Predecessor prior to the Weyerhaeuser Acquisition. Significant
changes could have occurred in the funding and operations of the Predecessor
were it to have operated as an independent stand-alone entity. As a result,
the financial information included herein is not necessarily indicative of the
financial position and results of operations of the Predecessor which may have
occurred if it were an independent, stand-alone company during the periods
presented.
Revenues for the Predecessor principally represent logs harvested for sale
to Weyerhaeuser's Klamath Falls wood conversion facilities at prices
determined in accordance with Weyerhaeuser's transfer pricing policy. These
transfer prices are not necessarily indicative of the prices the Predecessor
would have achieved if the logs had been sold to unaffiliated wood processors.
Revenues to Weyerhaeuser wood conversion facilities and unaffiliated wood
processors are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1, 1996
--------------- THROUGH
SOURCE OF REVENUES 1994 1995 AUGUST 29, 1996
------------------ ------- ------- ---------------
<S> <C> <C> <C>
Weyerhaeuser Company......................... $16,693 $20,065 $10,157
Unaffiliated wood processors................. 15,649 11,668 5,421
------- ------- -------
Total...................................... $32,342 $31,733 $15,578
======= ======= =======
</TABLE>
F-16
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Concurrent with the Weyerhaeuser Acquisition, Collins Products L.L.C.
(Collins), an unaffiliated party, acquired Weyerhaeuser's Klamath Falls wood
conversion facilities. U.S. Timberlands has entered into a 10-year log supply
agreement with Collins providing for the delivery by U.S. Timberlands to
Collins of 34 million board feet of merchantable timber each year at market
prices as discussed in Note 8.
The Predecessor participated in Weyerhaeuser Company's centralized cash
management system and, as such, its operating and capital expenditure needs
were met by Weyerhaeuser Company. The net advances from and distributions to
Weyerhaeuser Company are presented in the accompanying combined balance sheets
as a component of Weyerhaeuser investment and advances prior to the
Weyerhaeuser Acquisition. The Weyerhaeuser investment and advances account is
noninterest bearing.
Certain costs incurred by Weyerhaeuser Company for financial services,
information systems and other indirect costs have been allocated to the
Predecessor on a revenue and volume harvested basis. The resulting charge to
the Predecessor was $738 in 1994, $622 in 1995 and $445 in the period from
January 1, 1996 through August 29, 1996, and is included in selling, general
and administrative expenses in the accompanying combined statements of
operations. Management of the Company believes the allocation methods used
provide the Predecessor with a reasonable share of such expenses.
Interim Financial Statements (Unaudited)
The unaudited interim financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the management of the Company believes that the
disclosures are adequate to make the information presented not misleading.
Interim financial statements are by necessity somewhat tentative; judgments are
used to estimate interim amounts for items that are normally determinable only
on an annual basis.
The accompanying combined balance sheet as of September 30, 1997, and the
accompanying combined statements of operations and cash flows for the period
from August 30, 1996 through September 30, 1996 and the nine months ended
September 30, 1997, and the combined statement of changes in members' deficit
for the nine months ended September 30, 1997 are unaudited. In the opinion of
management, the accompanying unaudited balance sheet has been prepared on the
same basis as the audited balance sheet as of December 31, 1996. The
accompanying unaudited combined statements of operations and cash flows for the
period from August 30, 1996 through September 30, 1996 and the nine months
ended September 30, 1997 and the unaudited combined statement of changes in
members' deficit for the nine months ended September 30, 1997 have been
prepared on the same basis as the audited combined statements of operations,
changes in members' deficit and cash flows for the period from August 30, 1996
through December 31, 1996. The unaudited interim financial statements include
all adjustments which are, in the opinion of management of the Company,
necessary to present fairly the balance sheet as of September 30, 1997, the
statements of operations and cash flows for the period from August 30, 1996
through September 30, 1996 and the nine months ended September 30, 1997 and the
combined statement of changes in members' deficit for the nine months ended
September 30, 1997. Operating results for the period from August 30, 1996
through September 30, 1996 and the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the entire year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies summarized below include both those of
U.S. Timberlands and the Predecessor, unless otherwise noted.
F-17
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED 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 from timber sold on a stumpage basis (i.e., the customer arranges to
harvest and deliver the logs) is recognized when the timber is harvested.
Revenue on timber deeds and timberland and property sales are generally
recognized upon closing.
Concentration of Credit Risk
As of December 31, 1996, the Company had accounts receivable from three
individual customers that represented 60%, 19% and 10% of total accounts
receivable, respectively.
The majority of the Predecessor's sales were to Weyerhaeuser Company.
Receivables from Weyerhaeuser Company are reflected in Weyerhaeuser investment
and advances in the accompanying balance sheet. The Predecessor's accounts
receivable in the accompanying balance sheet represent receivables from
unaffiliated customers. As of December 31, 1995, the Predecessor had accounts
receivable from three individual customers that represented 27%, 17% and 13%
of total accounts receivable, respectively.
The Company had sales to individual customers that were greater than 10% of
total sales for the respective periods as follows:
<TABLE>
<CAPTION>
PREDECESSOR U.S. TIMBERLANDS
------------------------- -----------------
JANUARY 1, 1996 AUGUST 30, 1996
THROUGH THROUGH
1994 1995 AUGUST 29, 1996 DECEMBER 31, 1996
---- ---- --------------- -----------------
<S> <C> <C> <C> <C>
Weyerhaeuser Company............. 52% 63% 65% --
Unaffiliated customer............ 12% 14% 14% 54%
Unaffiliated customer............ -- -- 10% 14%
Unaffiliated customer............ -- -- -- 11%
</TABLE>
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
maturities at date of purchase of 90 days or less.
Inventories
The Company maintains a log inventory which is recorded at the lower of cost
or market determined on a first-in, first-out basis.
Logging Equipment Held For Resale
Logging equipment held by the Company as of December 31, 1996, is recorded
as logging equipment held for resale in the accompanying combined balance
sheet, as the Company changed to the use of outside contractors for all of its
logging operations concurrent with the Weyerhaeuser Acquisition.
Timber, Timberlands and Logging Roads
Timber, timberlands and logging roads are stated at cost less depletion and
amortization for timber previously harvested. The depletion rate is calculated
using a single composite pool by dividing the total cost of
F-18
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
merchantable timber by its estimated net merchantable volume. Depletion in any
given year represents the net merchantable volume harvested multiplied by the
depletion rate. These estimates are subject to change based on periodic
reevaluations of merchantable volume. Logging road costs for main and spur
roads are amortized based on the net merchantable volume harvested. Costs
incurred to resurface logging roads are generally capitalized and amortized
over a seven-year period on a straight-line basis.
Seed Orchard and Nursery Stock
The Company operates and maintains a seed orchard and nursery. Costs
incurred by the orchard and nursery to produce seed and seedlings utilized in
the reforestation of the Company's timberlands are capitalized to seed orchard
and nursery stock in the accompanying combined balance sheets. A certain
amount of seed and seedling stock is sold to unaffiliated customers and is
reflected as a component of by-products and other revenues in the accompanying
combined statements of operations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions and betterments
to buildings and equipment are capitalized as expended. Maintenance and
repairs are expensed as incurred. Depreciation is provided over the useful
lives of the assets on the straight-line method. Estimated useful lives for
buildings and land improvements is 40 years and equipment ranges from 3 to 5
years.
Deferred Financing Fees
Deferred financing fees consist of fees incurred in connection with
obtaining the related debt financing. The Company amortizes deferred financing
fees over the terms of the related debt which approximates the effective
interest method.
Income Taxes
USTK and Services are both limited liability companies (L.L.C.'s) and,
accordingly, are not liable for federal or state income taxes since the
L.L.C.'s income or loss is reported on the separate tax returns of the
members. Accordingly, no provision for current or deferred income taxes has
been reflected in the accompanying combined financial statements.
Interest Rate Collar Agreement
The Company entered into an interest rate collar agreement to reduce the
impact of changes in interest rates on its variable rate debt. The initial
cost of the interest rate collar agreement is recorded in deferred financing
fees in the accompanying combined balance sheets and is amortized over the
life of the agreement.
The Company does not utilize financial instruments for trading or other
speculative purposes. The counterparty to these contractual arrangements is a
major financial institution.
Fair Value of Financial Instruments
All of the Company's material financial instruments, except for the interest
rate collar agreement, are recognized in its combined balance sheets. The
carrying values generally approximate fair market value for these financial
assets and liabilities. Descriptions of the methods and assumptions used to
reach this conclusion are as follows:
Debt--The Company's debt includes interest rates that are tied to current
credit markets. Therefore, the recorded value for the debt approximates
fair value.
F-19
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Interest Rate Collar Agreement--The fair value of the interest rate
collar agreement is the estimated amount that the Company would receive or
pay upon termination of the agreement, taking into account the current
credit worthiness of the counterparty. As of December 31, 1996, the Company
estimates it would have paid $716 to terminate the agreement.
3. WEYERHAEUSER ACQUISITION:
The total purchase price for the Weyerhaeuser Acquisition referred to in
Note 1 was $283,464, including direct costs of the acquisition. The
Weyerhaeuser Acquisition was accounted for as a purchase with the purchase
price allocated first to current assets acquired, principally inventory, and
the remaining balance being allocated to noncurrent assets acquired, primarily
timber, timberlands and logging roads based on the relative fair market values
of the noncurrent assets as determined by an appraisal. Concurrent with the
Weyerhaeuser Acquisition, the Company changed to the use of outside
contractors for all of its logging operations. Accordingly, logging equipment
acquired was recorded at its estimated resale value.
Pro forma results of operations for the period ended December 31, 1996 had
the Weyerhaeuser Acquisition occurred on January 1, 1996 are as follows:
<TABLE>
<CAPTION>
1996
-----------
(UNAUDITED)
<S> <C>
Revenues.................................................... $ 29,597
Net loss.................................................... (25,845)
</TABLE>
4. INVENTORIES:
The Company's inventories consist of the following:
<TABLE>
<CAPTION>
U.S.
PREDECESSOR TIMBERLANDS
----------------- -----------------
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Logs.................................................................................... $1,703 $78
Other................................................................................... 143 --
------ ---
$1,846 $78
</TABLE>
5. ACCRUED LIABILITIES:
The Company's accrued liabilities consist of the following:
<TABLE>
<CAPTION>
U.S.
PREDECESSOR TIMBERLANDS
----------------- -----------------
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Interest................................................................................ $ -- $5,254
Debt guarantee fee...................................................................... -- 1,100
Workers' compensation................................................................... 565 --
Severance and harvest tax............................................................... 290 230
Employee compensation................................................................... 192 81
Other................................................................................... 184 573
------ ------
$1,231 $7,238
</TABLE>
F-20
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
U.S.
PREDECESSOR TIMBERLANDS
----------------- -----------------
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Holdings--Term loan, due September
1999.................................. $ -- $130,000
USTK--Borrowings under revolving credit
facility.............................. -- 90,000
USTK--Term loan payable quarterly, due
August 2002........................... -- 85,000
----- --------
$ -- $305,000
===== ========
</TABLE>
On August 29, 1996, Holdings entered into a $130,000 term loan with ABN-AMRO
Bank, N.V. and Deutsche Bank AG. The term loan's interest rate is variable and
fluctuates based on movements in the one-month LIBOR plus .50%. As of December
31, 1996, the term loan's interest rate equaled 6.11%. The term loan is
guaranteed by Weyerhaeuser Company. John M. Rudey, controlling shareholder of
the Company, and one of his affiliates have pledged their interests in
Holdings to Weyerhaeuser (the Pledge Agreement) for their obligations under
the guarantee if certain covenants and restrictions, as defined in the Pledge
Agreement, are not adhered to. As part of the Pledge Agreement, Holdings is
required to pay a guarantee fee to Weyerhaeuser based on a percentage of the
term loan balance outstanding. This fee increases from 1.74% to 2.75% if the
term loan is not fully repaid by August 31, 1997 and to 3.00% if not fully
repaid by February 28, 1998. This guarantee fee is being accreted as an
expense in the accompanying combined statements of operations based on an
estimated September 1997 refinancing date. Also, as part of the Pledge
Agreement, if the term loan accrues interest beyond December 30, 1997, the
Company must immediately begin acceleration of its timber harvest plans and
timberland sales. Such acceleration does not necessarily accelerate the
repayment of the Holdings' debt.
On October 18, 1996, the Company entered into an interest rate collar
agreement which effectively sets maximum and minimum interest rates on $87,500
of notional principal amount on the USTK borrowings ranging from a floor (the
rate the Company would pay even if rates fall below that level) to a maximum
during the three-year period ended October 18, 1999. The floor and maximum
rates were 7.3% and 9.0%, as of December 31, 1996.
Debt Refinancing Subsequent to Year-End
On July 14, 1997, USTK entered into a long-term financing arrangement (the
Credit Agreement) with certain banks to finance the Ochoco Acquisition
discussed in Note 9 and to refinance borrowings under the USTK revolving
credit facility and USTK term loan. The retirement of debt under existing
credit facilities will result in an extraordinary loss on extinguishment of
debt of approximately $3,600 due to the writeoff of existing unamortized
deferred financing fees and other related fees. This writeoff will be recorded
in the Company's third quarter 1997 financial statements. There were no other
gains or losses incurred in connection with this refinancing.
The Credit Agreement provides the Company an $85,000 revolving credit
facility, of which $85,000 was drawn on July 15, 1997, as well as a term loan
of $200,000. Borrowings under the new revolving credit facility are generally
limited to 50% of the value of the Company's timber, as defined in the Credit
Agreement. The revolving credit facility and the term loan both have variable
interest rates. The interest rate is calculated based on USTK's performance
against certain established leverage ratios. At the date of the Credit
Agreement, the interest rates on both the revolving credit facility and the
term loan were equal to LIBOR plus 2.25% (7.9%). Each of the loans is
collateralized by substantially all of USTK's assets and Services' members'
interests. The revolving credit facility matures on September 15, 2004. The
term loan is subject to mandatory prepayment in the event that timber and
timberland dispositions, which are not reinvested in other timber and
timberlands,
F-21
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
exceed $30,000 in the aggregate subsequent to July 15, 1997. Based on the
Company's projected operating plan, management does not believe any mandatory
prepayments will be required in 1997.
The Credit Agreement requires USTK and Services, on a combined basis, to
maintain certain financial covenants, including the maintenance of minimum
quarterly cash flows, maximum leverage and debt to asset value ratios, and
minimum fixed charge coverage ratios, and certain other restrictions as
defined in the Credit Agreement.
In accordance with the Credit Agreement, debt is scheduled to mature as
follows:
<TABLE>
<S> <C>
1997........................................................... $ --
1998........................................................... 20,000
1999........................................................... 25,000
2000........................................................... 25,000
2001........................................................... 30,000
Thereafter..................................................... 205,000
--------
$305,000
========
</TABLE>
7. MEMBERS' DEFICIT AND RELATED PARTY TRANSACTIONS:
Members' Deficit
The liability of the individual members of USTK and Services is limited to
the balances of their respective members' accounts.
The members and their respective ownership percentages are as follows:
<TABLE>
<CAPTION>
USTK SERVICES
---- --------
<S> <C> <C>
Holdings (100% owned by Rudey Timber Company L.L.C. and
affiliates)................................................ 99% -- %
Rudey Timber Company L.L.C. (100% owned by John M. Rudey and
affiliates)................................................ 1 --
John M. Rudey, Chairman..................................... -- 82.5
John J. Stephens, CEO and President......................... -- 10.0
George R. Hornig............................................ -- 7.5
--- ----
100% 100%
=== ====
</TABLE>
Related Party Transactions
In connection with the Weyerhaeuser Acquisition, the Company paid a fee of
$4,135 to Timberlands Management Group (TMG), an entity 100% owned and
controlled by Rudey Timber Company L.L.C., and a fee of $400 each to John M.
Rudey and John J. Stephens. In addition, during the period from August 30,
1996 to December 31, 1996, the Company paid TMG management fees of $2,800.
These payments have been recorded in selling, general and administrative
expenses in the accompanying combined statement of operations.
Receivable from Affiliate
During the period from August 30, 1996 through December 31, 1996, the
Company paid $10,000 to TMG. The receivable and the related interest were
repaid in February 1997 and, accordingly, have been recorded as a current
asset in the accompanying combined balance sheet as of December 31, 1996.
F-22
<PAGE>
U.S. TIMBERLANDS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS:
On August 30, 1996, the Company entered into a wood supply agreement with
Collins to supply a volume of approximately 34 million board feet of
merchantable timber to the customer at market prices. The term of the
agreement is ten years and is renewable for two additional terms of five
years, each at the option of Collins.
9. SUBSEQUENT EVENTS:
Ochoco Acquisition
On July 15, 1997, USTK acquired approximately 42,000 acres of timber and
timberlands and approximately 3,000 acres of timber cutting rights from Ochoco
Lumber Company L.P. for $110,873 (the Ochoco Acquisition). Substantially all
of the purchase price will be allocated to timber, timberlands and logging
roads. The acquisition was principally financed through $110,000 of debt
financing. See Note 6 for further discussion of the terms of the debt.
Planned MLP Common Units Offering
On July 26, 1997, the members of the Company formed a master limited
partnership (MLP) for the purpose of issuing Common Units representing limited
partner interests in a public offering (the Common Units Offering). The
expected aggregate gross proceeds from the Common Units Offering are
approximately $156,632. In addition, the Company intends that the MLP's
operating subsidiary, USTK (the Operating Company), issue $225,000 of senior
unsecured notes in a public offering (the Notes). The Company also intends
that the Operating Company will enter into a $25,000 working capital facility
and a $75,000 acquisition facility (the Acquisition Facility). The Company
intends to use the proceeds from the Common Units Offering, the Notes, and a
drawdown of approximately $40,000 on the Acquisition Facility to repay
existing indebtedness of the Company including debt associated with the Ochoco
Acquisition and related debt financing discussed in Note 6. Also, pursuant to
an agreement dated July 29, 1997, in connection with the Common Units
Offering, John Stephens' interest in Old Services will be redeemed for $1.0
million, payable in January 1998, and 95 Subordinated Units. Similarly, George
Hornig's interest in Old Services will be redeemed for 48 Subordinated Units.
In connection with the MLP's Common Units Offering and related formation of
New Services, L.L.C., the general partner of the MLP and the managing member
of the Operating Company (the General Partner), the General Partner intends to
issue income interests in the General Partner to certain officers and
directors of the General Partner at no cost. Such income interests will
participate pro rata in cash distributions from the MLP and the Operating
Company. In addition, under certain circumstances, if these officers or
directors terminate their employment, the General Partner is required to
repurchase their income interests at fair market value as determined by
independent appraisal. The fair value of these income interests will be
recorded as compensation expense in the Company's post-Common Units Offering
financial statements with a corresponding increase to contributed capital.
U.S. Timberlands Finance Corp.
On August 20, 1997, U.S. Timberlands Finance Corp. (Finance Corp.), a wholly
owned subsidiary of the MLP was formed. Concurrent with the Common Units
Offering, the MLP will contribute its ownership interest in Finance Corp. to
the Operating Company. The Operating Company and Finance Corp. intend to
offer, jointly and severally, $225,000 aggregate principal amount of Senior
Notes due 2007 (the Notes). The Operating Company and Finance Corp. will each
serve as co-obligors of the Notes.
F-23
<PAGE>
U.S. TIMBERLANDS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S.
PREDECESSOR TIMBERLANDS
--------------- ----------------------------- ---
JANUARY 1, 1996 AUGUST 30, 1996 NINE MONTHS
THROUGH THROUGH ENDED
AUGUST 29, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997
--------------- --------------- -------------
(A) (A)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Log and stumpage sales .................................................. $14,077 $ 1,916 $ 36,819
Timber and property sales................................................ -- -- 3,494
By-products and other.................................................... 1,501 -- 744
------- -------- --------
Total revenues......................................................... 15,578 1,916 41,057
OPERATING COSTS:
Cost of products sold.................................................... 9,225 1,404 12,101
Cost of timber and property sales........................................ -- -- 1,191
Depreciation, depletion and road amortization............................ 927 240 10,758
Selling, general and administrative expenses............................. 2,730 8,040 4,300
------- -------- --------
Operating income (loss) ............................................... 2,696 (7,768) 12,707
INTEREST EXPENSE........................................................... -- 1,927 17,818
AMORTIZATION OF DEFERRED FINANCING FEES AND DEBT GUARANTEE FEES............ -- 330 2,954
INTEREST INCOME............................................................ -- -- (1,192)
OTHER EXPENSE (INCOME), net................................................ 1 (12) (48)
------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.................................... 2,695 (10,013) (6,825)
EXTRAORDINARY ITEM--LOSS ON EXTINGUISHMENT OF DEBT......................... -- -- (3,571)
------- -------- --------
NET INCOME (LOSS).......................................................... $ 2,695 $(10,013) $(10,396)
- --------------------------------------------------
======= ======== ========
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
statements of operations for the period from August 30, 1996 through
September 30, 1996 and the nine months ended September 30, 1997 are not
comparable to the statement of operations of the Predecessor. See the
accompanying notes for additional information.
The accompanying notes are an integral part of these combined statements.
F-24
<PAGE>
U.S. TIMBERLANDS
COMBINED STATEMENT OF CHANGES IN MEMBERS' DEFICIT
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
U.S. TIMBERLANDS U.S. TIMBERLANDS
KLAMATH FALLS, SERVICES U.S. TIMBERLANDS
L.L.C. COMPANY, L.L.C. (COMBINED)
---------------- ---------------- ----------------
TOTAL MEMBERS'
MEMBERS' DEFICIT MEMBERS' DEFICIT DEFICIT
---------------- ---------------- ----------------
<S> <C> <C> <C>
BALANCE, December 31,
1996...................... $ (1,809) $(1,127) $ (2,936)
Member's distribution.... -- (1,191) (1,191)
Net loss................. (8,343) (2,053) (10,396)
-------- ------- --------
BALANCE, September 30,
1997...................... $(10,152) $(4,371) $(14,523)
======== ======= ========
</TABLE>
The accompanying notes are an integral part of this combined statement.
F-25
<PAGE>
U.S. TIMBERLANDS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
U.S.
PREDECESSOR TIMBERLANDS
------------ ---------------------------
JANUARY 1, AUGUST 30, NINE MONTHS
1996 THROUGH 1996 THROUGH ENDED
AUGUST 29, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997
------------ ------------- -------------
(A) (A)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................... $2,695 $(10,013) $(10,396)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities--
Depreciation, depletion,
amortization and cost of timber
and property sold................ 927 295 12,503
Loss on sale of property, plant
and equipment.................... 6 -- --
Write-off of deferred financing
fees............................. -- -- 3,452
Changes in operating accounts--
Accounts receivable............... 699 (1,797) (5,254)
Inventories....................... 1,348 734 78
Prepaid expenses.................. 371 (414) 564
Accounts payable.................. (292) 633 10
Accrued interest and debt
guarantee fees................... -- 1,951 6,877
Other accrued liabilities......... (242) 5,927 894
Interest receivable from
affiliate........................ -- (30) 121
Deferred revenue.................. -- -- 842
------ -------- --------
Net cash provided by (used in)
operating activities........... 5,512 (2,714) 9,691
CASH FLOWS FROM INVESTING ACTIVITIES:
Weyerhaeuser Acquisition............ -- (283,464) --
Receivable from affiliate........... -- (10,000) 10,000
Purchase of property, plant and
equipment.......................... (6) (85) (290)
Proceeds from sale of logging
equipment.......................... -- 8 400
Ochoco Acquisition.................. -- -- (110,873)
Advances from affiliate............. -- 1,200 3,000
Prepayment of advance from affiliate
................................... -- -- (3,000)
Timber and road additions........... (26) (12) (371)
Capitalized seed orchard and nursery
costs.............................. (427) (43) (137)
------ -------- --------
Net cash used in investing
activities..................... (459) (292,396) (101,271)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings................ -- 305,000 285,000
Repayment of long-term borrowings... -- -- (177,000)
Deferred financing fees............. -- (3,928) (5,970)
Members' contributions.............. -- 10,100 --
Distribution to member.............. -- -- (1,191)
Deferred Common Units offering
costs.............................. -- -- (1,840)
Weyerhaeuser investment and
advances, net...................... (5,054) -- --
------ -------- --------
Net cash provided by (used in)
financing activities........... (5,054) 311,172 98,999
NET INCREASE IN CASH AND CASH
EQUIVALENTS.......................... (1) 16,062 7,419
CASH AND CASH EQUIVALENTS, beginning
of period............................ 1 -- 16,613
------ -------- --------
CASH AND CASH EQUIVALENTS, end of
period............................... $ -- $ 16,062 $ 24,032
====== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.............. $ -- $ 251 $ 13,141
NONCASH ACTIVITIES:
Net asset transfers to Weyerhaeuser
Company, principally property,
plant and equipment................ $1,043 $ -- $ --
</TABLE>
- --------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the combined
statements of cash flows for the period from August 30, 1996 through
September 30, 1996 and the nine months ended September 30, 1997 are not
comparable to the statement of cash flows of the Predecessor. See the
accompanying notes for additional information.
The accompanying notes are an integral part of these combined statements.
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. Timberlands Finance Corp.:
We have audited the accompanying balance sheet of U.S. Timberlands Finance
Corp. (Finance Corp.), a wholly owned subsidiary of U.S. Timberlands Company,
L.P., as of August 26, 1997. This statement is the responsibility of the
Finance Corp.'s management. Our responsibility is to express an opinion on
this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Finance Corp., as of August 26,
1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Portland, Oregon,
August 26, 1997
F-27
<PAGE>
U.S. TIMBERLANDS FINANCE CORP.
(A WHOLLY OWNED SUBSIDIARY OF U.S. TIMBERLANDS COMPANY, L.P.)
BALANCE SHEET
AUGUST 26, 1997
<TABLE>
<S> <C>
ASSETS
CASH................................................................... $1,000
------
Total Assets......................................................... $1,000
======
STOCKHOLDER'S EQUITY
COMMON STOCK, $.01 par value, 1,000 shares authorized, issued and
outstanding........................................................... $ 10
ADDITIONAL PAID-IN CAPITAL............................................. 990
------
Total stockholder's equity........................................... $1,000
======
</TABLE>
The accompanying note is an integral part of this balance sheet.
F-28
<PAGE>
U.S. TIMBERLANDS FINANCE CORP.
(A WHOLLY OWNED SUBSIDIARY OF U.S. TIMBERLANDS COMPANY, L.P.)
NOTE TO BALANCE SHEET
AUGUST 26, 1997
1. FINANCE CORP.:
U.S. Timberlands Finance Corp. (Finance Corp.), a Delaware corporation, was
formed on August 20, 1997 and is a wholly owned subsidiary of U.S. Timberlands
Company, L.P. (the MLP). The MLP was formed to acquire substantially all of
the equity interests in U.S. Timberlands Klamath Falls, L.L.C. (USTK) and to
acquire, own and operate the business and assets of U.S. Timberlands Services
Company, L.L.C., which are Delaware limited liability companies engaged in the
harvest and sale of timber to third-party wood processors.
Finance Corp. and USTK intend to offer, jointly and severally, $225,000,000
aggregate principal amount of Senior Notes due 2007 (the Notes). Finance Corp.
and USTK will each serve as co-obligors for the Notes.
The MLP contributed $1,000 on August 26, 1997 for 1,000 shares of common
stock, par value $.01 per share, of Finance Corp. Concurrent with the MLP's
issuance of Common Units representing limited partner interests in a public
offering, all shares of Finance Corp. common stock will be contributed by the
MLP to USTK. There have been no other transactions involving Finance Corp. as
of August 26, 1997.
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New Services, L.L.C.:
We have audited the accompanying balance sheet of New Services, L.L.C. (the
Company) as of July 29, 1997. This statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Company, as of July 29, 1997
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Portland, Oregon,
July 29, 1997
F-30
<PAGE>
NEW SERVICES, L.L.C.
BALANCE SHEET
JULY 29, 1997
<TABLE>
<S> <C>
ASSETS
CASH.................................................................... $ 990
INVESTMENT IN U.S. TIMBERLANDS COMPANY, L.P............................. 10
------
$1,000
======
MEMBERS' EQUITY
MEMBERS' EQUITY......................................................... $1,000
------
Total members' equity................................................. $1,000
======
</TABLE>
The accompanying note is an integral part of this balance sheet.
F-31
<PAGE>
NEW SERVICES, L.L.C.
NOTE TO BALANCE SHEET
JULY 29, 1997
1. NATURE OF OPERATIONS:
New Services, L.L.C. is a Delaware limited liability company that was formed
June 24, 1997 to become the general partner of U.S. Timberlands Company, L.P.
(the MLP) and the managing member of U.S. Timberlands Klamath Falls, L.L.C.
(USTK). The MLP is a limited partnership that was formed to acquire
substantially all of the equity interests in USTK and to acquire, own and
operate the business and assets of U.S. Timberlands Services Company, L.L.C.
(Old Services), which are Delaware limited liability companies engaged in the
harvest and sale of timber to third-party wood processors. Upon completion of
the MLP's acquisition of USTK and Old Services, New Services, L.L.C. will be
renamed U.S. Timberlands Services Company, L.L.C., the successor entity to Old
Services.
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To U.S. Timberlands Company, L.P.:
We have audited the accompanying balance sheet of U.S. Timberlands Company,
L.P. (the MLP) as of July 29, 1997. This statement is the responsibility of
the MLP's management. Our responsibility is to express an opinion on this
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of U.S. Timberlands Company, L.P. as
of July 29, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Portland, Oregon,
July 29, 1997
F-33
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
BALANCE SHEET
JULY 29, 1997
<TABLE>
<S> <C>
ASSET
-----
CURRENT ASSET:
Cash................................................................... $1,000
======
PARTNERS' EQUITY
----------------
LIMITED PARTNER'S EQUITY................................................. $ 990
GENERAL PARTNER'S EQUITY................................................. 10
------
Total partners' equity............................................... $1,000
======
</TABLE>
The accompanying note is an integral part of this balance sheet.
F-34
<PAGE>
U.S. TIMBERLANDS COMPANY, L.P.
NOTE TO BALANCE SHEET
JULY 29, 1997
1. THE COMPANY:
U.S. Timberlands Company, L.P. (the MLP) is a Delaware limited partnership
that was formed on June 27, 1997 to acquire substantially all of the equity
interests in U.S. Timberlands Klamath Falls, L.L.C. and to own and operate the
business and assets of U.S. Timberlands Services Company, L.L.C. (Old
Services), which are Delaware limited liability companies engaged in the
harvest and sale of timber to third-party wood processors. The MLP's general
partner is New Services, L.L.C., which will be renamed U.S. Timberlands
Services Company, L.L.C. upon the consummation of the initial public offering
of the MLP.
F-35
<PAGE>
APPENDIX A
GLOSSARY OF CERTAIN TERMS
Acquisition Facility: A $75.0 million revolving credit facility entered into
by the Company to be used for acquisitions and improvements.
Adjusted Operating Surplus: With respect to any period, Operating Surplus
generated during such period (a) less (i) any net increase in working capital
borrowings during such period and (ii) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and (b) plus (i) any net decrease in
working capital borrowings during such period and (ii) any net increase in
cash reserves for Operating Expenditures during such period required by any
debt instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included
in clause (a)(i) of the definition of Operating Surplus.
Available Cash: With respect to any quarter prior to liquidation:
(a) the sum of (i) all cash and cash equivalents of the Partnership Group
on hand at the end of such quarter and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination
of Available Cash with respect to such quarter resulting from borrowings
for working capital purposes made subsequent to the end of such quarter,
less
(b) the amount of any cash reserves that is necessary or appropriate in
the reasonable discretion of the Manager 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 the MLP Partnership Agreement in
respect of any one or more of the next four quarters; provided, however,
that the Manager may not establish cash reserves pursuant to (iii) above if
the effect of such reserves would be that the Master Partnership is unable
to distribute the Minimum Quarterly Distribution on all Common Units with
respect to such quarter; and, provided further, that disbursements made by
a Partnership 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 Manager 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 Company.
BBF: One billion board feet.
BDT: Bone Dry Ton; a ton of residuals of lumber manufacturing that is free
of moisture.
BLM: The U.S. Department of Interior Bureau of Land Management.
Board Foot (BF): A unit of lumber measurement 1 foot square and 1 inch
thick.
CERCLA and Superfund: Refer generally to the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended.
A-1
<PAGE>
Chips: Wood generated either in a whole log chip mill or as a by-product of
the manufacture of lumber and plywood and used in the manufacture of pulp and
paper and various composite panel products such as medium density fiberboard,
particle board and oriented strand board.
Closing Date: The first date on which Notes are sold by the Issuers to the
Underwriters pursuant to the provisions of the Underwriting Agreement.
Code: Internal Revenue Code of 1986, as amended.
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 MLP Partnership
Agreement.
Company: U.S. Timberlands Klamath Falls, L.L.C., a Delaware limited
liability company, and any successors thereto.
Compensation Committee: A committee of the board of directors of the Manager
which will initially consist of five directors, including two independent
directors, which will determine the compensation of the officers of the
Manager and administer its employee benefit plans.
Conflicts Committee: A committee of the board of directors of the Manager
composed entirely of two or more directors who are neither officers, employees
or security holders of the Manager nor officers, directors, employees or
security holders of any affiliate of the Manager.
Contribution Agreement: The Contribution, Conveyance and Assumption
Agreement to be dated the closing date of the MLP Offering among the Manager,
the Company, the Master Partnership and certain other parties governing the
Transactions pursuant to which, among other things, the business and
operations of the Company and Old Services will be transferred and the
liabilities of the Company, Old Services and Holdings will be assumed.
Cutting Contract or Stumpage Contract: An agreement whereby a third party
purchases the right to harvest trees from a given tract of land within a given
time period, and title to the standing trees passes at the time of such
harvest. Total payment under such an agreement is tied to volume removed.
DBH: "Diameter at breast height," a term frequently used to describe a tree
measurement taken 4 1/2 feet above ground level.
DD&A: Depreciation, depletion and road amortization.
Departing Manager: A former managing member of the Company from and after
the effective date of any withdrawal or removal of such former managing member
pursuant to the Operating Company Agreement.
A-2
<PAGE>
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 service its indebtedness.
ERISA: Employee Retirement Income Security Act of 1974, as amended.
Exchange Act: Securities Exchange Act of 1934, as amended.
Fee Timber: Timber which is located on property owned in fee, as opposed to
timber that is located on lands owned by other parties and is acquired
pursuant to cutting contracts.
Finance Corp.: U.S. Timberlands Finance Corp., a wholly-owned subsidiary 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 the Company's acquisition of the Klamath Falls Timberlands
in August 1996.
Incentive Distribution Right: A non-voting limited partner interest in the
Master Partnership issued to the Manager in connection with the transfer of
substantially all of its member interest in the Company to the Master
Partnership pursuant to the MLP Partnership Agreement which partnership
interest will confer upon the holder thereof only the rights and obligations
specifically provided in the MLP 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 Manager that are in excess of the Manager's
aggregate 2% general partner interest.
Indenture: The indenture pursuant to which the Notes will be issued, a form
of which has been filed as an exhibit to the registration statement of which
this Prospectus is a part.
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 Partnership Group member; (b) sales of equity interests by
any Partnership Group member (other than Common Units sold to the underwriters
in the MLP Offering pursuant to the exercise of their over-allotment option);
and (c) sales or other voluntary or involuntary dispositions of any
Partnership assets of any Partnership Group member (other than (i) sales or
other dispositions of inventory, accounts receivable and other assets in the
ordinary course of business, including the exchange of timber or real property
for other timber or real property to the extent that the timber or real
property received in exchange is of equal or greater value, or the sale of
timber or real property, to the extent the proceeds are invested within 270
days in other timber or real property, and (ii) sales or other dispositions of
assets as a part of normal retirements or replacements), in each case prior to
the liquidation date. Notwithstanding anything herein to the contrary, Interim
Capital Transactions shall not include (A) the first $50.0 million in real
property (and related timber) sales made by the Partnership Group subsequent
to the closing date and (B) stumpage, timber deed and other bulk timber sales
(which, in the case of (A) and (B) would otherwise be deemed Interim Capital
Transactions) generally of the type described in the Master Partnership's
strategic plan approved by the Board of Directors of the Manager prior to the
closing date.
A-3
<PAGE>
Issuers: The Company together with Finance Corp.
Klamath Falls Timberlands: The approximately 600,000 fee acres of timberland
acquired by the Company and Old Services in August 1996 from Weyerhaeuser.
Logs: The stem of the tree after it has been felled. The raw material from
which lumber, plywood and other wood products are processed.
Long-Term Incentive Plan: The U.S. Timberlands Company, L.P. 1997 Long-Term
Incentive Plan.
MBF: One thousand board feet. A common unit of measure for pricing standing
timber as well as lumber.
MBG: Mason, Bruce & Girard, Inc., independent forest resource consultants.
MLP Offering: The initial public offering by the Master Partnership of
Common Units.
MLP Partnership Agreement: The Amended and Restated Agreement of Limited
Partnership of the Master Partnership, as it may be amended, restated or
supplemented from time to time.
MMBF: One million board feet.
Management Incentive Plan: The U.S. Timberlands Company, L.P. 1997
Management Incentive Plan.
Manager or General Partner or New Services: New Services, L.L.C., a Delaware
limited liability company, and its successors and permitted assigns as
managing member of the Company and general partner of the Master Partnership
Master Partnership: U.S. Timberlands Company, L.P., a Delaware limited
partnership, and any successors thereto.
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.
Notes: The $225.0 million aggregate principal amount of 9 5/8% Senior Notes
due 2007 offered hereby.
NYSE: New York Stock Exchange.
Ochoco: Ochoco Lumber Company.
Ochoco Acquisition: The acquisition of the Ochoco Timberlands by the Company
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 the
Company 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., and any successors thereto.
Operating Company: U.S. Timberlands Klamath Falls, L.L.C., a Delaware
limited liability company, and any successors thereto.
A-4
<PAGE>
Operating Company Agreement: The Second Amended and Restated Operating
Agreement of the Company, as it may be amended, supplemented or restated from
time to time.
Opinion of Counsel: A written opinion of counsel, acceptable to the Manager
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 Master Partnership or cause the Master Partnership to be
treated as an association taxable as a corporation or otherwise taxed as an
entity for federal income tax purposes.
Operating Expenditures: All Partnership Group expenditures, including, but
not limited to, taxes, reimbursements of the, Manager 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 Manager, 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
Manager'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 Manager 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 Manager so
determines. Notwithstanding the foregoing, "Operating Surplus" with respect
to the quarter in which the liquidation occurs and any subsequent quarter
shall equal zero.
OSHA: Federal Occupational Safety and Health Act.
Partnership Group: The Company, the Master Partnership and any subsidiary of
either such entity, treated as a single consolidated entity.
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.
A-5
<PAGE>
Registration Statement: The Registration Statement on Form S-1, as amended
(No. 333-34389), filed by the Company and Finance Corp. with the Commission,
relating to the Notes.
RROW: Reciprocal right-of-way.
Seedling: A young tree generally less than three years of age used as
planting stock for reforestation.
Securities Act: The Securities Act of 1933, as amended.
Silviculture: The practice of cultivating forest crops based on the
knowledge of forestry; more particularly, controlling the establishment,
composition and growth of forests.
Softwoods: Coniferous trees, usually evergreen and having needles or
scalelike leaves, such as Ponderosa pine, Douglas fir, white pine and spruce.
Stand: An area of trees possessing sufficient uniformity of age, size and
composition to be distinguished from adjacent areas so as to form a management
unit. The term is usually applied to forests of commercial value.
Stumpage: Standing timber (timber as it stands uncut in the woods).
Subordinated Unit: A Unit representing a fractional part of the partnership
interests of all limited partners of the Master Partnership 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 MLP
Partnership Agreement. The term "Subordinated Unit" as used herein does not
include a Common Unit.
Subordination Period: The Subordination Period will generally extend from
the closing of this offering until the first to occur of: (a) the first day of
any quarter beginning after December 31, 2002 in respect of which (i)
distributions of Available Cash from Operating Surplus on each of the
outstanding Common Units and the Subordinated Units with respect to each of
the three consecutive, non-overlapping four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
during such periods, (ii) the Adjusted Operating Surplus generated during each
of the three consecutive, non-overlapping four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the 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 Master Partnership in respect of incentive compensation),
plus the related distribution on the general partner interest in the Master
Partnership and the managing member interest in the Company, and (iii) there
are no outstanding Common Unit Arrearages; and (b) the date on which the
Manager is removed as general partner of the Master Partnership upon the
requisite vote by holders of Outstanding Units under circumstances where Cause
does not exist and Units held by the Manager 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 Manager
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,
A-6
<PAGE>
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 Master Partnership in respect of
incentive compensation), plus the related distribution on the general partner
interest in the Master Partnership and the managing member interest in the
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 Manager is removed as
general partner of the Master Partnership under circumstances where Cause does
not exist and Units held by the Manager 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 Manager will have the right to convert
their combined 2% interest in the Master Partnership and the 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 "The Partnership Agreement--Cash
Distributions."
Thinning: Removal of selected trees, usually to eliminate overcrowding, to
remove dead, dying, deformed or diseased trees and to promote more rapid
growth of desired trees. "Pre-commercial thinning" refers to thinning that
does not directly produce merchantable timber. "Commercial thinning" results
directly in merchantable timber.
Timber: Standing trees not yet harvested.
Timberlands: The timber properties of the Company.
TMG: U.S. Timberlands Management Group, L.L.C., an entity 100% owned and
controlled by Rudey Timber Company L.L.C.
Transactions: The transactions related to the formation of the Company and
the Master Partnership, the issuance of the Common Units, the issuance of the
Notes, the entering into of the Bank Credit Facility and the other
transactions to occur in connection with this offering and the MLP Offering.
Unitholders: Holders of the Common Units and the Subordinated Units,
collectively.
Unit Majority: During the Subordination Period, at least a majority of the
outstanding Common Units, voting as a class, and at least a majority of the
outstanding Subordinated Units, voting as a class and, thereafter, at least a
majority of the outstanding Units.
Units: The Common Units and the Subordinated Units, collectively, but not
including the right to receive Incentive Distributions.
USFS: United States Department of Agriculture--Forest Service.
USFWS: United States Fish and Wildlife Service.
USTK Debt: The $285.0 million of bank indebtedness incurred by the Company
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 the Company 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 Company to be used for working capital purposes.
A-7
<PAGE>
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NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE ISSUERS OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary....................................................... 1
Forward-Looking Statements............................................... 15
Risk Factors............................................................. 15
The Transactions......................................................... 20
Use of Proceeds.......................................................... 21
Capitalization........................................................... 22
Selected Historical and Pro Forma Financial and Operating Data........... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business and Properties.................................................. 34
Management............................................................... 46
Security Ownership of Certain Beneficial Owners and Management........... 53
Certain Relationships and Related Transactions........................... 54
The Operating Company Agreement.......................................... 55
Description of Bank Credit Facility...................................... 57
Description of Notes..................................................... 58
ERISA Considerations..................................................... 87
Underwriting............................................................. 88
Validity of the Notes.................................................... 89
Experts.................................................................. 89
Available Information.................................................... 90
Index to Financial Statements............................................ F-1
Glossary of Certain Terms................................................ A-1
</TABLE>
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Until December 8, 1997 (25 calendar days after the date of this Prospectus),
all dealers effecting transactions in the Notes, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in ad-
dition to the obligation of dealers to deliver a Prospectus when acting as Un-
derwriters and with respect to their unsold allotments or subscriptions.
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$225,000,000
U.S. TIMBERLANDS
KLAMATH FALLS, L.L.C.
U.S. TIMBERLANDS
FINANCE CORP.
[LOGO U.S. TIMBERLANDS
KLAMATH FALLS, L.L.C.]
9 5/8% SENIOR NOTES DUE 2007
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PROSPECTUS
NOVEMBER 13, 1997
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SMITH BARNEY INC.
BANCAMERICA ROBERTSON STEPHENS
DEUTSCHE MORGAN GRENFELL
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